Rounding in the Carrier's Favor—Does it Make “Cents”?
UPS® and FedEx® are excellent at two things: delivering packages on-time and making huge profits. The two combined for nearly $10 billion in profits on nearly $100 billion in revenues in 2014 alone. Coincidentally, the two combined to deliver nearly 10 billion packages in 2014 as well. That’s about $1 in profit per package delivered. Have you ever thought that some, if not all, of that profit could be attributed to rounding? If it seems farfetched that rounding could add up to $10 billion, just keep reading. Fractions of fractions add up.
There is a simple and uniform policy that both carriers use to round any pennies on package charges in their favor. To start, the carriers control the base pricing of their service offering, as they should. They will then offer incentives for you to use their service. Often, these incentives will not add up to a round number in dollars and cents, so they round up to the next penny. For instance, shipping a 10 pound package using Ground service to Zone 2 will cost you $9.01 in freight charges. If you have a 40% discount on this service, that makes the total $5.406, or rounded in the carrier’s favor, $5.41. If you had a 39.5% discount, it would calculate to $5.45105, rounded to $5.46. This is rounding up—and not traditional rounding that we were taught in elementary school, or even more complicated banker’s rounding.
Fiscal 2016 Earnings: FedEx® Reports Record Revenue in Annual ReportFedEx® recently reported quarterly earnings and revenue surpassing expectations. Revenue exceeded $50 billion for its first time since it was established in 1971, increasing 20 percent year-over-year.
What you may not have realized is that this policy extends well beyond just rounding up on pennies. Did you know that both carriers will round up on weight, whether actual or dimensional? Actual weight rounding is simple. If you ship a package that weighs 11.4 pounds it is considered a 12 pound package. Next, dimensional weight is more complicated. If you ship a 12″ x 12″ x 12″ package full of feathers that only weighs one pound, you will be billed as if the package weighed 11 pounds.
The next way carriers round is in fuel consumption. Fuel surcharges are based on an index that changes monthly. First, the index itself is rounded, because it is an average of fuel prices for a period of time, then the carrier rounds the average to the nearest penny. After rounding the index, the index is applied by rounding up using the normal penny rounding system described earlier. As of this writing, UPS® is charging 5.25% for a fuel surcharge on Ground shipments. If $24.42 is the total of charges applicable to a fuel surcharge, the fuel surcharge is $1.28205— or rounded in the carrier’s favor, $1.29.
With all of this rounding, it’s easy to see how this could quickly add up. And the truth is, it does. Simply rounding up makes a lot of money at the expense of shippers, large and small. These are the types of small figures that, in large volume, can add up to significant profits for the carriers.
Think of all of the packages of all shapes and sizes that the carriers do ship and all of the surcharges they can assess. If, on a small package of feathers, rounding can account for nearly 40 cents, just think about all of the rounding that occurs on the 10 billion packages shipped. With this in mind, it’s not farfetched at all to see how $1 per package in profit could be totallyattributed to rounding and nothing more.
See for yourself how pennies added up to dollars with our interactive calculator.