Taking a Deep Dive into Amazon’s Logistics Pricing

Pricing Proposals from Amazon Logistics

Earlier this month, I heard from iDrive Logistics, a Salt Lake City-based small package business intelligence consultancy specializing in third party logistics relationships and contracts, regarding pricing proposals it had obtained from Amazon Logistics.

Given the frenetic pace in which Amazon has gone about setting up its logistics and supply chain operations, as well as expand its presence, this grabbed my attention, to say the least.

In short, iDrive Logistics said these pricing proposals from Amazon Logistics go beyond FBA (Fulfillment by Amazon), SFP (Seller Fulfilled Prime), and MCF (Multichannel Fulfillment) and, in effect, serve as proposals that would act as a replacement for FedEx/UPS, and United States Postal Service Priority Mail.

Amazon, Not Even Close To Being competitive

While these proposals would act as a replacement for the aforementioned competitors, iDrive Logistics explained that this offering from Amazon is not even close to competitive on a multitude of levels, specifically pointing to onerous surcharge application with a poor service level.

Editor’s Note: An Amazon spokesperson told Logistics Management that Amazon does not have any residential surcharges or weekend delivery fees.

Matthew White, an iDrive Logistics strategist, told Logistics Management that while doing its due diligence with clients over the past couple of months, it has encountered small proposals from Amazon Logistics to its iDrive Logistics clients, which are not for Amazon FBA or MCF, but for Delivery by Amazon.

“There is this incredible noise about Amazon Logistics, and many believe it is a threat to the operations and profitability of UPS and FedEx,” he said.

“And, to our surprise, these proposals are shockingly non-competitive, and do not seem to pose a long- or short-term threat to FedEx or UPS.”

What much of this comes down to, according to Glenn Gooding, iDrive Logistics President, is that there is what he called a “massive disconnect between Amazon’s brand perception in the marketplace and reality.”

As an example, he pointed to Amazon’s touting of delivery by drone, which can be viewed as innovative, attractive and technology-driven, but when peeling back the layers and looking at it from what called a lens of sanity, there are many barriers regarding drone usage like the FAA and DOD, local municipalities, anti-terrorism, TSA, and the possibility of counterfeit efforts, too.

But what Amazon’s touting of drones has done is serve as a great marketing vehicle to position the right type of expectations and awareness around its brand, which has translated into everything Amazon does, he noted.

“That is a big part of this,” he said.

“Is it true that Amazon is trying to build out its own delivery network? It is absolutely true. Is the endgame for Amazon to go out and effectively compete with UPS and or FedEx for a non-Amazon type of delivery? I don’t believe that is the endgame for them. We are seeing a very rational, consistent progression for Amazon. It did not become financially viable until it rolled out its Amazon Prime subscription model, and it has experienced phenomenal year-over-year growth. The key to that growth is that 80% of Prime subscribers pay the $120 per year for the perception of free expedited shipping. But every holiday season the delivery experience takes a bit of a black eye based off a lack of carrier capacity, and that is why you see Amazon go out and buy 4,000 trailers, lease 40 aircraft, and build out a new delivery network. They need to control their own destiny and need to be able to have available capacity and continue to grow the Prime model and maintain the Prime delivery experience for the subscription base.”

If Amazon is able to fill up network space to offset operating expenses, Gooding said is a positive for them, with its network expansion serving as dipping a toe in the water to see if they can bring in non-Amazon types of packages.

But it comes with the caveat that it is a difficult time, at the moment, to be cost-competitive, which is the rub, in a sense.

“We are not seeing any cost-competitiveness from Amazon at all,” said Gooding.

“Amazon is mirroring the rate structure for accessorials and surcharges, in a lot of cases, and are not offering full pickup and service, and cannot go back and quantitatively tell a client how many client shipments are going to be delivered in the Amazon delivery network versus being handed off to the last mile carrier.”

Even if Amazon was able to make full end-to-end delivery, Gooding said it is still not as easy as Amazon Logistics coming in with a cost-competitive offer and taking a segment of the business from UPS or FedEx from a shipper.

This is due to there being so much complexity in this marketplace controlled by performance language in carrier contracts, which include discounts built around a shipper maintaining an agreed-upon financial commitment with a carrier.

“But Amazon, UPS, USPS, or FedEx comes in and says ‘we would like to take 40% of your business and offer you a great deal,’” said Gooding.

“If you do that, the remaining 60% of your spend is going to take a punitive pricing increase to offset any savings you got. There are some real barriers to this marketplace that are unlike other markets, and we see a huge disparity between the layman’s perception of the Amazon brand and its effect on the delivery world.”

This goes back to Amazon’s endgame, which Gooding said is not to compete with UPS and FedEx but to offer additional capacity and another cost-competitive delivery channel for them to control Prime growth.

As a result, he said within the FBA umbrella, with packages moving through their fulfillment operation that is impactful to UPS and FedEx.

“Amazon will continue to grab the efficient deliveries, the urban, city-dwelling, high-earning demographic deliveries and push out the less efficient, bulky, hard to handle deliveries to other carriers,” he said.

“If you were managing the Amazon account from a UPS perspective, you would be concerned because our delivery characteristics are going to change annually, with less of the good stuff and more of the bad stuff. UPS kind of has the tiger by the tail. Estimates range that the Amazon spend with UPS is $5 billion-to-$7 billion per year. There are not many shippers out there that represent that kind of spend.”

With 2019 delivery activity positioned for a record-breaking year, Gooding said consumer confidence is where it needs to be, and Amazon is doing everything it can to position itself with the capacity to handle that spike.

Read: How Retailers Can Survive the Amazon Era

Some of the takeaways from Amazon Logistics pricing proposals obtained by iDrive Logistics include:

• Service levels comparable to FDX SmartPost;
• Pricing in essence at parity with USPS Priority commercial pricing/SmartPost
• Delivery Area Surcharge applied the same way as UPS/FDX with similar zip codes @ $3.25 per package; and
• Dimensional factor 139, which is same as FDX/UPS but worse than USPS (166); and 
• 2-7 Day transit speed

iDrive Logistics’ White said if you are taking USPS Priority Mail, which is a 2- and sometimes 3-day service, that cost basis is very similar to Amazon Logistics, with the difference being that the USPS will pick up and deliver your package and it won’t arrive in two-to-seven days, it will get there in two days.

“If Amazon is trying to go after e-commerce shippers that are best served by USPS Priority Mail on a cost basis, it is going to be very difficult,” he said.

“And compared to the delivery experiences of UPS and FedEx, which are considered more robust with more supply chain resources, you are still looking at pricing parity without a pickup and with no guarantee on who is actually going to drive your package to its destination. That makes it hard for a shipper.”

Editor’s Note: An Amazon spokesperson told Logistics Management that Amazon does offer a full pickup service.

Gooding and White’s analysis of Amazon Logistics takes a deep dive into costs and challenges related to doing business with Amazon in a competitive marketplace, to say the least.

Amazon continues to make major strides in expanding its network and capacity commitments, which makes an interesting and challenging market even more so.

Editor's Note: An Amazon spokesperson told Logistics Management that these third-party statements in this article are inaccurate and do not represent the details of its program or the value it provides to its customers.

Related Article: Why Amazon Has a Leg Up On the Online Competition, Thanks To Its Massive Customer Base

Related  White Paper

Negotiating Carrier Agreements 
In this white paper, we describe how to become a better negotiator and the important distinction between cost modeling and benchmarking. Download Now!

---

More Resources  from iDrive Logistics