Surcharges for labor – a sign of things to come?

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DPD Baltics has introduced a labor surcharge in response to rising wages. Surcharges are common in the delivery sector, but will customers wear yet another surcharge? Analysis from Julia Bayram and Marek Różycki (Last Mile Experts).

DPD Baltics (Lithuania, Estonia and Latvia) has introduced a new ‘labor surcharge’ based on quarterly officially published wage inflation indicators. The main reason for this surcharge is the continuing wage inflation of blue collar workers. This trend is visible in the Baltics and across the EU and is hitting the CEP (courier, express, parcel) sector hard, but will the market accept yet another incremental charge?

There are several options to deal with rising wages, ranging from technological innovations that reduce or simplify human interactions, through to price increases to cover increasing salary costs. This new surcharge is a systemic cost recovery solution avoiding the need for periodic negotiations with customers.

Surcharges are an effective pricing tool, which is especially useful where cost factors are variable and hard to predict. A good example is the fuel surcharge now widely used by logistics players to compensate for unpredictable fuel prices fluctuations, which heavily affect the cost base.

Another widely used type of surcharge is pricing of optional value-added services, such as cash on delivery or document return. Surcharges can also be a great tool to modify customer behavior. For example, implementing a surcharge for printed invoices can lead clients to choose online invoicing instead.

A surcharge can be a good way to increase prices without touching the base price list and entering potentially protracted negotiations with customers. Moreover, with surcharges the base price looks attractive compared to competitors who don’t use surcharges, but surcharges create a hidden layer. This particular surcharge is interesting in that – like the fuel surcharge – it is ‘automatically’ adjusted in line with wage dynamics and doesn’t require periodic manual adjustment.

Of course, the smart players can also tweak ratchet-based surcharges to their advantage underneath the radar. Some examples include the aggressiveness (or not) of the formula increasing the surcharge in line with fuel price rises…or indeed the speed at which or base to which the surcharge falls with fuel price.

Another good example is the volumetric weight surcharge that can be lowered or increased significantly simply by adjusting the divisor, which can sometimes range from 3000 to 7000. This can be big money for some parcels, as calculation is height x length x girth/divisor. When one looks more closely, there is an array of surcharges covering a wide area of items and the sum of the surcharges can sometimes increase the price paid by half or more, especially with international express products.

What is our take out on DPD Baltics’ new surcharge? Our view is that this may be a bridge too far in that the company already operates several other surcharges and no real improvement or tangible add-on service accompanies the surcharge.

On one hand, it seems to be a logical move to protect against this dynamic variable. However, one of the negative effects of using too many surcharges in pricing is that a calculation of the final price becomes too complicated for the customer.

This is especially so as more and more companies are implementing a peak or seasonal surcharge to cover additional – mainly labour related – costs at this time. While small corporate customers will tend to be more flexible and sometimes not aware of the implications of these hidden costs, large players tend to push back on surcharges.

Price is not the only factor in deciding upon one or another courier service provider. Elements such as quality, reliability, relationships, and customer service are also important. The specific situation here – with one dominant player as is the case for DPD in the Baltics – also helps in gaining customer agreement to this kind of additional levy. However, in many countries, the open CEP market is competitive and the question is ‘how far can you go before the customer will reach breaking point and take their business elsewhere?’

Bio:
Julia Bayram is PRO partner for Turkey and Latvia at Last Mile Experts. She has expertise in last-mile delivery solutions and courier parcel logistics, company strategic development and project management.

 

 

Marek Różycki is managing partner at Last Mile Experts, specializing in CEP and e-commerce last-mile advisory.

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