Carrier Contract Negotiation Strategies: How Carriers Deploy Clauses (and How You Counter)

If you’re a brand or 3PL that has found themselves locked into a carrier contract without quite knowing how it happened, or why it’s suddenly and unintuitively more expensive to add another carrier, you aren’t alone. Carrier contracts are built with that intention.

Private carriers like UPS and FedEx have been really good at structuring rate contracts that handcuff a brand from switching up or introducing another carrier. Once they know your full volume, these carriers will create an agreement that captures all of your business and sometimes even anticipates your growth.

Although it can be difficult and complicated to diversify, ultimately it’s worth it to future-proof your shipping strategy and optimize for the best rates.

Why carrier diversification is so important

Most carrier contracts are framed against their published rates. For example, a percentage discount or otherwise deviation from a published rate card. And yet, who controls those published rates, but the carriers?

That means even if your contract states 30% off of published rates, there’s nothing stopping carriers from bumping their rates up by 20%, effectively changing your discount to 10%, based on what you calculated for.

When you have more than one carrier in your rotation, you’ll find that some are better at certain specifications than others.

Some, like regional carriers, might have better rates and faster shipping for different zones. Other carriers will be more affordable during peak if they don’t implement peak surcharges. Some carriers specialize in certain service levels, and others will have different benefits.

For example, Amazon Shipping is excellent for parcels between one and nine pounds, but they only offer ground service, and only offers pickup from specific locations.

Having more to choose from means having options when prices (and customer expectations) go up.

How carriers capture your business

You might be ready and willing to diversify your shipping strategy, but carriers employ several strategies to lock in your business, many of which involve punitive pricing increases for diversification.

So if you decide to move 30% of your volume from FedEx or UPS to Amazon Shipping, FedEx or UPS may put punitive pricing on the remaining business you have left with them to recoup that loss anyway.

Here are a few things we’ve seen take place and how to address them.

Minimum volume requirements

Most carrier contracts will be contingent on their published rates. For example, they might offer 30% off of published shipping rates as long as you meet a minimum volume requirement.

Most private carriers measure spend performance on a 52-week rolling spend average. You’ll get discounts at a certain spend level, and if you fall below those thresholds the discounts will be reduced incrementally.

This is tricky, because if they know your overall volume, they will adjust the contract so that the “minimum” to unlock those rates is actually very close to your full business.

For example, if a brand sells $10M a year, carriers will construct a contract that requires all of that parcel business in order to get the best rates. If you dip beneath those volumes, they might switch over to a smaller discount on published rates, or even a penalty fee.

What to do about it: There are different ways to work around minimum contracts. For example, you may consider peeling off a portion of your growth to test out new carriers. If you see roughly 10% growth year-over-year, you can allocate that 10% to another carrier while still maintaining your minimums for your existing carrier.

Primary carrier designation

Another thing carriers might try to do is offer an agreement wherein they are the “primary carrier.” So for example, they could require that they constitute 92% of all of your small parcel shipments. Then, if you fall below that, you get a penalty or are switched to published rates.

What to do about it: This is one of the hardest contract clauses to work around since it designates a percentage, but it’s also one of the harder ones to enforce since it entails you handing over all of your shipping data and then the carrier sifting through it and making their calculations.

RFP prohibited

Carriers may also add language into their contracts that prohibits you from running an RFP (request for proposal) before your contract ends. That means even if there are better rates out there, you aren’t allowed to send out a formal request for them until your current carrier contract is almost up.

For example, they might say you cannot run an RFP before 90 days from the end of your agreement, or you’ll be subject to published rates.

This clause is essentially a command for a brand to stop rate shopping until the contract is close to renewal.

What to do about it: You won’t be able to run an official RFP across carriers unless you want to be switched back to full price rates, but you can still discover shipping rates through transportation management systems that provide access to multiple carrier rates. For example, the iDrive TMS can plug directly into your existing tech stack to show you different shipping label and carrier options based on service level, dimensions, weight, and zone.

Early termination clause

Some carrier contracts have an early termination clause. That means if you want to end the contract before times up, even if you can no longer make the minimums anymore, you’ll need to pay to exit. Sometimes it’s a flat rate, sometimes it’s a percentage of your annual spend, and sometimes it’s both.

For example, an early termination clause could cost you 2% of your annual spend plus a fixed dollar amount.

What to do about it: If a carrier truly isn’t working for you anymore, you’ll need to bring the numbers to prove it. More on that below.

How to negotiate carrier diversification while maintaining good carrier relationships

Carrier negotiation is 50% science and 50% art. It’s always good to come prepared with data, as well as a compelling story. Here’s what to do when it’s time to start diversifying.

1) Understand your parcel characteristics

The first step to diversifying your carrier mix is to understand your parcel characteristics. What kind of packages are costing you the most, giving you the most problems (claims or late deliveries), or triggering customer complaints?

Is it a certain SKU? Location? Sales channel? Dimensions? Weight?

Consider all of this before defining exactly what kind of parcels you want to diversify carriers for.

2) Map out the pitfalls

Then, you need to pre-choreograph all of the pitfalls and decision points that will come up when you’re updating carriers. Operationally, think about what you need to execute as a brand, and how diversification will align with customer experience.

For example, what happens when one carrier has all of your 1-9lbs parcels and another has your heavier parcels, and someone orders two unique items that weigh 20lbs and 5lbs respectively? Do you split the items? Will they arrive on different days? Will your customer assume the first package that arrives is missing a piece, rather than expecting two separate packages? What kind of customer experience does that provide?

You need to pre-engineer all of the complex situations that might come up, and make decision trees for them, before you go to market with a new carrier mix. Pre-empt any complexities that a multi-carrier strategy will bring to your operations.

3) Shop your business around

Once you’ve done all of the research and calculations, define your needs and shop them around. Go to potential new carriers, and only allow them to bid on the slice of business you want to source for.

For example, don’t tell a new carrier you do $10M in annual sales. Instead, tell them you’re looking to partner with them for $2M of sales for parcels for a certain route.

It’s important not to divulge your full shipping scenario, because often carriers will adjust their offerings to capture your full business. So even if they were willing to give a 30% discount on your $2M business, they’ll now offer 15% on $2M but 30% if you give them all $10M.

4) Negotiate with your current carrier(s)

Now that you have alternate quotes, it’s time to go back to your carrier(s) and present offers from other options that show how much you can save. You can then negotiate with your current carrier from a stronger, data-driven vantage point.

In our example above about contracts requiring a certain carrier to be the “primary” carrier, you can look at the spirit of the agreement. What has that carrier done throughout the lifetime of the contract that might contradict the spirit of the partnership?

Consider a carrier that wants a majority of your shipping business, but has increased prices three times without letting you know. You need to bring all of the data you’ve gathered above and present how those shipping costs are affecting your margins.

You might say “You want 92% of our business but you’ve increased prices in these areas without letting us know, on top of the upcoming GRI. That comes out to us taking a 13% increase during this time period. We can’t run a business with these margins, and are forced to look at alternatives.”

Once you’ve shown your cards, it’s time to prepare for the response.

5) Have a backup prepared

Have plans for different outcomes. If you want to move 30% of your business to another carrier, prepare an alternative solution for the remaining 70% in case negotiations go poorly with your original carrier.

You’ll also need to figure out the correct mix of national and regional carriers. You may need to bring in a new national solution and two regional solutions to replace your existing carrier.

All of this may sound complicated, but the rewards are well worth it. I’ll leave you with an inspirational tale.

We worked with a brand that did $2.8M in spend with a popular carrier. We made a wholesale change to another carrier to save them 22%, which manifested in $600,000 a year in savings from their shipping budget.

This customer made a full switch to another carrier, which is a scenario where we typically see anywhere from 15% to 23% of savings. When moving to a multi-carrier mix, we’ve seen even greater success, with savings of up to 30%.

Diversify your carrier mix: More choices means better options

To sum up, diversifying your carrier mix will ultimately leave you with more choices when surcharges and tariffs hit. More choices means you’ll always have a best option among them, which is a much stronger position to be in rather than relying on the twists, turns, and whims of a single carrier.

The carriers won’t make it easy for you, but you can do your research, compile a strong argument, and present all the data for a going multi-carrier. As long as you know how to read and understand your carrier contracts, you can stay aware of what levers to negotiate on and which clauses to look out for.

And if you want some help analyzing and negotiating your carrier contracts, and finding your ideal carrier mix, get in touch with iDrive Logistics.