Apparently, no one believes that good things come in small packages anymore. Instead, UPS (NYSE:UPS) says people are buying stuff that's being shipped in bigger boxes, and that's taking up premium real estate in its big brown trucks. So beginning Dec. 29, its package delivery service will switch to dimensional pricing and start charging you based on your package's size in relation to its weight.
Dimensional-weight pricing is nothing new, as UPS and rival FedEx (NYSE:FDX), which also just announced a switch to new pricing based on package size, have both used it for ground services, as have air freighters and truck carriers. The U.S. Postal Service adopted it a few years back, calling it "Shape-Based Pricing."
Although the clock began running on when UPS would adopt the plan after FedEx announced its new arrangement, Big Brown said it's been looking at the situation for years because it "enables us to more appropriately align rates with costs which are influenced by both the size and weight of packages."
My Foolish colleague Rich Smith clearly lays out how FedEx's system affects you as a customer, comparing the damage wrought if you wanted to ship a box of batteries compared to a box of toilet paper using Amazon.com (NASDAQ:AMZN), and though there are bound to be some nuances between the two, UPS will likely function in much the same way. As Rich noted, the two carriers tend to walk lockstep on price increases, so this was more of a "when" proposition, rather than an "if," but it seemed unlikely for UPS investors to lose either way.
However, Amazon investors might not be so lucky. Earlier this year the e-commerce site hiked the cost of its Prime membership service by $20 to help absorb some of the increased transportation costs it faced. Since starting the service nine years ago, it hasn't raised the cost at all and over that time it's gone from offering free shipping on 1 million items to over 19 million. Despite the reasonableness of the proposal -- it was even discounted, since Amazon originally said the fee could be hiked by as much as $40 -- the new, higher $99 price still generated a strong backlash among customers.
So if Amazon was covering its costs for nine years of rising fuel and shipping costs, the new math involved in dimensional-weight pricing will lay down a new layer of expense on top of it. I've received items from Amazon at times that left me scratching my head about the packaging: big, lightweight boxes filled with sealed-air cushions surrounding the much smaller box of the item I actually ordered.
Amazon now faces a choice of absorbing the anticipated higher shipping costs or risking the wrath of customers by having to institute a new round of price hikes of its own. While the e-commerce leader doesn't divulge much information about its Prime memberships, analysts estimate Amazon has around 21 million to 23 million members and that it's growing at around 40% annually.
That sounds as if Amazon should not feel much of an impact, but now that customers are paying sales taxes in more jurisdictions, the catalog of movies available on its streaming service is of limited value (particularly if you're also a Netflix subscriber), and with the question of whether the new streaming music service is a bonus still an unknown, the one-two punch of FedEx and UPS hiking shipping costs once more puts it in a quandary.
The move by the delivery services giants makes sense: It's an easy increase to profits while appropriately aligning the costs of shipping bulky boxes. For companies like Amazon that rely upon their services to meet the needs and expectations of their customers, it brings the cost-benefit analysis to a whole new dimension.
Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, FedEx, Netflix, and United Parcel Service. The Motley Fool owns shares of Amazon.com and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.