The Art of Determining Shipping Cost for Ecommerce Merchants
Published on July 23, 2024
As an e-commerce business owner, you've probably spent countless hours perfecting your product lineup, fine-tuning your marketing strategy, and optimizing your website. But have you given enough thought to your shipping strategy?
Trust me, as someone who's helped numerous e-commerce businesses scale, I can tell you that how you handle shipping can make or break your profitability and customer satisfaction.
In this guide, we'll dive deep into the world of shipping costs. We'll explore the different ways to determine your shipping fees, break down the components of shipping costs, and discuss strategies for the perfect balance between your margin and customer expectations.
Let’s get started!
Understanding the Shipping Costs
Before we dive into the nitty-gritty of calculating shipping costs, let's take a moment to understand why it's so important to your business.
Properly managing shipping costs can impact your profit margins and, believe it or not, increase customer loyalty. It's much more than just getting your goods to your customers and hoping for the best. You need a strategy that works for you and your customers. There are several factors that come into play when calculating how much it really costs you to ship your packages.
How to Determine Shipping Costs When Selling Online
With a better understanding of what makes up shipping costs, let's look at how to determine shipping costs when selling online.
To develop a comprehensive shipping strategy, you need to consider several factors and approaches.
Components of Shipping Costs
- Handling (Time and Labor): This is the human element of your shipping process. Calculate the time and labor required to pick, pack, and fulfill an order.
- Packaging Materials: List all the packaging materials you use (e.g., boxes, tape, bubble wrap) and their costs. Don't forget to include the cost of branded packaging if you use it.
- Postage and Carrier Fees: Use carrier rate charts or online shipping calculators to determine postage costs based on package weight, dimensions, destination, and service level. This is often the largest portion of your shipping costs.
- Fulfillment Centers and Special Handling: If you use fulfillment centers, consider in their costs, such as storage, pick and pack, and service fees. Also consider any special handling requirements for your products.
How to Determine Shipping Costs When Selling Online Step by Step
Determining shipping costs for your e-commerce business is a complex process. Here are the steps to calculate your costs and choose the right strategy for your business.
Step 1: Understand the Components of Shipping Costs
Handling Costs:
- Time and labor for picking, packing, and processing orders.
- Document every step and associated cost.
Packaging Materials:
- List all materials: boxes, tape, bubble wrap, etc.
- Calculate the cost per package.
Carrier Fees:
- Based on weight, dimensions, destination, and service level.
- Often the largest component of shipping costs.
Fulfillment Center Fees (if applicable):
- Storage fees, pick-and-pack fees, and service fees
Step 2: Calculate Your Base Shipping Cost
Use this formula:
Shipping cost = Handling cost + Packaging costs + Carrier costs
- Create a detailed spreadsheet to track these costs for each product.
- Use carrier rate calculators or your negotiated rates to determine carrier costs:
Step 3: Consider Key Factors Affecting Shipping Costs
Destination:
- "Distance equals dollars" – the further you’re shipping to, the more expensive your shipping cost will be.
- Identify your primary market and build your rate table around it.
- Adjust rates for other regions based on distance.
Size and Weight:
- Larger and heavier items incur higher shipping rates.
- For furniture, cribs, gym equipment, etc., factor in:
- Two-person delivery requirements
- Appointment scheduling
- Special handling procedures
- If shipping internationnally, consider restricting the delivery of certain bulky items to a specific hub or distribution center and then leverage local distribution networks.
Delivery Speed:
- Establish a base commitment (typically 3-5 days in Canada).
- Offer premium rates for expedited options (same-day, next-day) or partner with a consolidator, or local logistics company to optimize efficiencies.
International Shipping:
- Factor in import/export fees.
- Consider partnering with third-party providers for better global rates.
Step 4: Analyze Your Market
- Research competitor shipping policies.
- Create a table showing:
- Who charges for shipping
- Who offers free shipping
- How free shipping is offered (thresholds, conditions)
- Determine where you want to position yourself in the market.
Step 5: Understand Customer Expectations
- Be aware of the "Amazon effect" - many customers expect free or discounted shipping.
- Recognize that charging full shipping costs may lead to cart abandonment.
- Note that customers are more accepting of shipping charges on high-value items.
- For items under $50, customers generally don't expect to pay for shipping.
Step 6: Choose Your Shipping Cost Strategy
There are three main strategies for determining shipping costs, each with its own set of pros and cons:
Pass Full Shipping Cost to Customer
Pros:
- It's financially sound, ensuring you recover all shipping costs.
Cons:
- It can make you less competitive in a market where free shipping is increasingly expected.
- You might see higher cart abandonment rates, especially if you're competing with e-commerce giants like Amazon.
When to Consider It:
- This is common practice in your vertical and with your competitors, so you are “on-par” in the market.
- You offer a unique, differentiated product that cannot be found at other competitors in the market.
- You offer a high value product, where customers would be willing to pay the incremental expense to receive the item.
Pass Partial Shipping Cost to Customer
Pros:
- It reduces your financial burden while still offering competitive rates.
- It's more customer-friendly than full cost pass-through.
Cons:
- It requires a strategic understanding of your products and customers and will require analytics and a team to manage.
- You will need to absorb some expense in your P&L reducing your product margin.
When to Consider It:
- Consider this for high-margin products or items with high perceived value.
- When you have negotiated vendor support to cover a portion of the shipping expense.
- Customers are more likely to accept a small shipping charge for a high-end product than for a low-cost item.
Offer Free Shipping
Pros:
- It can increase customer satisfaction and loyalty significantly.
- It will reduce cart abandonment rates.
- It often leads to higher average order values and repeat purchases.
Cons:
- You absorb the full expense of shipping, which can impact profitability.
When to Consider It:
- If you can offer free shipping on specific products or categories.
- If you can set spend thresholds. For example, if your average order value is $60, consider offering free shipping on orders over $75 to encourage larger purchases.
- Use it as a loyalty incentive to reward frequent customers.
- Offer flat-rate free shipping on all orders, but only if you have a solid grasp on your costs and margins.
Step 7: Implement Your Chosen Strategy
- Set up your e-commerce platform to reflect your chosen strategy.
- Ensure your strategy is applied consistently across all sales channels.
Step 8: Use Tools and Resources
Build or use a shipping rate calculator
- Build or use an online shipping rate calculator to input your package dimensions, weight, and shipping zones. Building a spreadsheet to calculate your rate can be as easy as:
Handling Time (hours) Labor Cost / Hours Packaging Cost Weight (lbs) Dimensions
(L x W x H)
Dimensional Weight (lbs)
Shipping Zone Carrier Carrier Rate Special Handling Fee Fulfillment Center Fee Total Cost 0.5 $15 $2 1 10x6x4 2 Zone 1 FedEx $5 $1 $2 $15.5 0.75 $15 $3 2 12x8x6 5 Zone 2 UPS $8 $0 $3 $24.25 1 $15 $2.5 1.5 14x10x8 7 Zone 3 Canada Post $7 $1.5 $4 $27
To calculate dimensional weight, multiplying the package’s length, width, and height, and then dividing the product by the carrier’s dimensional factor (DIM factor) - Use your negotiated carrier rates.
Consider rate shopping partners
- Especially beneficial for small businesses
- Can provide significant savings through bulk negotiated rates
- 3PL providers can offer warehousing, fulfillment, and shipping services, often at lower rates due to their volume discounts.
Step 9: Ensure Transparency
- Clearly communicate shipping costs and policies throughout the shopping process
- Include shipping information on:
- Product detail pages
- Shopping cart
- Checkout process
- Create a comprehensive FAQ section about shipping
Step 10: Monitor and Adjust
- Regularly review your shipping costs and their impact on your business. Understand your product margins to determine how much you can absorb in shipping costs.
- Analyze customer feedback, browsing and, purchasing behavior. Early indicators can be identified through website analytics like page-exits and cart funnel abandonment.
- Stay informed about market trends and competitor strategies.
- Be prepared to adjust your strategy as needed. Ensure your shipping costs and policies are competitive to attract and retain customers.
Remember, your shipping strategy isn't set in stone. As your business grows and evolves, so too should your approach to shipping.
Putting It All Together
Determining the right shipping strategy for your e-commerce business isn't a one-size-fits-all solution. It requires a deep understanding of your products, your customers, and your competition. Start by analyzing your competitors' shipping policies. Create a spreadsheet to understand who offers free shipping, how they structure their offers, and where you want to position yourself in the market.
Regularly review your costs, customer feedback, and market trends to ensure that your shipping strategy continues to serve both your bottom line and your customers.
But remember, staying on top of your shipping metrics is critical. This is where tools like Buster Fetcher can be invaluable. Buster Fetcher's in-depth reports can give you with easy insight into your shipping operations, helping you track key performance indicators without having to dig deep into your data.
In the end, the goal is to find a balance that keeps your customers happy without eating into your profits. Whether that means offering free shipping across the board, setting strategic thresholds, or finding creative ways to offset costs, the right solution is out there. It might take some trial and error, but with careful analysis and a willingness to adapt, you'll find the shipping sweet spot for your business.
So, are you ready to dive in and revolutionize your shipping strategy? Your customers (and your profit margins) will thank you!
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