The Internet has made it possible for someone in the Maldives to purchase a product from a business based in Canada. Geographical distances are redundant as far as shopping is concerned. Nevertheless, when dealing with tangible goods, a business must find a way of delivering the item to the online buyer quickly, efficiently and accurately. Managing your business’ shipping costs is therefore essential to ensuring your company remains competitive and profitable.
When contemplating your shipping costs, you must take into account cost strategies and cost factors.
Shipping Cost Strategies
Shipping cost strategies fall into three broad categories.
1. Free Shipping
Free shipping is the ideal every ecommerce business aspires to. Nevertheless, free shipping is never truly free. No prudent e-retailer will allow free shipping to push them into loss-making territory. So when a store talks about free shipping, that usually relates to either one of two things.
First, the business has opted to take a hit in the short-term in the hopes of drawing sufficient customer volumes to carry the business when the offer ends. Second, the store is passing the cost to the customer indirectly by including it in the overall price of the product.
To know whether free shipping is a viable strategy for you, you should compute your sales volume (which can be leveraged to negotiate lucrative discounts with carriers), profit margins, competitor pricing and the minimum order that’ll allow you to sustainably offer free shipping.
2. Fixed-Rate Shipping
Unless you are Amazon and cushioned by an extremely profitable subsidiary like Amazon Web Services, free shipping is usually impractical and unsustainable. If you opt for a flat rate shipping strategy, then you’ll set a fixed cost that is applied to all products irrespective of weight, dimensions or destination.
The obvious advantage of this approach is predictability. From the get-go, your customers know exactly how much it will cost them. The disadvantage is that you won’t always be able to cover your freight costs. It’s also fraught with uncertainty for international orders where taxes, duties, surcharges and other landed costs are harder to keep track of.
The international landed costs are billed after delivery meaning the unexpected costs the customer is faced with ultimately negate the idea of fixed shipping pricing. Still, developing or embedding a reputable shipping calculator on your site that shows estimated international shipping costs via FedEx, UPS, DHL and USPS could provide some reasonable degree of predictability.
3. Calculated Rate Shipping
Calculated rate means you compute the exact cost and subsequently transfer it to your customer in its entirety. The benefit is that the cost of shipping is completely out of your hands. Everything falls squarely at the feet of the buyer.
Also, you can offer your customers multiple shipping options so they can choose what is most palatable for them. For example, if there are 2-day and 7-day options, they would be free to pay less for a longer delivery deadline.
The drawback is that many prospective buyers will balk when they see the cost of shipping exceeds what they anticipated. Another major impediment is the challenge of integrating real-time carrier rates shipping software into your store that takes into account all key variables such as weight, size and destination address.
Factors Determining Shipping Costs
When you attach a cost to shipping, the goal is often not to make a profit from it but rather break even. Determining what the cost of shipping will be is the difficult part. If you want to get it right and ensure the cost leaves both you and your customers satisfied, you must weigh the constituent elements that together comprise your overall freight costs (since, for example, international freight costs are much higher).
1. Destination or Origin
For your product to be shipped from point A to B, there’ll be one or more means of transportation involved. Whether by truck, plane or sea, there are expenses for facilitating the movement. The cost will differ by carrier. Nevertheless, most carriers will define shipping zones that determine how much one pays. That makes shipping costs easier to understand when compared to a strictly mileage-based pricing strategy.
For domestic shipping across the US, carriers have identified a total of 8 zones. The zone naming is not pre-established. Rather it’s based on the origin address which is defined as Zone 1. Subsequent zones will be classified based on their distance from the package’s origin. The further the gap between zones, the higher the shipping fees.
2. Weight or Dimensional Weight
Carriers will charge your shipment based on the item’s weight or dimensional weight. Weight-based pricing is straightforward i.e. the heavier the package, the higher the shipping cost. Dimensional weight pricing is based on the box’s length, height, and weight. It acknowledges that though the package itself is light, it probably takes up a substantial amount of truck floor and wall space.
As a retailer, this is why you should choose your packaging boxes carefully (something we’ll cover in a section below). By identifying the smallest reasonable packaging material for your items, you can save on not just packaging materials but its transportation.
3. Delivery Speed
The quicker you’d like your package delivered, the more expensive shipping will be. Speed is one thing that’s a constant cause of anguish for small and medium-sized ecommerce stores. That’s in large part thanks to the high bar set by giant e-retailer Amazon’s shipping costs. Customers accustomed to the ever faster shipping from Amazon will demand a similar standard from smaller stores.
2-day delivery is what customers expect whereas 3-4 days is deemed acceptable. The constant battle to keep up with Amazon’s breathtaking pricing and speed means that even when an ecommerce store grows its sales, the cost of shipping may eat into its profit increase.
4. Packaging Materials
Packing materials contribute to the overall cost of shipping. Retailers spend just under 10 percent on packaging compared to what they spend on the actual product. Your choice of packaging must be purposeful. Some e-retailers make the mistake of ordering oversized boxes in the pretext of getting a discount for bulk packaging purchases and having something that can fit most of their products. This is unnecessarily expensive if you are using a carrier that applies dimensional weight pricing.
But your packaging choice must go beyond size. Quality matters too. Poor quality packing materials increase the risk of product damage and therefore the likelihood of product returns. You lose money on shipping costs, on the lost sale and a diminished reputation that curtails future sales.
5. Warehouse and Distribution Center
Shipping doesn’t strictly apply to the movement of your product. There are other costs that are intrinsically tied to shipping. Before the order gets on an outbound truck, ship or plane, there’s substantial preparation required.
These time-consuming warehouse tasks include assembling boxes, inserting stuffing materials and dividers, and securing and taping cartons. Even if you are going to use robots and other mechanical equipment, the cost of acquiring and maintaining such machinery eventually affects your overall shipping costs.
Effectively managing your shipping costs is crucial to running a profitable ecommerce business. By evaluating the different elements that go into shipping expenses, you can better manage your logistics in a cost-efficient way.