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Determining Shipping Costs for Your Products

March 9, 2021
5 min read
Transportation Logistics
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welcome mat that says free shipping & handling with two boxes

Determining your annual eCommerce shipping and handling fees can be a tricky business, with pitfalls on both ends of the spectrum from setting them either too high or too low. Charging too much can leave customer orders in the limbo of cart abandonment, and assessing too little will, of course, negatively affect your bottom line.

It is critical to properly capture the shipping and fulfillment costs you will face over time, say, compared to getting the costs of your goods down as you look ahead to set prices.

B2B and B2C Shipping and Handling Challenges

As consumer you’ve probably seen a few great online deals only to discover an exorbitant shipping charge attached to it. It’s all too common in today’s online space. Sellers use a “too good to be true,” price on the item and make up the difference in shipping. On the flipside, some of those same items may have a higher price tag with “free shipping.” How can some shippers offer free shipping while others charge through the roof? In most cases, the “free shipping” folks have pre-determined an average shipping rate for their item and have included in the total sales price. The consumer believes they are getting free shipping, but in reality they are paying for it as part of their item purchase.

B2B shipping may be handled similarly, but in may cases, B2B sales happen in greater quantities and, therefore, incure greater shipping charges. One of the ways manufacturers and distributors help offset shipping charges is by utilizing public warehouses in locations where their products most often ship. By storing larger quantities of product in a warehouse, they’ll offset the warehousing cost by reduced LTL and FTL transportation costs from their main headquarters.

Whether you’re shipping B2B or B2C, setting the shipping price for your items may help sell it or cost you the sale. Determining your margin and actual shipping costs along with competitor prices will help you determine whether you have the ability to offer free shipping as part of the purchase price. In many instances, shipping costs can actually make money for your business. Consider a flat rate for quantity items. For example, 1-5 items ship for $9.00. 6-12 items ship for $15, and 13+ ship for $30. In this example, the customer purchasing one item still pays the $9.00 rate. The actual $9.00 rate supports up to 5 items, so anything less than will cost less to ship, adding profit to your sale.

Get a Handle on Cost

Determine your annual surcharge rates. These are generally the USPS delivery confirmation fees, UPS and FedEx residential and delivery area surcharges, and the UPS and FedEx fuel surcharge assessed.

Estimate surcharge volume. Find the percentage of your UPS and FedEx parcels that are subject to the residential surcharge and/or to the delivery-area surcharge. You will also need to estimate the percentage of your USPS parcels that include delivery confirmation as an option.

Determine your per-order warehouse and supplies expense. Add your monthly warehouse labor cost, shipping supplies expense, and facility cost (excluding USPS, UPS, or FedEx delivery costs) and divide this by your average monthly shipping volume. For example, if your total warehouse and supplies are $6,250 per month and you ship 1,000 orders per month, the per order cost equals $6.25. Using the example above, consider charging a flat rate of $12.00 for 1-3 items. The client sees a perceived savings of $12.50 for 3 items, but is actually paying an additional $5.75 for a single item. Modeling out the ratios could mean greater profit per-item in some % of sales, but could also add to costs if more clients utilize the quantity discounts. There is room and creative ways to integrate shipping in such a way as to make shipping a profit center rather than a cost center.

Do Your Homework

Try comparing individual sales totals with their corresponding shipping and handling costs. This will give you your shipping and handling costs by package weight. Then, simply compare a representative sample of your sales totals by customer order to their individual weights per package with the real shipping and handling costs.

This exercise will bring you to the natural development of a company-appropriate shipping and handling fee strategy. If your marketing department insists on free shipping offers, you can do so with confidence when the overall numbers you arrived at were based on hard facts.
So, while setting your company’s shipping and handling fees too high or too low can be a costly mistake, it can easily be avoided with careful planning, a little homework, and a model that fits the annual sales and projections of your unique business.

Custom parcel carrier agreements can help save thousands on shipping but are very complex. Most people don’t have the experience to know what to ask for or expect in a custom parcel agreement. Amware helps client realize the greatest value on their custom parcel agreements by auditing and negotiating the best parcel rates for their clients.

Contact us to learn more.

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