How to Calculate Shipping and Handling Costs
As an e-commerce retailer, your shipping and handling costs can make or break you. Sure, offering free or bargain-basement shipping fees can win you favor with customers, but if it puts you in the red and eats into your bottom line, what’s the point?
On the other side of the coin, too-high shipping and handling fees can drive away potential customers and sales. It could even push customers right into your competitors’ arms – and no one wants that.
Setting Your Initial Shipping and Handling Costs
Shipping and handling fees should be set very carefully and very thoughtfully, and as your business changes and grows, they need to be re-assessed, re-calculated and revised.
Sadly, there’s no easy, instant shipping and handling costs calculator that can tell you exactly what to charge.
To be most beneficial to your bottom lines, your shipping and handling fees should be tailored to your exact business – its sales volumes, operating expenses, product prices and more.
To start, first get a feel for what packaging, handling and postage is going to cost you.
Here’s 3 elements you’ll want to consider:
1. Packaging
- What types of boxes, bags, envelopes, tape and inserts are you using?
Create a spreadsheet to total up what one package costs you to pack, and make sure to break it down by package size and weight if you sell a variety of products.
As it relates to Amazon, you can bet your customers are paying attention to the packaging for your items. And if it’s bad, it could result in negative seller reviews.
Here are a few more reasons why Amazon packaging is important:
Of course, for drop shippers, it’s hard to control the packaging. That’s why most successful sellers use FBA for top selling products.
But even if you’re using FBA for some or all of your products, you’ll still need to know the packaging rules and regulations for those shipments to Amazon.
2. Handling
- Do you have to pay someone to pack your orders?
- How much do you pay them per hour and how much time does it take them on each package?
- Do you have a warehouse for storage and a pick-and-pack system you also need to cover?
These should factor into the equation as well.
“Pick lists and packing slips and an easily organized warehouse, garage, and/or shelving can cut down on the wrong product finding its way into a box,” Joey Blanco, Content Manager at Shipstation said in a recent interview.
“Having a second set of eyes confirming that what’s in the box is what was ordered helps, too.”
3. Postage
- What mailing service are you using?
Check out their rate chart, and be sure to factor in any surcharges that might apply (UPS and FedEx have various fuel surcharges.) Add these charges to your spreadsheet, too.
You can also use this as an opportunity to rate-shop. Check out what each shipping provider offers in terms of rates and surcharges, and find the lowest cost delivery methods for your products.
Your ultimate goal is to calculate your average shipping, packaging and handling costs per order. If your costs come out to roughly the same on all products and orders, then you can charge a flat rate for every transaction.
If your shipping and handling varies greatly depending on order size and package weight, you’ll want to have a sliding scale of fees depending on what a customer orders.
Assessing Your Shipping and Handling Costs
1) Once you’ve determined a baseline for what your shipping and handling costs should be, you’ll want to look at them in relation to your sales totals. Pull up your recent orders, as well as your shipping and handling spreadsheet.
- How much did each order cost to ship and handle?
- How did it compare to what you charged the customer?
You want to be sure you’re always covering your costs and not letting shipping and handling eat into revenues.
2) You’ll also want to look at shipping and handling costs as they relate to sales totals. Create a new spreadsheet that shows how much each recent order total was, what you netted in profit and how much it cost you to ship out.
Was shipping and handling 5 percent of your net? 10? 20? This can help you determine thresholds at which you may be able to offer free or discounted shipping without hurting your bottom line.
3) Finally, use this information to spot opportunities for reducing your shipping and handling costs. If you’re regularly paying 20 percent of profits to cover S&H, then you may want to make a change.
- Could you find a new warehousing solution?
- Use a different shipping provider?
- Leverage lighter weight packaging?
Dive in and see where those costs are coming from.
As your business changes and sales and order volumes ebb and flow, you’ll want to reevaluate your shipping and handling fees. They may need to be adjusted from time to time as you add new products, invest in new warehousing or packaging strategies or hire new employees.
The Truth About Free Shipping
- How important is free shipping to consumers?
In our “Amazon Consumer Study“, we asked 1500 men and women five key questions about their Amazon shopping habits—from product discovery to checkout.
Although some results were expected, others were less predictable (ex: men were more likely than women to run
price checks before making purchases).
So, where does free shipping fall in comparison to product price, reviews, and other purchasing factors?
According to our data, price won out as the determining factor in both male and female respondents’ decisions to make a purchase on Amazon, followed by convenience of shipping and quality of reviews.
The survey revealed that ages 55-65+ were least impressed by “Convincing product descriptions and photos,” “Price,” and “Quality of reviews” than any other age group.
Instead, this group strongly values the “Convenience” of Amazon (ex. Prime’s free two-day shipping).
In contrast, 18-24-year-olds care far less about shipping and weigh price as the single most important factor in their choice to go with Amazon.
According to our team of Amazon advertising experts, 18-24-year-olds are conditioned to expect free shipping when shopping online— and this group probably also has less disposable income, which explains why price is so important.
The key takeaway?
Price is still king, but fast free shipping and customer reviews can make or break even the cheapest sale.
To learn more, check out the entire study available here.
For more information on shipping and handling, email [email protected].
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