Modern eCommerce customers demand affordable shipping with a fast delivery time, not only because of the options they have available but also because of Amazon’s offers. To keep up with Amazon’s subscription-based 2-day shipping, many eCommerce businesses are tempted to offer free shipping on their sites.
However, not every business can manage the costs and logistics of offering free or fast shipping to every customer. To help you offer as much as you can to your customers while also maintaining your profit margins, in this article we discuss:
- How to calculate shipping costs
- The pricing of the major shipping carriers
- Strategies for how to save money on shipping
- How a 3PL can help you manage your shipping process
The State of eCommerce Shipping Today
In the age of Amazon where 2-day shipping is expected for items that customers need quickly, such as an OTC medication or video game cable, many smaller eCommerce businesses feel pressured to offer free or fast shipping even if it strains their profit margins. It can be intimidating to read the statistics that 72% of shoppers prioritize free shipping as the main reason they shop online.
However, even if free shipping motivates many customers to shop for day-to-day items, your store may not need to meet the same expectations. A custom dress, machine part, art piece, or furniture set may not require the same demanding shipping schedule.
Customers expect to pay premiums for unique or custom products. Despite Amazon normalizing a 2-day shipping process, studies have shown that many customers will still accept longer delivery times, with nearly 57% reporting that they would wait as long as a week.
An optimized delivery schedule balances profitability with the customers’ expectations. There is no single solution to every eCommerce business’s shipping costs. This is why your shipping procedures and how you calculate them are an essential aspect of planning your eCommerce logistics.
Your ultimate plan in terms of shipping charges and delivery times should change depending on what you can offer your customers and what they expect to receive.
How Shipping Costs are Calculated
The factors that influence shipping costs can each be optimized for your fulfillment process. These factors cannot always be controlled but since they determine how your carrier charges you for your orders, they are essential to understand.
The weight of the package is a clear number that factors into your shipping charges. The major mail carriers compare this number to the package’s dimensions (see below) to calculate your business’s shipping costs. In general, heavier packages cost more to ship.
The length, height, and width of the package multiplied together equals the package’s dimensions. This number, divided by a standard coefficient agreed upon by carriers, is what is termed the “dimensional weight” or “DIM weight.” This number may be larger or smaller than the package’s actual weight in pounds.
Note that carriers calculate shipping costs based on whichever number is higher, the package weight or the dimensional weight. This is so they can avoid footing the bill for a huge package that takes up space in their vehicles but doesn’t weigh much or a small package that is extremely heavy.
Carriers do not change the shipping charges based on the value of the package’s contents. However, you may want to insure expensive items through the carrier so that in case of them being lost, damaged, or stolen, you can be reimbursed.
This possibility must factor into your calculation of your business’s shipping charges since frequent package insurance adds up quickly.
The distance your packages must travel changes the price of shipping them. Carriers use shipping zones (in the United States, there are 8) to calculate the cost of shipping your products.
The locations of your warehouses compared to the locations of customers will make the travel distance vary. Additionally, higher shipping zones, which are those on the East Coast, tend to cost more.
The delivery times you offer your customers drastically change your shipping costs. If you offer 2-day or overnight shipping for free, you will be paying premium shipping through your carrier for every purchase, even to the most expensive shipping zones.
The location of your market changes the factors you must consider with shipping times. Lower zones, such as those on the West Coast, can sometimes deliver packages in 1-2 days using normal ground shipping. However, on the east coast, this offer will almost always require more expensive options.
Since not every product sale requires 2-day shipping, this is a cost that can be managed closely to improve profit margins.
Another factor that you must consider when calculating shipping costs is unforeseen accidents. Transit delays can cost you both in terms of your customer’s satisfaction and in your profits. Customers may demand compensation for the 2-day shipping they paid for but did not receive.
Items can be damaged or lost, a multi-item order could be split up, or weather could impede a delivery. You never know what could happen, which is why you must have room in your shipping cost calculation for this potential.
How to Calculate Shipping Costs for the Major Carriers
Whichever shipping carrier you use, they will calculate your shipping charges by comparing the above information to your needs in terms of delivery times and change their offers to your business accordingly. Here is a brief breakdown of the general procedures of each of the top 3 carriers, USPS, UPS, and FedEx.
For small items, particularly when standard ground shipping is acceptable, USPS is often an eCommerce business’s cheapest option. USPS already delivers mail to customers daily, meaning they already have the means to fulfill your orders.
Their shipping charges can be calculated using the official USPS price calculator.
USPS offers commercial pricing options for businesses that use them for retail shipping. To receive this discount (up to 15% in some cases), you must apply to USPS directly.
UPS uses dimensional weight to calculate shipping costs. They offer several options for shipping based on your delivery time, including Ground, 3-Day Select, and 2nd Day Air. You can estimate shipping costs using the UPS price calculator.
They also offer eCommerce businesses help with their fulfillment process as well as shipping discounts through the UPS Ready Program Support Center.
Like UPS, FedEx uses DIM weight to calculate shipping. They offer Ground, 2-Day, and Standard Overnight Shipping methods.
They also have a program geared towards small businesses to help them grow and improve their shipping solutions. This Small Business Resources Center offers rewards and potential shipping discounts up to 16%.
Use the FedEx Get Rates & Transit Times tool to calculate your shipping prices.
When calculating your business’s fulfillment costs, you must evaluate the total cost of fulfilling an order, not just the shipping. The factors that should be taken into account when assessing your profit margins include:
- Base product cost
- Shipping cost
- Packaging cost
- Payment processing fee
This means that for every product, these four costs must be added up and divided by the optimal profit margin (such as 50% or .5). If the result is higher than the sale price of the item, you are not meeting your profit goals.
For example, for a product that costs $30 on your site and an optimal profit margin of 50%, the above costs must equal no more than $15.
In this entire equation, shipping costs remain the factor you can influence the most. Strategies for cutting costs on shipping prices and logistics therefore represent a significant influence on your ability to meet this profit margin.
Strategies for Saving Money on Shipping Costs
To reduce the cost of shipping, eCommerce businesses can integrate these options into their fulfillment process.
USPS offers regional boxes through their Regional Rate Priority Mail. So long as you use those boxes, you can use USPS much like a flat rate shipping service within a shipping zone.
This can save businesses money, particularly when the travel distance is low and the packages are small but consume a lot of space, such as the case with a store that ships unique clothing items.
Flat Rate Shipping
Both FedEx and USPS have a flat rate shipping service that can save businesses money. You have to use the carrier’s shipping materials, but this simplifies the entire rate calculation process since the boxes are standardized across the board.
Different pickups cost different fees. Carriers can offer multiple pickup options that may change their postage rates depending on the time it saves them driving to your warehouse or other pickup location.
Use a 3PL Company
A 3PL or third-party fulfillment service can help you manage your shipping costs more effectively (see below).
Benefits of Using a 3PL Company for Shipping
Perhaps the most all-encompassing strategy for saving money on shipping costs is outsourcing your fulfillment process to a 3PL. In-house fulfillment may seem like a cost-saver at first, but you deny your process the expertise that 3PLs can offer as well as the time and resources you no longer have to devote to calculations and logistical management.
3PLs like eWorld Fulfillment can offer many benefits to your shipping procedures, including:
Particularly for larger operations with customers spread out over the country (or the world), a distributed inventory has many cost benefits. Running more than one fulfillment center reduces shipping costs by placing hubs closer to your customers, allowing you to offer shorter delivery times to more users.
However, managing multiple fulfillment centers can be difficult without the help of a 3PL.
3PLs can obtain discounted shipping rates for your business in multiple ways. Since they ship a high volume of merchandise for many customers, they build relationships with carriers that allows them to secure discounts that they can pass on to you.
They also know how to use shipping calculations to refine your packing and delivery procedures to save your business money.
Delivery promotions such as free 2-day shipping with a minimum spending limit become easier to offer when you use a 3PL. They can leverage their experience with a carrier, their distribution network, and their knowledge to free up the resources necessary to give your customers more shipping options.
The Takeaway for eCommerce Businesses
Shipping costs can be difficult to calculate and manage. However, carriers use the same information to bill your business for shipping charges, so knowing how they are calculated helps you form a more profitable fulfillment strategy.
A 3PL can integrate its relationship with carriers and their knowledge of shipping costs with your business’s objectives to find the most cost-effective way to fulfill your orders. In the process, you can not only save money but offer your customers the coveted low shipping times that have become standard eCommerce practice in the modern-day.