Offering your customers the best shipping rates is essential in this highly competitive retail environment. You don’t want to guide customers through the entire purchase journey only for them to abandon their basket at the end due to high shipping rates. The influence of shipping costs on purchase habits is sizable.
In a recent study conducted by Convey of 2,500 U.S. consumers, 64.3% of respondents said price is the most important factor related to shipping. Calculating shipping costs that work for you and your customers is critical. To do this, you must understand the impact of shipping on product pricing and the factors used to calculate shipping costs.
In this post, we walk you through both of these points and more, so you can calculate the best shipping rates for your business. Let’s dive in.
What are Shipping Costs?
Shipping costs are the direct costs associated with moving an item from a shelf in your shop or warehouse to a customer’s doorstep. These costs include but are not limited to:
- The cost of boxes, packaging, tape and stickers
- The cost of paying a worker to pick, pack and dispatch an item
- The cost of a courier to collect and deliver an item
- The cost of import/export fees when shipping internationally
Later on we will discuss additional costs such as insurance and handling fees, but let’s stick with these for now. As a retailer, you aim to get an item from your shelf to your customer in the agreed time frame, for the lowest price, and to ensure it arrives in good condition.
Why is Calculating Shipping Costs an Important Process?
As a retailer, you need to look after your budget as well as customer needs when calculating shipping cost. Charging too little will eat into your margins and isn’t sustainable in the long run. Charge too much, and you might lose business to competitors.
You might see many of your competitors offering free shipping or shipping deals. While it may be tempting to do the same, it’s highly likely they’ve been through a thorough shipping cost calculation process to be able to offer such deals. It would be best if you did the same. When you know your shipping costs, you can provide an instant shipping quote at the checkout which is now expected by consumers shopping online. Often this requires work in the back-end, like setting up shipping rates for each product and inputting shipping zones.
However, doing this will build trust and customer loyalty and ultimately drive more sales. Transparency about your shipping costs is also great for building brand loyalty. Offering multiple shipping options at different price points is another way to lower cart abandonment rates. It makes customers feel like they are making the decisions and having a personalized experience.
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How to Determine Shipping Cost
There are three categories of shipping costs that we have outlined below. Each has advantages and disadvantages, and it’s up to you to decide which is best for your business and customers. There is no ‘one-size-fits-all’ answer which is why calculating shipping costs is essential.
1. Calculated Shipping
Calculated shipping is the easiest way of calculating shipping costs. To get the price, measure the weight and dimensions of your package. The shipping charge is calculated based on these measurements and the customer’s location. The only downside to this method vs. the other two is if you have 1,000 different products you need to calculate the price for each individually. However, committing time to do this is very beneficial because your customers will have a shipping quote based on the actual product they purchase.
2. Flat-rate Shipping
Flat-rate shipping is where you charge one price for shipping regardless of shape, weight and size. The only time the price may differ is when shipping to different countries. With this method, customers can buy as much as they like and only pay one fee, which is set by you, the business. It’s a popular choice with small companies because it is convenient and reliable. For large businesses with more significant logical challenges, it’s not the most suitable method. To offer a flat-rate shipping service, you must calculate the average shipping cost for the whole company. Then, as your costs rise, you can increase the shipping fees, as they fall the cost to your customers will fall.
3. Free Shipping
Free shipping seems to be offered by the majority of retailers, and for a good reason. Consumers love free shipping, and it can be a great way to increase sales. For the retailer, though, this can be a different story. To offer free shipping retailers have two options:
- Build the cost of shipping into the product list price, potentially making the product more expensive than competitors
- Absorb the cost of shipping and reduce margins
If you blare the statement, “Free shipping on all orders!”’ across your website, customers won’t think twice about paying more. It also makes the checkout process less complicated.
What if I’m Shipping Globally?
If you’re shipping globally, you must factor in landed cost, the total cost of shipping a product globally. These might include:
- Purchase price
- Transportation fees
- Currency conversion
- Duties and taxes
- Any other associated costs
Determining landing cost isn’t always straightforward because of the variables involved. It also heavily relies on the country of export. In some cases, the costs of importing a product lies with the buyer, but sometimes it can be split between buyer and seller. Any agreements like this should be made before sending goods.
What Information Do You Need to Calculate Shipping Costs?
The four elements required to calculate shipping costs are shipping point and origin, package weight, package dimensions and expected delivery times. You can calculate the majority of postal shipping rates using these figures. With this information, you can compare shipping rates using a shipping cost calculator. Most shipping companies let you check shipping costs before sending a parcel. If you send multiple items, you might qualify for bulk shipping rates or business shipping rates.
Shipping Point of Origin and Destination
Generally speaking, the further the package is traveling, the higher the shipping cost. This is especially true for international shipping rates. Shipping the same package to California will cost less than shipping to Europe. U.S. shipping rates are based on shipping zones. These are used by companies like UPS, USPS, FedEx and DHL to calculate shipping costs for domestic delivery. The U.S. shipping zones are as follows.
|Shipping Zone||Distance Between Origin & Destination|
|Zone 1||0-50 miles|
|Zone 2||51-150 miles|
|Zone 3||151-300 miles|
|Zone 4||301-600 miles|
|Zone 5||601-1,000 miles|
|Zone 6||1,001-1400 miles|
|Zone 7||1,401-1,800 miles|
|Zone 8||1,801+ miles|
The Weight of the Package
Calculating the shipping cost of a package based on weight is simple. Just weigh the package and use a shipping cost calculator to get a shipping price. If the parcel is small but heavy, get a shipping cost based on dimensional volume which might be cheaper. Remember that when calculating postage by weight, use the total weight of the package and not the weight of the product itself. Suppose you are using additional packaging for breakable items like cardboard, bubble wrap, and shredded paper. In that case, it could increase the weight of the package. The extra weight would increase the cost of shipping.
Dimensional weight is package length x width x height. Dimensional volume is useful for odd-shaped and bulky items. Couriers often use dimensional weight and product weight together to calculate shipping costs. The aim is to estimate how much space the package will fill on the delivery truck so their deliveries can be more efficient. Using dimensional shipping weight can work out cheaper for some packages. Buying a range of shipping box sizes will help to reduce overall package volume and reduce shipping costs.
Delivery Times for Shipping
Delivery times are usually linked directly to your service offer. So, if you offer one-day shipping, you need to use an overnight service. Alternatively, you might offer multiple shipping services for the customer to choose from based on how quickly they need the item. The costs of shipping services directly relate to how long it takes for the time to be delivered. Overnight shipping costs more than three-day shipping, for example. Of course, weight and dimensions will also determine the shipping cost.
Shipping Cost Comparison
Even if you’ve been shipping parcels for a long time, you should regularly conduct a shipping cost comparison. Regular comparisons ensure you are offering your customers the best deal. To do this, you can use a shipping cost calculator. Most courier websites will have these and allow you to book shipments directly. As an example, this is a shipping cost comparison for a box weighing 4lb with dimensions of 8 11/16” x 5/7/16” x 1 3/4 “.
|Courier||Service||Delivery Time||Shipping Cost|
|UPS||2nd Day||2 days||$21.25|
|USPS||Priority Mail 2nd Day||2 days||$23.15|
|FedEx||2 Day||2 days||$52.62|
As you can see, the shipping cost varies hugely between different services and courier companies. Making a shipping cost comparison will ensure you get the best bang for your buck.
What Can Affect My Shipping Costs?
We’ve seen how destination, size, weight and delivery service impacts shipping costs, but what else affects shipping costs? To give your customers the best experience when shopping online and to reduce the likelihood of cart abandonment, you must factor in these services when calculating shipping costs.
1. Shipping insurance
Buying shipping insurance is essential if you are shipping expensive, personal, or fragile products. Shipping insurance will protect you and your business against items that are lost, damaged, or stolen during the shipping and handling process. Although delivery rates are high, losing one or two expensive shipments that aren’t insured could impact your profits, especially if you have tight margins. The cost of buying shipping insurance will likely be minor compared to the cost of the product. Sometimes as low as 3% of the shipment value. It’s worth comparing shipping insurance costs between couriers and third parties to get the best deal.
2. Shipping-related charges
Due to the nature of shipping and handling it’s inevitable shipping related charges are sometimes incurred. This can happen when shipping domestically and internationally. The three shipping related charges to look out for are pickup location, fuel surcharges, and fees when mistakes occur. Pick up related charges are broad and courier specific. They could relate to deliveries made outside of usual service areas and pickups from residential addresses. Fuel surcharges are common when using express services like overnight or same day. These costs vary based on the cost of fuel which makes forecasting difficult. Fees that might come under ‘mistakes’ include:
- Returning an item to the sender
- Parcels being refused
- The package requiring multiple attempts to be delivered
- Addresses needing to be amended during transit.
3. Parcel Handling-Related Charges
The most common parcel handing-related charge is for sending dangerous goods. This could include anything from batteries to needles to guns. You will likely need to use special packaging stickers if you are sending items like these. Another example of additional handling charges is when a parcel takes two people to deliver it. Bulky and heavy items like couches and refrigerators are typical examples. Similarly, odd-shaped and sized parcels may be subject to these fees as well as items like crates made from wood or metal.
4. Duties and taxes
As we mentioned in the ‘shipping globally’ section, there are more factors to consider when shipping internationally. The most likely additional cost you will come across are duties and taxes. These depend on what you are shipping and the value of the item. Sometimes they are covered by the buyer, the seller, and sometimes they’re split between both. The two types of taxes that you need to be aware of are Delivered Duty Unpaid (DDU) and Deliver Duty Paid (DDP). Failing to understand these may result in hidden fees.
- DDU Shipments – Apart from duty or taxes that are due when the package arrives in the importing country, all charges must be paid by the seller. In simple terms, this means the sale price of the goods must include all of the costs of delivering the goods to the recipients doorstep. The seller handles everything from transportation costs, customs charges and handling charges.
- DDP Shipments – In the case of Deliver Duty Paid shipments, the seller must cover all of the costs associated with DDU shipments as well as duty and import taxes. Couriers may have additional charges for paying taxes and duties on your behalf when your package arrives in the destination country.
Another potential charge you could be subject to is if you under-declare the value of a shipment. This can have huge implications on delivery times as customers may require a new invoice to be sent before the shipment is released. Warehouse fees and additional courier charges are also standard.
How to Determine Product Pricing
Many factors influence your product pricing strategy, shipping costs included. Firstly you need to calculate how much it costs to run your business. From here, you can calculate the price of your products to ensure they cover the running costs and generate a profit. If you haven’t already, you should have a profit and loss spreadsheet that contains all of your income, fixed costs, and variable costs. Things like property and equipment leases, salaries, inventory, and utilities should be detailed in this document. You can use this to calculate the price of your products, and ensure your margins (the difference between your costs and product price) are sufficient to generate a profit. If these numbers don’t match up, you run the risk of exhausting financial resources, and ultimately the business will fail.
How Does This Relate to Shipping Price?
The price of your product relates to the shipping price because it determines the shipping method. Using the free shipping example from earlier, if the cost of your product is $10 and the shipping cost is $5, the sale price to break even is $15. This doesn’t take into account your running costs, so realistically the sale price will be much higher. If you want to keep the price of your product competitive and in line with competitors who charge for shipping, generally you will also need to charge for shipping. The margin is made on the product (cost of product + markup). In this case you won’t be making profit or loss on shipping because you would charge the customer the direct cost to you, or fractionally more.
Why is Product Pricing Important?
Product pricing is one small factor in the overall story of your customers. If you conduct market research to find out who they are, where they live, their income and spending habits. This information enables you to craft offers and messages that are more likely to make customers buy from you over a competitor. If your customers are younger, they may expect free shipping wherever they shop online. On the other hand, older customers may be happy to pay for postage. Take Amazon, for example; they offer one-day shipping on most products which makes them the go-to place to buy online. Information like this has a direct impact on your product pricing and shipping strategy.
How to Create Better Shipping With Inventory Management
Aside from returns, shipping is the last big decision that can make or break a purchase. It’s therefore critical to understand the impact different shipping offers have on your customer’s purchase habits. With the purchase made, correct items don’t just magically appear at the shipment stage. If done correctly, they go through a calculated pick/pack/ship process regulated with inventory management software. Inventory management software provides complete inventory visibility and an automated quality control process to ensure correct shipments. Returns cost retailers a lot of money, so investing to ensure the right products are sent is worth every cent. When you know where an item is and how much of it is in stock, you reduce the risk of overstocks, out of stocks, or lost inventory entirely. And with quality control processes, incorrect or damaged items are caught before reaching shipment. This improved approach to inventory management helps to create:
- Better shipping by reducing delays in dispatch
- Reduced returns rates
- Increased efficiency
As both a small seller or an established brand, it’s imperative to implement smart inventory management to keep customers both satisfied and loyal.
Calculating the best shipping rates for your business has many benefits. One benefit is that it can give you a competitive advantage, allowing you to offer cheaper products or betting shipping rates. This, in turn, generates more business and loyal customers. Getting to this stage requires calculating your shipping costs so you can choose an appropriate shipping method. If you are shipping overseas, there are additional costs involved like taxes and duties which we’ve covered in this post. If your business is at the point where a spreadsheet no longer suffices your shipment strategy, consider integrating with one of SkuVault’s many shipping partners. See the full list here.