There are many factors that go into calculating shipping costs. In addition to your internal capabilities and resources, geographic constraints, product attributes and requirements, and technology, you need to know your delivery methods, rates, supplies costs (find out more about getting free shipping supplies here) and handling fees to calculate your costs and determine how to charge for it.
1. Determine your delivery time
The delivery methods you offer customers will impact cutoff times, rates, and conversions. Some consumers will inevitably need certain products in their hands faster than others, but it’s still worth testing your offerings — from standard ground services to 2-day delivery to overnight shipping, you may be surprised to learn what resonates with your customer base.
Of course, faster delivery methods become more expensive as zones or distances increase. If you’re only shipping from one location, only orders shipped to nearby destinations can be delivered in two days via ground. Orders to farther destinations will have to go out via air shipping to guarantee 2-day delivery.
That’s why distributing your inventory and shipping from multiple regions can save you money and meet customer expectations without charging more for expedited it.
2. Get estimated costs
Shipping for small businesses can be expensive. Minimizing your costs by working with different carriers can help you compare rates for the best value. You may even qualify for greater discounted rates as you ship a higher order volume.
USPS, FedEx, and UPS use dimensional weight to calculate its charges. You will be charged for whichever is greater: the actual weight of the package or its DIM weight. It’s carriers also use zones to calculate rates based on where your package is shipped from.
So, two different points of origin shipping to the same destination can be shipped to different predetermined zones and be priced differently.
3. Determine if any shipping costs will be factored into the product cost
With so many factors impacting costs, how much you charge for shipping and handling can be very different from what other ecommerce businesses choose to charge.
In general, more expensive products can absorb the cost of shipping into the product price if you wish to waive it and handling fees for your customers to reduce dropoff.
For example, building a $5 shipping cost into a $100+ product may not seem like that much more money for someone who is already willing to pay $100+. However, this strategy doesn’t work as well for cheaper items that compete on price, or extremely heavy items that are generally very expensive to ship.
Think about it: If you always get your favorite bottle of shampoo for $5 and you see it offered for $10, you will likely look elsewhere before you even notice that it is free delivery is an option.
4. Add handling costs
When you receive a fulfillment quotation, the shipping company accounts for handling costs which cover the operations within a fulfillment center.
In addition to staff labor, there are indirect costs to support the infrastructure such as shelving units, pallet racks, forklifts, conveyors, warehouse management systems, taxes, utilities, office supplies, benefits, workers’ comp, liability insurance, licences, packing supplies, labels, printers, and more.
With so many variables, you may be wondering, “How much should I charge for shipping and handling?”
While the exact per-order handling fee can be difficult to calculate, you can create rough estimates by calculating your monthly operational expenses including warehouse labor, rent, and packing supplies. Then, divide this number by your average monthly volume.
For example, if your total monthly operational fees come to $5,000 and you ship 1,000 orders per month, your per-order handling cost comes to $5.
Of course, this is an oversimplified approach to calculating handling costs but can help you keep tabs on your margin. For example, if a customer spends $50 before fees and taxes, the cost of shipping is $9, and your per-order operational or handling expense is $5, then the total shipping and handling cost for the order is $14, or 28% of the order value.
The cost will change based on package weight, carrier, service chosen, and destination, so you may choose to use several figures in these calculations.
While it may seem as though you can save money by using in-house fulfillment, the truth is that managing, shipping, and handling yourself, there are many hidden costs, even a certificate of mailing can be over $1 per package shipped, including your time spent fulfilling orders — a reason many companies choose to outsource shipping and handling.
If you work with a third party, you can calculate a similar number by looking at all fulfillment costs and fees including onboarding or implementation, inventory receiving, warehousing, support, pick/pack, kitting, packaging, and shipping.