With the ever-present speed and convenience of online shopping, not many people stop to think about the number of touchpoints that are actually required to get a package to their home.
Those touchpoints are pieces of the overall shipping and handling process. When asking “How much does shipping cost?” it’s important to understand that shipping and handling refers to more than just postage.
But knowing how much to charge customers for shipping and handling can be very challenging. Read on to learn how to calculate shipping and handling costs and and manage operations, whether in-house or through a 3PL.
What is shipping and handling?
Shipping and handling is the process of preparing and packing an order and then sending it to a customer. You will often see shipping and handling as a set of fees incurred on top of the order value and taxes. It covers the costs of labor, packing supplies, storage, transportation, and delivery.
Shipping vs. handling: what’s the difference?
While many people think of shipping and handling as one and the same, others may wonder what the handling part is.
Shipping refers to the cost of postage and related transportation to get the package from the shipping carrier to the end consumer. This fee includes surcharges, fuel charges, and other costs related to the distance traveled and delivery timeline chosen.
Handling fees refer to the labor associated with collecting inventory for an order, packing products into a box with the appropriate packaging materials, generating a shipping label, loading the shipment onto a truck, and any other movement that happens in the warehouse. In other words, handling fees include many steps of the overall order fulfillment process. Handling fees increase as more touchpoints are required, such as kitting, gift wrapping, adding customization or inserts, etc.
Why you can’t overlook shipping and handling
Shipping and handling should be just as important to you as it is for your customers. Between the costs incurred, your reputation and ability to meet customer expectations, and keeping up with the competition, shipping and handling has a major effect on customer acquisition and loyalty.
Top 4 factors that go into forming a shipping and handling strategy
With shipping and handling being one of the most important pillars of any ecommerce business, there are many considerations to think through. Getting it wrong can result in abandoned carts, frustrated customers, bad reviews, and lots of dollars lost. Here are the top factors that influence your shipping and handling structure (and pricing).
1. Capabilities and resources
The size of your business and the resources required and available to you directly affect your shipping and handling strategy.
If you choose to manage shipping and handling yourself, will you run operations out of your home, purchase land, lease a warehouse? Your current order volume, number of SKUs, and growth projections are good places to start.
Low order volume will make it cost-effective to keep shipping and handling in-house, as opposed to outsourcing. You likely won’t need a full inventory or warehouse management system to track operations until your business grows to the point where you need to hire people to help pack boxes. High SKU counts may lead to high warehousing and storage costs if you’re not turning products over quickly.
Regardless, if your order volume picks up or you’ve reached an inflection point, you’ll need a solution that will scale with you, whether you invest in the infrastructure or outsource shipping and handling.
2. Geographic constraints
Understanding where your orders are shipping to can help to identify where you should be shipping from.
When you manage shipping and handling yourself, you’re limited to storage and shipping from your location alone. If you expand operations or outsource shipping and handling, you’ll want to carefully position your operations geographically to reduce your average shipping cost and time in transit.
The farther the distance or higher the shipping zone a package is sent to, the more expensive postage will be. While it might seem cheaper to pay a couple extra dollars to ship a package than to operate out of multiple locations, that extra postage adds up. If you multiply the cost savings out across all of your orders, it can result in much higher shipping and handling costs for you and your customers.
Shipping from a central location or from both coasts can help you more efficiently reach your customers. As your order volume increases and you ship from additional locations in different geographic regions, you can further reduce shipping and handling costs and automatically have orders shipped from the facility that’s closest to the shipping destination.
Shipping to shorter distances also allows you to leverage ground shipping rather than more costly air shipping. The same goes for shipping from urban areas rather than less populated rural locations, as your inventory is already near the end customer. Finally, if you have a global customer base, you’ll want to access affordable international rates.
3. Products sold
There are several product attributes that affect your overall logistics strategy.
First, the product itself: Is it HAZMAT, a dangerous good; made-to-order or customized; large and/or heavy; fragile; temperature-sensitive or requires refrigeration; etc.? The more special requirements your products have, the stricter you’ll have to be with storage, packaging, and shipping and handling. You may need a more hands-on approach to your entire supply chain.
Next, how much your product(s) cost to manufacture, how much you charge for each item, and whether items are frequently purchased together will help you shape a shipping and handling strategy. Inexpensive items (e.g., $5) with a shipping and handling charge that costs as much as the product itself may deter people from completing a purchase. If shoppers tend to purchase several items together at once, you may consider bundling products or offering a minimum spend threshold as an incentive to qualify for discounted shipping.
Finally, highly seasonal products will lead to very busy months operationally followed by lulls during which little money comes in at all. If your sales cycle fluctuates, leasing a warehouse can lead to cash flow problems and laying off a seasonal workforce.
4. Tech stack
Integrating your ecommerce platform and any marketplaces you sell on with your shipping and handling solution can streamline and automate order processing.
Based on your sales channels and the shipping and handling solution you use, you may encounter limitations or need to hire developer resources. Some basic functionality should include:
- Alerting shipping and handling teams as soon as an order is placed
- Sending tracking info back to the online store to share with customers
- Gaining full visibility into inventory on hand across shipping locations
- Preventing stockouts through reorder notification points
4 steps to calculating shipping costs
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, shipping rates, and handling fees to calculate your costs and determine how to charge for shipping.
1. Determine your delivery time
The delivery methods you offer customers will impact cutoff times, shipping 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 shipping 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 shipping.
2. Get estimated costs
Shipping for small businesses can be expensive. Minimizing your costs by working with different shipping carriers can help you compare rates for the best value. You may even qualify for greater discounted shipping rates as you ship a higher order volume.
USPS, FedEx, and UPS use dimensional weight to calculate shipping charges. You will be charged for whichever is greater: the actual weight of the package or its DIM weight. Shipping carriers also use shipping 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 shipping 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 shipping 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 products 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 shipping is free.
4. Handling costs
Handling costs 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 shipping 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 shipping cost will change based on package weight, shipping carrier, service chosen, and shipping destination, so you may choose to use several figures in these calculations.
While it may seem as though you can save money by managing shipping and handling yourself, there are many hidden costs, 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.
3 shipping options that customers expect
It’s unsurprising that delivery methods can improve customer loyalty. But if your shipping and handling costs cut into your margins, you’ll struggle to stay profitable. Ecommerce brands must strive to offer attractive shipping options that also make sense for their business model.
1. Flat rate shipping
Flat-rate shipping refers to charging the same fixed shipping rate for every order. Most ecommerce platforms let you customize the shipping rate to the country, weight range, or order total to better reflect the actual cost.
Flat rate shipping should be the blended average cost across orders. That said, the shipping cost of some orders will not be 100% recovered while others will be overcharged or abandoned altogether due to shipping and handling costs being too high.
2. Two-day (or same-day) shipping
Two-day shipping is achieved by either expedited air shipping, which is needed for packages coming from overseas or the other side of the country, or ground shipping, which is ideal for shipments traveling a shorter distance and is less expensive. Many sellers ship from multiple regions of the country via ground shipping to keep 2-day shipping costs low.
3. Free shipping
- Including the shipping cost in the product price and offering sitewide free shipping
- Requiring a minimum amount of money to be spent (greater than the average order value) in exchange for free shipping
- Loyalty programs and subscriptions that take an annual fee in exchange for free shipping on orders (e.g, Amazon Prime)
If you offer free shipping, make sure to promote it everywhere, as this can be a strong marketing tool. However, keep track of any increases in returned items to see whether money is ultimately recovered from the free shipping promotion.
If you’re overseeing shipping and handling for your ecommerce business, you’ll want to have a thorough understanding of how the different carriers charge for each service and delivery method.
USPS offers what are often the cheapest prices for ground shipping because they already run local residential routes daily. To calculate USPS shipping costs, choose from their domestic, international, and business calculators here.
UPS has several shipping services to choose from across a variety of shipping destinations and transit times. Use UPS’s Estimate Shipping Cost calculator to enter details about your shipments and receive accurate pricing.
FedEx’s pricing ranges based on delivery speeds. Calculate FedEx shipping costs and transit times by entering package details using their Rate Finder tool.
DHL is best known for their international shipping capabilities. Calculate export and import rate and transit times by using DHL’s Rate Quote and Transit Time tool.
How to outsource your shipping and handling
Your shipping and handling strategy will change as your business grows. The effort and costs associated with shipping and handling in the early days will be very different from how it’s managed as you scale. That’s why many ecommerce businesses turn to a third party.
When to outsource
There is no one “right time” to outsource shipping and handling, but here are some tips to know when you may be ready to explore this option:
- You don’t have room to store inventory
- You don’t have time to truly run your business because you spend all your time on fulfillment
- You don’t want to purchase land or lease a warehouse
- Your sales are increasing and you’re forecasting major growth
- You want to expand into new markets
- You want to meet customer expectations around affordable 2-day shipping
What you get with a 3PL
In addition to not having to manage a warehouse, spend countless hours on ecommerce fulfillment, or run operations yourself, there are many benefits a 3PL offers that would be difficult or costly to replicate on your own.
Most 3PLs today offer the following:
- The order fulfillment process at scale, including storage, picking, and packing
- Discounted rates due to high shipping volume across thousands of clients
- Access to vetted partners such as custom packaging providers, marketing agencies, and more
- Integrated technology that automatically syncs with your sales channels
- Ability to reduce abandoned carts through affordable 2-day shipping
- Inventory management and forecasting tools with insights into real-time levels
Shipping and handling are critical pieces of your logistics strategy and overall ecommerce business. From offering the right delivery methods to obtaining favorable shipping rates, there’s a lot that goes into keeping customers happy and costs low. If you’re interested in learning more about handing off shipping and handling to a third party, get in touch with ShipBob.