Shipping

How to calculate and reduce shipping costs for online shops

Mariluz Sampalo

Mariluz Sampalo

Feb 25, 2022

How to calculate shipping costs for online stores

Inside this article

  • iconThe importance of calculating shipping costs
  • iconHow to calculate shipping costs for online shops
  • iconEstablishing the price of the shipment
  • iconStrategies for reducing shipping costs
  • iconConclusion
  • Are you paying too much for your shipments? Calculating your shipping costs is the first step toward making sure that a) they are profitable for your business, and b) that you can offer free shipping and low shipping rates to your customers.

    According to Bolt, an agency specialized in eCommerce checkouts, high shipping costs are the main reason why buyers leave the checkout page without making a purchase.

    Every online shop has its individual needs and peculiarities, which makes the process of reducing shipping costs even more daunting, especially if you’re not used to shipping jargon.

     It’s hard to figure out how to calculate shipping costs, let alone how to reduce them.

    What are the factors to consider when reducing shipping costs? Below, we cover all of the variables that can affect the final price of a shipment so that you can more accurately calculate it and then optimize your shipping costs.

    The importance of calculating shipping costs

    The only way to offer your customers affordable shipping options is to familiarize yourself with your shipping costs and their impact on your profit margin.

    After all, how are you going to know how much your customer should pay for a shipment if you don’t even know how much it’s costing you?

    Moreover, calculating the real shipping costs is the only way to plan and execute a strategy for cost reduction. By calculating the real costs, you’ll be able to tell whether your system is working, based on real results.

    Calculating the shipping costs of your online shop allows you to:

    • Charge adequate shipping rates to your customers
    • Identify which courier service is most efficient for your needs
    • Boost sales and lower the cart-abandonment rate
    • Carry out a strategy for cost reduction

    How to calculate shipping costs for online shops

    There are endless possibilities to calculate shipping costs, but most of the methods are based on two variables: a sum of all costs, fixed and variable, involved in the processing and transportation of the goods, and an estimation of the number of shipments within a set period.

    Let’s see which parameters you need to take into account to calculate the shipping costs.

    Couriers’ shipping rates

    The main variable costs that you’ll need to consider are courier shipping rates. Shipping companies use a formula to calculate shipping costs and they establish rates based on a combination of fixed costs, variable costs, the distance of the route, weight and shipping service.

    To find the rate of a particular shipping company, go to their price shipping calculator and input the necessary information about the parcel you have in mind.

    If your eCommerce business has a considerable amount of orders, you can also obtain deals with couriers to get special rates and conditions.

    If your online shop doesn’t have a contract with any couriers, you can use a shipping management tool that provides pre-set shipping rates for domestic and international orders.

    Nature of the goods

    Fragile or dangerous goods that require special treatment are more cost-consuming and therefore more expensive to ship. Don’t forget to consult each courier’s shipping conditions to find out if there are possible additional costs.

    Delivery time

    Generally speaking, transportation companies offer special delivery time options, like express shipping. Obviously, faster shipping means higher costs.

    Additional services

    If you check the services offered by any courier, you'll notice that they provide several additional services to further improve the purchasing experience and protection of the items shipped. For example, you may see offers for insurance, flexible deliveries, customized tracking systems, etc. Some of these options are included in the standard rate, but others may be charged as an additional service.

    The cost of packaging

    Not all shipping costs come from the courier itself; your internal processes also consume resources and money. For instance, the material used for packaging will have a direct impact on your logistics costs.

    Taxes and duties

    If you ship to territories outside the EU, you’ll likely face additional taxes or duties at some stage of the delivery process. Our advice to you is to inform yourself of the various laws regarding the export and import of products in all areas where you ship your products.

    Up until now, we’ve been talking about variable costs that may not be as easy to calculate and control. The following costs are fixed. That means that you can calculate and optimize them down to the millimeter.

    Cost of human capital

    This amount is a calculation based on the number of shipments and the cost of paying the staff involved in processing these orders.

    Technological cost

    This includes the cost of maintenance for your infrastructure and technological solutions to optimize your processes.

    Establishing the price of the shipment

    Ideally, every online shop would prefer to offer a quick and free shipping option to its customers. However, this isn’t always possible, since not all eCommerce businesses have the same capacity to cover the shipping costs.

    The following strategies will help you calculate your shipping costs and establish the best rate for your business:

    Free shipping

    This method technically means that the online shop covers 100% of the shipping costs. 

    However, another option is to, partially or totally, add the shipping costs to the price of the product/s. This way, the customer pays for the shipping costs without realizing that they’re doing so.

    For example, if there is a €2 shipping cost for a product that costs €1.35, you can increase the price of the item to €3.35, so that the customer covers the full costs.

    As risky as this strategy may seem, it works. Why? Because of the psychological factor associated with paying for the shipment.

    Having free shipping is, for many customers, more important than the price of the product itself, especially if the difference is just a couple of euros.

    Variable shipping rate

    If you work with several couriers, your shipping rates likely vary depending on postal codes and the location of your warehouses.

    Selecting the courier with the best shipping rates for each order is the best way to reduce a variable shipping rate for your customers.

    In fact, you don’t even need to choose the shipping courier and rate yourself. You can display all of the shipping options in your checkout page and let the customers decide which courier they want to use and at what price.

    This way, the customer will never get the impression that you’re imposing a specific shipping price, thereby improving the conversion rate at checkout.

    Fixed shipping cost

    If you want to offer a fixed shipping cost for all orders in your shop, you need to first make sure that all the goods you commercialize are very similar in price and size, to ensure that they can be sent with the same shipping method (and cost).

    If your customers are in geographical areas that are far from each other, there may be orders for which your profit margins can be considerably reduced. Because of the distance, shipping costs for farther destinations will probably be higher than domestic shipments.

    For instance, if a customer always pays €1 for the shipments, but your shipping costs are €1 for domestic shipments and €2 for shipments for other territories, you’ll lose €1 of profit each time you ship to these.

    This means that establishing a fixed shipping cost only makes sense if the majority of your customers are domestic and you can bear the cost of making a few shipments to other territories.

    Strategies for reducing shipping costs

    Once you have calculated the shipping costs and established a price or a set of rates for shipping, the next step is to further reduce the costs to maximize your profit margins.

    Two practices that will help you to reduce your shipping costs are:

    1. Adjusting the size of the packaging to the dimensions of the product

    The packaging dimensions define the dimensional weight of your packages. This is one of the measurements that couriers use to determine their rates. The lower these measurements, the lower the final cost will be.

    The best advice is therefore to eliminate any ‘empty’ space inside the package.

    dimensional weight or volumetric weight is the sum of all measurements of a package

    Source: Bookairfreight

    Take into consideration which packaging is best for the protection of your products to avoid unnecessary shipping issues and potential returns later on. In our packaging guide, you can find all the essential information to find the best packaging for your online business.

    2. Creating a multi-courier network in a single interface

    To successfully implement a strategy with variable shipping rates and to efficiently calculate the shipping costs for every order, it’s fundamental to centralize your various couriers and rates in a single interface. Outvio is perfect for this.

    As the volume of your shipments grows, you’ll need to set up an efficient system to compare shipping rates without having to use courier calculators.

    With Outvio, all your shipping options will be sorted by price. This makes selecting the best courier rates a much easier and faster task, and it ultimately results in less time spent processing orders and cheaper shipments overall.

    Conclusion

    Calculating shipping costs can be a frustratingly complex and imprecise task. In this article, we've explained all the fundamental concepts behind calculating your shipping costs and significantly reducing them.

    Now comes the most important part: analyzing your internal processes and finding the best strategy for your particular situation, so that you can reduce shipping costs in a way that suits your business and customers.