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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 eCommerce shipping rates to your customers.
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 shipping costs and reduce them.
What are shipping costs? Why it's important to calculate them as an online store?
Shipping costs are the price that the online store or the buyer must pay to make or receive a shipment.
Shipping costs include: the cost of the packaging, the cost of labour (the agent preparing the parcel and shipment), the cost of the courier and shipping method, the cost of international fees when we talk about international shipping and any other variable costs, such as insurance.
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 store allows you to:
- Plan a strategy to reduce shipping costs
- Identify which couriers work the best for your needs
- Boost sales and lower the cart-abandonment rate
- Charge adequate eCommerce shipping rates
How to calculate shipping costs for online stores
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 store doesn’t have a contract with any couriers, you can use a shipping management tool that provides pre-set eCommerce shipping rates for domestic and international orders.
Sign up and start shipping with the best rates in Outvio. Outvio's automation features let you know which courier and shipping method are the most effective and even allow you to automatically select the best shipping rate for all shipments.
Distance
Generally speaking, the longer the travel route, the more fuel the vehicle will consume and the higher the shipping cost will be too.
Shipping the same package to Florida will cost less than shipping it to Spain. Normally, couriers provide shipping zones to calculate shipping costs for domestic and international shipping.
Additionally, distance is often related to other means of transport, but this will be covered in the delivery time section, as some businesses choose to stick to the same shipping method, even if it means longer lead times in shipping.
The weight and dimensions of the parcel
Calculating the shipping cost of a package based on weight is simple.
However, if the parcel is small but heavy, you should consider calculating its volumetric weight since this is one of the factors couriers use to determine shipping costs.
Read more on volumetric weight and learn how you can calculate it and reduce it to save on shipping costs.
Delivery time
Generally speaking, transportation companies offer special delivery time options, like express shipping. Obviously, faster shipping means higher costs.
Often, delivery times are tied to the means of transport, meaning that, couriers can offer express shipment by land to a certain degree.
If the shipment is international or the region of destination is too far away, they will most likely rely on sea or air shipment. If this is the case, the fuel needed and the price paid for square meter used in the freight has a different price that the volumetric weight of a land shipment.
This will certainly affect the shipping cost, but it's more related to the delivery time promised to customers (or required by them).
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 may be included in the standard rate, but other couries may charge some of these services additionally.
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 or if it's even possible to ship such items.
The cost of packaging
Not all shipping costs come from the courier itself; your internal processes also consume resources and money. For instance, the type of packaging you choose has a direct impact on your logistics costs.
From the material, to its size, functionality or construction, everything adds up and can become a threat to your profit margins.
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 be informed of the various laws regarding the export and import of products in all areas where you ship your products to and from.
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 (picking and packing products, handing off the parcels to the couriers, etc.).
Technological cost
This includes the cost of maintenance for your infrastructure and technological solutions to optimize your processes.
How to determine shipping costs for customers
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 determine shipping costs for the buyer to 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.
Another possibility, commonly used, is to offer free shipping for a minimum order quantity, e.g. free shipping for orders above €20, 25, or which ever quantity makes sense for your business.
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 eCommerce shipping rates likely vary depending on postal codes and the location of your warehouses.
Selecting the courier with the best eCommerce shipping rates 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 or shipping they want to use and at what price.
For example, some customers may prefer a lower shipping cost and have the parcel delivered at a pick-up point, while others choose to pay more and receive it at home.
If you opt for this, customers will never get the impression that you’re imposing a specific shipping price, thereby improving the conversion rate at checkout.
Flat-rate shipping
If you want to offer a flat-rate shipping 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.
How to figure out shipping costs? Conclusions
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.
Analyze your internal processes and find the best strategy for your particular situation. Only by doing so will you be able to lower shipping costs in a way that suits your business and customers.
