How to Determine Shipping Cost Without Ripping Off Your Customer

How to Determine Shipping Cost Without Ripping Off Your Customer

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The race to determine shipping cost is the next big strategy in eCommerce. In fact, it’s already started, and continues to get more competitive. 

In a recent study of 2,500 U.S. consumers conducted by Convey, 64.3% of respondents said cost is the most important factor related to shipping. 

As a retailer, the process to determine shipping cost is a make-it-or-break-it scenario for both new and old customers. Implement a drastic shipping change and risk losing loyal customers to competitors. Implement a cheaper shipping cost and win over a slew of new customers. 

Several factors contribute to which shipping method a company ultimately chooses, including company size, lifecycle stage, and business model. It’s a tricky balancing act to appease your own business needs and needs of the customer. 

But there’s more that goes into shipping cost than slapping a number or free offer price at checkout. In order to determine shipping cost retailers also have to factor in a pricing strategy on the products themselves.

Let’s dive into the options retailers have to calculate shipping cost and create an appropriate pricing strategy to support a shipping price structure. 

What are Shipping Costs?

The process to determine shipping cost includes several variables, like the dimensions of the package, speed of delivery, and the average cost of the entire company’s shipping costs. 

Why is this process important?

As a retailer you need to look after your own budget as well as the needs of your customer when calculating shipping cost.

Retailers have to think about how charging too little or too much will affect the customers. If you charge too much you risk losing the sale to a competitor. If you charge too little you’re not making enough profit to sustain your business. 

In some cases, shopping carts may offer real-time shipping quotes before checkout. For example, choose your shipping location and shipping method at checkout and receive a shipping quote. The power of the sale price is essentially in your hands. This method of transparency and ease helps build customer loyalty.

There are three categories of shipping costs:

  1. Calculated shipping
  2. Flat-rate shipping
  3. Free shipping

How to Determine Shipping Cost

Calculated Shipping

The most basic way to begin calculating shipping is to take measurements of the products before listing them for sale. Measure the weight and dimensions of the package.The shipping charge is automatically calculated based on the package measurements and the customer’s location.

Flat-rate Shipping

Flat-rate shipping is exactly as it sound. The total price of shipping is not tied to the shape, weight, or size of the shipped item. 

Customers fit however much they can or want into a box and pay the set shipping fee designated by the company. Small business customers utilize flat-rate shipping because it’s convenient and reliable. Boxes in various sizes are located at shipping locations like USPS and Fedex.                                

However, a bigger company has more logistics to think about. First, you need to calculate the average of all the company’s shipping costs. Be sure to pay attention to the changing average over time. If average costs fall, allow the price you charge for flat rate shipping to fall as well. Similarly, if overall costs rise, adjust shipping charges to rise to prohibit lost money.

Free Shipping

What is not to love about free shipping? Everything if you’re the customer. If you’re the business owner, it’s a different story.

Business owners have two options when it comes to offering free shipping: build the cost into the listed price or absorb it. 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 complex.

What if I’m shipping globally?

Global shipping needs to factor in landed cost.

Landed cost is the total cost of shipping a product globally, including purchase price, transportation fees, currency conversion, duties, and any other associated costs. 

Landed cost can be hard to determine because of the different variables. The variables are important because they depict the actual profitability of your products. The final sale price is cost plus profit.

How to Determine Product Pricing

There are two important ideas to remember when pricing a product. First, determine how much it costs to run your business, and second, the price must cover the profit and costs. 

The cost to run a business includes a multitude of factors, like property/equipment leases, salaries/wages/commissions, inventory, utilities, etc. It’s a lot to remember, so make sure you’ve got everything covered before establishing how to price a product. 

Equally as important, the price of your products have to cover the profit and costs to run your business (including overhead costs). 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 a product helps determine the shipping method. The shipping costs plus the product price play into the profit needed to run a business, so getting the product price right is crucial to determining an overall shipping strategy. 

Why is Product Pricing Important?

It’s important to know who your customers are, where they live, and how much they like to spend. Retailers learn this information from conducting customer market research. These variables come together to determine product pricing and shipping costs, among many other things. 

How to Price Your Products

Competitive Pricing

Competitive pricing is great for products that are hard to differentiate from competitors. These prices are based on an established market price for a product or service. The key player in the market often sets the price that smaller companies inevitably follow. It’s like a game of follow the leader.

Cost-Plus Pricing

Be careful with this method. The “plus” refers to the figure that must cover all overhead and generate percentage of profit required. This creates a profit margin.

Underpricing

Consumers can perceived low-priced products as cheap. Underpricing also runs the risk of lowering products so low that businesses can no longer cover their costs. Do not underprice products too low. Or worse yet, find out you undercharge after the shipments go out.

Overpricing

Alternatively, overpricing products can also turn customers away. Yes, you have costs to cover, but customers are always looking at competitor prices. Find the sweet spot in-between.

Demand Pricing

Demand pricing involves a combination of volume and profit. Products sold at different prices through different sources are priced based on demand. For example, a retailer pays more per unit because they are not able to sell as great a quantity as a wholesaler.

Markup Pricing

Markup price is determined by adding an amount to the cost of a product. As a result, the additional markup cost plus the original cost is the total cost charge to the customer. 

For example, if the cost of a t-shirt is $20 and the selling price is $30, the markup is $10. But if you throw in the incentive of a coupon, customers will be likely to spend twice the money.

[Is your company losing money from bad shipping? Find out how mis-shipments may cost more than you think]

Tools to Help Calculate Shipping Cost

The world’s biggest shipping platforms like UPS and FedEx have created user-friendly shipping calculators. 

These aren’t necessarily meant to be used by business owners shipping out large amounts of product. Calculators are built for customers shipping out one or two packages. Nevertheless, they’re a handy tool to plug and play with variables to see a final example pricing. 

Here’s a list of shipping calculators: 

Summary

Each business determines shipping cost differently. Think strategically about shipping costs in relation to your customer base and company revenue. Give your customers the best option, while still covering the costs of running your business.

It’s also vital to stay up-to-date with the latest shipping trends in the industry and adjust your strategy accordingly. 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. 

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