Calculating shipping costs is a tricky process. Several factors contribute to which shipping method a company ultimately chooses, including company size, lifecycle stage, and business model. In order to calculate shipping cost, business owners need to take these factors into consideration before selling products. In this comprehensive article, I will breakdown everything from configuring a pricing strategy, to how to calculate shipping cost to figure out how to determine shipping cost. Buckle your seatbelts.
Pricing a Product
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 to Price Your Products
Pricing strategy should be based on customer market research. It’s important to know who your customers are, where they live, and how much they like to spend. Here’s a few pricing options to think about when considering these components.
- 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. Pricing products too low can be perceived as cheap by consumers. Underpricing also runs the risk of lowering products so low that businesses can no longer cover their costs. Despite a bad economy, 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 Price. 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.
After conducting market research on your target market and customer base, decide on the pricing strategy that best suits your business needs. Make sure your SKUs are being priced for profitability before listing them online. Once that’s settled, it’s time to calculate shipping costs.
[Is your company losing money from bad shipping? Find out how mis-shipments may cost more than you think]
Calculating shipping costs is a constant battle of am I charging too much? Too little? Should I not charge for shipping at all? Determining the right amount to charge for shipping is the difference between losing customers and gaining customers. Underpricing and overpricing, as discussed above, comes into play when calculating shipping costs, as well. However, shipping costs boil down to three options.
- 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. From there, the shipping charge is automatically calculated based on the packages measurements and the customer’s location.
- Flat-rate Shipping. 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. Customers fit however much they can or want into a box and pay the set shipping fee designated by the company. Here’s the most recent prices on USPS flat-rate shipping charges.
- 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. At the end of the day, free shipping is more important than brand loyalty.
If you’re trading globally, landed cost is an important factor in calculating shipping 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. Because of all the different variables, landed cost can be hard to determine, which is what you need to see the actual profitability of your products. The end selling price is cost plus profit.
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To make things easy, here’s a list of linked shipping calculators from the top shipping services. With estimated shipping tools, determining the cost of shipping is made much easier and exact.
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.
The best way to determine shipping cost is different for each business. 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.