(This post was last published on April 30, 2019. We’ve updated it for accuracy and completeness.)
Online shoppers continue to raise their expectations for free shipping. 75% of consumers expect delivery to be free even on orders under $50, up from 68% a year ago, according to NRF. Further, 65% say they look up free-shipping thresholds before adding items to their online shopping carts.
Unfortunately, offering free shipping is one of the biggest challenges for online sellers. There’s a lot of factors to consider. And when you’re not careful, offering low rates can ruin your margins and ultimately your profitability.
This leaves many sellers feeling stuck. Raising your shipping costs could cost you sales, but lowering shipping costs could mean serious trouble for the financial health of your business.
To help you optimize your shipping costs, our guide explains the main factors that increase your shipping costs and how to reduce them.
Why Shipping is So Expensive
While most customers expect free and fast delivery (thanks Amazon Prime), they don’t see or understand all the work that goes into delivering a package to their doorstep.
For sellers, there’s a lot of variables and moving parts that go into shipping costs. Carrier agreements are complicated and can contain “hidden” fees that aren’t always obvious. While other costs simply come down to what you ship and where.
Because of all these factors, even small parcel shipping can be expensive as these fees quickly add up and start to drain your profits.
Direct Shipping Costs You Can Calculate
Here’s the main factors that determine a package’s shipping cost:
1. DIM Weight
In general, shipping became more expensive and complex when carriers implemented dimensional (DIM) weight pricing. Instead of just calculating the actual weight of the package, you have to consider how much space it will take up in a truck, or its cubic volume.
To determine this, sellers can calculate DIM weight by multiplying the package’s length, height, and width, and then dividing it by the parcel company’s DIM factor:
DIM Weight = Package’s (L x H x W) / DIM factor
Shipping carriers like USPS, FedEx, and UPS calculate and bill shipping charges based on whichever is greater: the actual weight of the package or its DIM weight.
For example, let’s say your parcel weighs only 5 pounds, but you ship it in a 12” X 12” X 12” box.
DIM Weight: (12 x 12 x 12) / 166 = 10 pounds
Actual Weight: 5 pounds
According to its DIM weight, you’ll be billed at the 10 pound rate, and not the actual weight of 5 pounds.
Why do carriers care about DIM weight? Unlike actual weight, package size (or volume) does affect the amount of items they can transport on their vehicles at once, affecting their own efficiency and costs. DIM weight pricing allows carriers to charge more for lightweight packages that ship in large boxes.
Pro Tip: The carrier’s DIM factor is the main driver in the calculation. The lower the DIM factor, the more you’ll pay. Remember that you can negotiate your DIM factor with your carrier, especially if you’re a high-volume shipper.
2. Shipping Destination
For domestic shipments in the US, carriers use “shipping zones” based on zip codes to determine the distance a package travels from its origin to the final destination, and how much to charge.
To calculate your shipping zone, you first consider the point of origin, or location, from which the order is shipped. This is referred to as Zone 1. Next, your destination zone is how far (in miles) the shipping address is from the point of origin, or Zone 1.
For example, shipping a package within 50 miles of its point of origin stays in Zone 1 and is the most affordable. Shipping a package over 1800 miles (or to Zone 8) will be more expensive.
Shipping zones vary by carrier and service. While most carriers provide their own online shipping zone calculators, you’ll have to check rates based on your own shipping location.
Because shipping zones are based on point of origin, it’s important to consider how close your warehouses (or inventory) are to your customers. It costs more to ship inventory from Maine to a customer in California versus shipping the same order from a warehouse in California.
Pro Tip: Some providers like USPS will offer flat rate shipping, which means you pay the same rate no matter what zone you ship to. We cover more about flat rate shipping below.
You also have to consider how fast you want to deliver the product (and across what distance). It’s more affordable to offer 2-day shipping to a customer in Zone 1 than in Zone 8 because it takes different means for the carrier to cover more distance in the same amount of time.
4. Type of Product
Lastly, you should factor in the contents of your packages. For high-value products (like original artwork or jewelry), you might include shipping insurance in case the package is damaged or lost. And, shipping HAZMAT or temperature-sensitive products could require extra handling.
Shipping Cost Calculators
- USPS Retail Price Calculator
- UPS Time and Cost Calculator
- FedEx Rate Calculator
- DHL Shipping Cost Calculator
- Amazon FBA Revenue Calculator
Hidden Shipping Fees You Often Miss
While weight and destination are costs you can calculate ahead of time, carrier agreements can also include “hidden” fees that aren’t so obvious to find or understand, even to experienced shippers. From value added services and money back guarantees to early termination fees and more, there’s a lot to absorb when reviewing the terms of your carrier agreement.
Brian Gibbs from Refund Retriever helps break down some of these fees and why they can quickly add up for small parcel shipping.
1. Value Added Services
Value added services or accessorial fees will account for a large percentage of a company’s shipping costs. Do you know how many residential fees, delivery area surcharges, and address correction fees have been applied to your invoices in the past 6 months?
And, FedEx and UPS don’t make it easy to identify or qualify these fees either. Luckily, you can turn to a trusted third-party like Refund Retriever to help.
2. Fuel Surcharges
All carriers charge fuel surcharges, yet few sellers actually understand their impact on shipping expenses.
Fuel surcharges are extra fees charged to cover the fluctuating cost of fuel. The calculation is a percentage of the base rate and added to the charges of each package. As a result, it covers additional fuel costs and keeps the carriers profitable, even when the price of fuel rises.
Fuel surcharges apply to domestic and international transportation charges and to the many value added service charges.
3. Minimum Package Charge
A minimum package charge is when a shipper agrees to pay the greater amount of the net charge based on discounts or a set minimum within the carrier agreement. FedEx and UPS set the minimum charge for all services in each agreement. Specifically, a Zone 2 – 1 pound package.
This minimum charge will negate a large percentage of the discounts for packages that are under 5 pounds and in lower zones. Take a UPS ground package, the minimum package charge is $7.85. If you have a 50% discount for this package, you will still pay $7.85 without any discount applied.
How to Reduce Your Shipping Expenses
Lowering your shipping costs isn’t something you can fix in a few minutes. You have to understand what you’re paying for now and how you need to ship to meet customer expectations. Then, you can start to reevaluate and implement strategies like these:
1. Re-negotiate your Carrier Agreements
A good place to start is to first read your carrier agreements. Most of the time, you have no idea what’s on the agreement other than discount percentages. There could be terms with early termination clauses, service guarantee waivers, or unfair payment terms.
A good carrier contract should have large base discount rates, a lowered minimum package charge, a service guarantee for on-time package delivery, and reduced rates for your top 5 accessorial fees.
To help you audit and analyze your data, you can turn to providers like Refund Retriever as carriers don’t always provide the necessary data points to assess your current situation. They can help you find different ways to reduce your shipping costs.
If you are looking for an expert to negotiate with UPS and/or FedEx on your behalf, 71lbs can do a comprehensive shipping assessment and save you 11% or more on your yearly shipping costs through their contract negotiation services. Learn more about how they can help raise your bottom line.
2. Use Flat Rate Shipping
Flat rate shipping can simplify your shipping efforts and save you money. USPS Priority Flat offers 1 to 3 day shipping services for a single flat rate, no matter where you ship. Your product just has to fit in one of their designated boxes and weigh under 70 pounds.
Check out how the USPS flat rate program works.
3. Use Multiple Carriers
Every carrier is going to have their advantages and disadvantages. As you grow, it can be helpful to use multiple carriers depending on the package and its destination. This way you always ship with the best-rate carrier.
Managing multiple carriers can be a little overwhelming though. That’s why many online sellers turn to shipping software as their shipping volume grows.
4. Use Shipping Software
You can use shipping software to import, organize, and process all your online orders for fulfillment. From a single place, you can create and print shipping labels and compare carrier rates. Sellers can also leverage workflows that automatically assign and ship orders by the most cost-effective carrier.
Popular shipping software for ecommerce:
Another major reason to use shipping software is that these providers can offer their customers discounted shipping rates that they negotiated with major carriers.
5. Operate Warehouses Closer to Customers
It’s important to understand where your customers are located geographically. If you find you have a cluster of customers in one area, you can move inventory closer to them.
This is the same mindset that Amazon has. They’re masters at building and shipping inventory from the warehouse that’s closest to the customer, so they can ensure free and fast delivery every time.
Even if you don’t plan to operate the warehouse yourself, you can choose to work with a 3PL that’s strategically close to your customers.
6. Outsource Shipping to a 3PL
Beyond shipping software, growing online sellers can outsource to a third-party logistics (3PL) provider. They can help with everything from warehouse management, transportation of goods, to reporting and inventory forecasting.
The main advantage of a 3PL is that they can leverage carrier relationships and volume discounts that you couldn’t achieve otherwise. You also don’t have to worry about the complicated logistics part of your online business, and get back to focusing on selling.
If you do decide to partner with one, read our guide on how to pick the best 3PL partner for your business.
How to Use Shipping Rates as a New Marketing Tool
Once you optimize your shipping costs and processes, you can use low shipping rates to attract more customers and increase sales. Read more about how to turn your shipping rates into one of your best marketing tools.
How to Cover Unexpected Shipping Costs
Despite your effort to control shipping costs, sometimes they still go up unexpectedly — a new surcharge, a yearly increase, or a sudden surge in sales that leads to higher volumes. Since shipping is almost never a fixed cost, it’s important to have a plan for covering last minute shipping expenses when they arise.
With Instant Access you get paid the next day, every day for your marketplace sales instead of being paid on terms (i.e. Amazon pays sellers on 14+ day terms). Having the ability to cash out every day gives eCommerce businesses more flexibility. You’ll always have money in the bank to cover unexpected expenses like shipping.
For Instant Access, approval is based on account health and sales performance, with no credit checks. You can receive funding in just 24 hours, which is critical if you need to cover last minute expenses fast.
Both Instant Access and Instant Advance are debt-free and equity-free. An Instant Advance is not debt, but a purchase of your future sales, while Instant Access makes it easier to self-fund by giving you your own revenue faster.
Longtime Payability customer 5Strands Affordable Testing was able to cover all of their additional shipping costs and shipping materials right after a big Black Friday sale thanks to Instant Access. For more on 5Strands and their story, check out our video featuring founder Lisa Blaurock, her team, and their office dogs.
Instant Advance is a capital advance based on your future sales on Amazon, Shopify, or the other platforms you sell on. Sellers usually receive around 75% – 150% of their monthly sales and they go from $1,000 to $250,000. As with Instant Access, there are no credit checks and sellers can get approved as soon as the next business day. For more on Instant Advance and the impact it has on eCommerce businesses, check out the GO Buddha Meals story.