Handling fees: What are they and how to calculate them?

Between product costs, shipping, and marketing, keeping track of expenses can get tricky. One sneaky culprit– handling fees. These charges help offset the cost of order fulfillment. But what exactly are handling fees, and how do you calculate them?

This beginner-friendly guide will break down handling fees in 2024, so you can understand handling fee costs and factor them into your pricing strategy. Now let's dive in and make sure those extra charges don't eat into your profits.

Table of Contents:

• What is a handling fee?
• How to calculate handling fees
• Examples of handling fees
• Benefits of handling fees
• Tips for determining your handling fee
• Navigate midsize business challenges and opportunities
• Handling fee FAQ

What is a handling fee?

A handling fee is an amount a customer pays on top of their order subtotal and shipping fees. It covers the cost of expenses related to fulfillment, specifically packing fees based on required labor. 

Handling fees are charged once per order—not added to each individual product. Some sellers roll the handling fee into the overall price, while others make it a separate line item on the invoice. If you are going to list it as a line item, clearly label it on the invoice. That way, your customers don’t think you’re overcharging them. 

With QuickBooks Online, you can customize your invoices easily and add or remove shipping and handling charges as needed. Keep in mind that seeing your handling fee at checkout might impact the customer’s perception of your prices.

How to calculate handling fees

Figuring out your handling fees is a fairly straightforward process, but it does require some math. Here is the formula for calculating handling fees.

(Average number of minutes worked to package item / 60) x Hourly rate

To calculate handling fees based on this formula, you will need to:

• First: Determine the average number of minutes it takes to prepare each item for shipping
• Second: Divide the result by 60
• Third: Multiply the result by your hourly rate

The result is your opportunity cost, which is the time you could have spent generating revenue. Use the amount of your opportunity cost as your handling fee on orders. 

For example, 10 minutes / 60 = 0.16; 0.16 x $12 per hour = $2.00. Based on this formula, $2.00 is your handling fee on orders.

Once you’ve calculated the handling fee based on labor, you may want to add shipping and packaging costs. That way, all your bases are covered, and you’ll know you’ve accounted for the expenses related to shipping and handling.

Handling fee calculation example

Let's say it takes your warehouse staff an average of 7 minutes to pick, pack, and process an order. At an hourly rate of $16 per hour, here's how to calculate your handling fee:

• First: Determine the average number of minutes it takes to prepare each item for shipping. In our example, suppose it takes your warehouse staff an average of 7 minutes to process an order.
• Second: Divide that number by 60 to convert it to hours: 7 minutes / 60 minutes an hour = 0.12 hours.
• Third: Multiply the resulting time by your hourly rate to find the handling fee per order. If your warehouse staff earns $16 per hour, the calculation would be: 0.12 hours x $16/hour = $1.92.

Based on this calculation, a handling fee of $1.92 would help cover your labor costs associated with order fulfillment. Remember, this is just an example, and you'll want to factor in your specific costs for packaging materials and any other handling expenses.

Examples of handling fees

Here are a few order fulfillment components that can affect the cost of your handling charges.

Storage costs 

Storage costs refer to the fees a warehouse charges for holding your products on their shelves. These fees are typically based on the amount of space your inventory occupies, measured in square footage or pallet positions. 

When calculating handling fees, it's important to factor in your average storage cost per unit. This will help ensure your handling fee covers the cost of keeping your products safe and accessible until they're shipped to customers.

Packaging costs

Packaging costs encompass all the materials you use to prepare your products for shipment. 

Packaging costs include essential items like: 

• Boxes
• Bubble wrap
• Packing peanuts
• Tape
• Branded tissue paper
• Stickers
• Custom mailing envelopes

By tracking your average cost per order for these materials, you can ensure your handling fee accurately reflects the cost of getting your products safely into your customer's hands.

Labor costs

Labor costs represent the wages paid to your warehouse staff for picking, packing, and processing orders. To determine the labor portion of your handling fee, calculate the average time it takes to fulfill an order and multiply that number by your hourly labor rate. 

Shipping costs

Shipping rates can include postage, surcharges, fuel charges, and additional fees for certain shipping options, such as expedited delivery. The cost of shipping highly depends on package weight and location, so keep that in mind when deciding how much to charge for shipping. There may also be a difference between carriers—USPS vs. FedEx, for example—so that’s another factor to consider.

Handling fees may also differ depending on whether they’re domestic or international—if you ship outside your country. This is because you may need to consider additional charges for international handling fees, like insurance or extra packaging supplies required to protect the item traveling a further distance. International shipping fees can be quite high, so you don’t want that to cut into your profits.

Benefits of handling fees

While handling fees might seem like an extra cost for your customers, they offer several advantages for your business. Here's how handling fees can benefit you.

Transparent pricing 

By incorporating handling fees into your pricing strategy, you can ensure your customers are aware of all the costs involved in getting their orders to them. This transparency builds trust and avoids any hidden surprises at checkout. A clear breakdown of product costs, shipping fees, and handling fees allows customers to make informed purchasing decisions.

Expense coverage

Handling fees helps ensure your business isn't subsidizing the costs associated with order fulfillment. These fees cover expenses like storage, packaging materials, and labor, which are all essential parts of getting your products to your customers. 

By factoring these costs into your handling fee, you can maintain healthy profit margins and reinvest in areas that improve your business, like product development or marketing plans.

Upselling opportunities

Handling fees can be strategically used to incentivize customers to spend more. For example, consider offering free handling above a certain order value. This can nudge customers towards larger purchases, increasing your average order value and boosting your overall revenue.

Tips for determining your handling fee

Calculating a handling fee that's both fair and profitable requires careful consideration of several factors. Here are some key tips to guide you through the process.

Conduct competitor analysis 

If your handling fee seems high compared to competitors or you’ve had customer complaints, it could be time to assess your fulfillment costs. For example, you may need to find ways to lower your labor costs by making the process more efficient. Or, you might need to switch to more cost-effective packaging materials.

Consider a free shipping threshold 

Offering free shipping above a certain order value can be a powerful incentive for customers to spend more. This strategy can help offset handling fees while encouraging larger purchases. To implement a free shipping threshold effectively, calculate the average order value where your handling fee is covered, then set your threshold slightly above that point.

Decide between flat or tiered fee structure

A flat handling fee applies the same charge to all orders, regardless of size or weight. This can be simple to manage but might not be ideal for heavier or bulkier items that cost more to ship. 

A tiered fee structure charges different handling fees based on order weight, size, or destination. While this can be more accurate, it can also be more complex for customers to understand. Consider the volume and variety of your products when deciding which structure best suits your business.

Navigate midsize business challenges and opportunities

As your business scales beyond the startup stage, handling fees become even more critical. The good news is that midsize businesses have more opportunities to optimize these costs via invoicing or invoicing software. 

You can negotiate bulk discounts on packaging materials, explore warehouse automation to reduce labor expenses, or even consider offering free handling above a certain order value. Remember, a transparent handling fee can be a powerful tool. By clearly communicating these costs, you build trust with your customers and maintain healthy gross profit margins.