If you charge too much for shipping, you risk pricing yourself out of the market. If you charge too little, you risk cutting too far into your profit margins.
A solid pricing strategy depends on knowing what factors go into determining shipping rates and how these affect your profit margin, as well as knowing the rates of your competition. Here are some tips to help you choose an optimal shipping rate as part of an effective pricing strategy.
The Basics of Shipping Weight
Package weight is a key factor in determining shipping rates. The weight used to calculate shipping weights, referred to as the billable weight, is based on actual weight and dimensional weight.
- Actual weight is the weight of a package rounded up to the next pound.
- Dimensional weight is a measure of shipping density. Multiply length by width by height, rounding each up to the nearest inch.
- Billable weight is the greater of the two.
Shippers are responsible for supplying accurate information, and errors can affect rates. Manufacturer size descriptions may not always reflect the actual dimensions of package edges and protrusions, and discrepancies can affect rates, so be sure to use actual measurements.
Shipping and Handling
During shipping, you may also encounter the phrase “shipping and handling.” As eBay explains, this refers to expenses involved in the shipping process that go beyond the actual cost of postage, like packaging materials.
The method of shipping you choose will also factor into the cost.
- Ground shipping is usually the least expensive form of shipping, except in underdeveloped areas with poor roads.
- Naval shipping is used for most international shipping. It is also used for domestic shipping over inland waterways in some areas.
- Air shipping is done by cargo plane and in luggage compartments of passenger planes. Air is the fastest shipping method for long-distance shipping, but also the most costly.
- Intermodal shipping combines multiple shipping methods. It refers to specialized containers that can be transferred efficiently between ships, trains and trucks.
Calculating Shipping Costs
Most major shipping carriers provide shipping cost calculators on their websites. For instance, the United States Postal Service’s website includes domestic, international, and business price shipping calculators. To use the business price calculator for domestic shipping, input key information such as the type of parcel service you need, the item’s weight, the ZIP codes of the origin and destination, the number of pieces and any extra services you need. The calculator will then provide pricing information.
Best Practices for Competitive Shipping Pricing Strategy
With an understanding of shipping cost basics, you can focus on developing a competitive shipping price strategy. Order fulfillment company eFulfillment Service recommends padding your shipping price by picking a pricing point that enables you to earn a net profit in all circumstances rather than just charging customers the same shipping and handling price you pay. Simply put, determine a fixed shipping price if possible rather than leaving it variable.
- Shipping carrier APIs (application program interface), which are hooked into your ecommerce store and are used to calculate shipping costs specific to each customer’s location and order size, don’t always factor in variables such as delivery area surcharges.
- If you outsource your shipping services, your costs may not line up with carrier costs. You’ll need to account for fees paid to your outsource partner for their service.
- Using a shipping carrier API will prevent you from letting customers know up front, before they hit “Add to Cart” or “Buy,” how much they’ll be paying for shipping. This can lead to shopping cart abandonment.
When selecting a price point, you should consider several factors. First, consider your product line. For example, if you sell cheap products with a low profit margin such as t-shirts, a strategy using free shipping would be unprofitable. On the other hand, if you sell luxury jewelry, your profit margin might be high enough you can afford free shipping.
Your customers also help determine your shipping strategy and price point. For instance, if your customers are mainly domestic, you will use different shipping services than if your customers are overseas. Other variables include whether your customers are located in urban or rural areas, how price-sensitive they are and their average lifetime value.
A third factor to consider is your competition. For instance, if you’re in a highly competitive industry, a free shipping offer might help distinguish you from the competition. But in a less competitive market, this might not be a strong selling point. Research your competition’s shipping rates to gather information about what pricing strategies are currently being used in your niche.
Finally, when it comes to settling on a shipping pricing strategy, you have six basic options to offer:
- Free shipping on everything, which is difficult to do successfully unless you can recover the costs through very high profit margins or a high average lifetime customer value.
- Free shipping on certain items, such as higher-priced items.
- Free shipping when a customer places an order that reaches a certain price threshold.
- Free shipping to your best customers through means such as a loyalty rewards program.
- Flat-rate shipping, which is simple and works well as long as you calculate how your average order value balances against your average shipping costs.
- A shipping service API to calculate prices on a per-order basis.
If you’re not sure which strategy will work best, consider split-testing different shipping price strategies, just as you would when testing a product price.