Competitive Pricing: We win by losing price wars

Competitive pricing is great! It drives sales. Competitive pricing is stupid! It kills margins. Which side are you on? Do you know when to stop in order not lose money on every sell you make?

Ask anyone in online merchandising - pricing is Voodoo. Yet, all the different approaches can be grouped into two: "cost plus" and "competitive pricing".

Cost Plus Pricing

• Wholesale Price: changes every few months; calculated through multiple level discounts; subject to promotions and volume discounts.
• Dropship/ Handling Fee: applied either on the product or the order level; can easily reach $50 per product.
• Shipping Charge: ranges between $6 and $800 depending on product weight, dimensions, shipping method (USPS, UPS, LTL or White Glove), freight class/ density, origin/ destination; subject to numerous surcharges - oversize, residential, liftgate, fuel; shipping cost for a product set IS NOT equal to the sum of that for components.
• Target Margin: usually set on the category level; can be managed on the product level for the top sellers.
  

Let`s imagine, you sell 100,000 products which are shipped from 500 manufacturers with 10 different carriers. Having accurate product costs means modeling all the relationships, precalculating average expected shipping costs. While perfectly doable - it appears to be extremely complex, so most of the retailers skip the hard part and guesstimate.

In my experience - even the most educated guesses are wildly wrong most of the times. Adding fixed 35 % margin doesn`t really help. Products with overestimated costs are offered at 50-60 % actual margin and those with grossly underestimated costs are still sold below the cost.

So, let`s take it as given - your costs are wrong. But if everyone else is wrong - wouldn`t the market balance itself and eventually every product be priced right?

Competitive Pricing

Raison d'être for competitive pricing is - people like it cheap. There is very little brand loyalty, customers switch for $5 difference on $500 product. So, as Chuck Prince (Citibank CEO) said about the mortgage derivatives disaster - as long as music plays you dance. Competitor offers a $5 discount - you reduce your price by $10. A vicious cycle leaving everyone not only shirtless but shortless.

In addition to large and midsize companies wanting to be a billion dollar company, there are hundreds of new entrants who`s only way to compete is price. Take wrong assumptions, add aggressive players and you get a Pareto equilibrium where everyone is selling at below the costs (and going bankcrupt in hard times like ours).

Way Out

So, is there a sustainable way out? A smart man said - we win by losing the price wars. You should compete whenever you still make reasonable margin, but should not sell at a loss. The only way to sell exactly at a right price is to know exactly the costs and constantly reprice the products.

My three steps pricing solution:

1. A comprehensive product database with most recent product costs and business rules for dropship fees.
2. Weekly expected ship cost calculation (through APIs with all of your shippers).
3. A script that takes all the costs, adds target margins and generates retail price recommendations.

The very first run will tell you whether your costs should be renegotiated or you set too high of the margin target. Renegotiate the costs, fine-tune the assumptions and you have an auto-pilot pricing solution that assures you make nice margins on every sale and stay competitive with less sophisticated players.

Winning is fun!

Creating a marketplace for unique products sold at 50 % plus margins

A few grim facts: US marches into another great recession. Consumers viciously compare prices and switch for a $1 difference. Online retailers dropship from the same established manufacturers selling almost at cost just to stay in business. So, is everyone blind? Why compete with Walmart and Target instead of signing up small manufacturers and selling unique products at a nice margin?

There are two most commonly cited reasons: setup cost and traffic.

Setup Costs
Big guys have product info nice and clean, are easy to exchange orders with, have predictable shipping schedule. Small guys frequently lack product pictures or descriptions, ship 2-3 days a week and are difficult to resolve issues whenever these happen. In addition, big guys have more products so smaller setup cost is allocated to larger product base, smaller guys cost more per product and will have lower sales making working with them a riskier bet.

Traffic
There are thousands of people searching for "Nautilus" or "elliptical" or "rowing machine". Another sports equipment manufacturer can be quickly hooked up with existing Adwords campaign. Niche products, on the other side, require keywords research and optimization on a more granular level.

From a perspective of a single retailer - small guys are a pain in the neck due to higher costs and unpredictable sales volumes.

This is a classical Prisoner`s Dillema when retailers go after large manufacturers out of a fear that time spent developing small manufacturers will result in a loss of an opportunity to have guaranteed even though less profitable sales with the large guys.

So, what`s needed to create a marketplace for unique products produced by small manufacturers and sold at 50 % plus gross margin?

1. Universal Product Database
To start selling the product online a few key characteristics should be present for each product: picture, description, dimensions, weight, shipping method.

2. Common Product Taxonomy
There are hundreds of ways to describe the same product. What`s the difference between contemporary and traditional? sleigh bed or platform one? Each niche product needs to be mapped against the common structure that can be used to connect with comparison shopping engines or generate a list of keywords suggestions.

3. Pricing Tool
The easiest way to scalably manage prices of new products is through a Tool that takes retailers discounted product costs, connects to shipping accounts (UPS, FedEx, Yellow, UPS Freight etc.) to get an accurate shipping quote, adds X % margin and generates recommended retail price.

4. Webbased OMS (order management system)
Small guys have very basic capacities. A web-based solution to communicate with their retailers helps them create a new channel and lowers management costs. There are a couple of solutions out there yet all of the providers seem to focus on large manufacturers overlooking the potential of transaction cost reduction for smaller folks.

Just a couple of areas where existing solutions fail to meet the market needs: suggesting whether a damaged product should be returned to the manufacturer or disposed by the customer, making sure that retailers get credit memos from the manufacturers for shipping errors or defective products. The more you dive into the business needs - the more griddy details raise to the surfact and scream to be addressed.

5. Feed Management System
Feed Management is used to get products published in Google Product and Shop Comparison engines (Bizrate, Shopzilla etc). While setting up feeds can be difficult for individual retailers - it will be a piece of cake for a solution combining product database, taxonomy and order management.

Finally, if everything is so simple - why there isn`t yet such a marketplace where small manufacturers can submit their products and find retailers who will build stores at a rate of 1,000 SKUs a week?

My answer - this is a coordination challenge. There are companies with tons of products in their databases, there are OMS solution providers, there are feed management companies. Yet, noone has yet looked at the system as a whole and built a universal solution. I find this idea very interesting and would greatly appreciate your comments on what`s the best way to build such a marketplace.

Thank you and thrive!

Price right your top 10,000 products. Repeat weekly

Are you making a profit every time someone buys from you? Are your prices too high or too low? Would you like to earn exact margin % over actual product, dropship and freight costs on every sale?

I truly believe that cost reconciliation is a cornerstone of any business. One of my past engagements was an inventory program analysis - digging up freight inbound costs, product costs, warehouse order processing costs, outbound freight, returns, damages etc. Inventory products were responsible for 25 % of company`s sales and everybody considered the program to be a huge success. My findings were quite shocking, but before I share them with you let me discuss the basics of pricing.

The formula:
Free Shipping Retail price = Product Cost + Dropship Fee + Freight Cost + Target Gross Margin.

Let`s take a coffee table currently selling for $100 and see what should be our retail price if we want to keep 30 % gross margin.

1. Product Cost
Product cost is manufacturer`s cost after all the discounts applied. A typical product cost formula is 50/20/20 or 50 % of recommended retail (wholesale cost) minus 20 % minus another 20 % of the result. For a $100 coffee table the 50/20/20 formula gives us $50 * 0.8 * 0.8 = $32 product cost.

First level of complexity: product lines. Different lines can have different formulas. Next, vendors. Some manufacturers have one tier discount, others multi-tiers.

To get the product cost right you either need a manufacturer to provide you with per product accurate cost or program exact formulas for each vendor - product line - product combination. It can be done but requires a lot of discipline from the vendor management team.

An alternative way to get accurate product costs is per-product invoice reconciliation. That requires Accounts Payable to enter invoices on per-line item basis but provides accurate per product costs.

2. Dropship Fee
This is probably the smallest of the challenges. Most manufacturers have either per order or per product fees that can be easily imported. For our table the dropship fee is $10.

3. Freight Cost
Here is my beloved one. Take any of your products and check expected shipping cost. I will bet $100 that actual shipping cost differs from your expected by more than 25 %. Two most common reasons for having wrong expected shipping cost in your system:

• Public UPS/ FedEx rates (instead of your discounted ones) used in the calculation.
• Shipping costs were calculated a few years ago and don`t reflect annual rate increases.

To get exact per product shipping costs for my customers I`ve developed a script that connects to UPS/ FedEx or LTL carriers and quotes specific for the customer discounts. With such a tool obtaining actualizing shipping costs for 10,000 products is a matter of hours.

Back to our coffee table: original shipping cost was $25 and recalculated one is $17.

4. Gross Margin
A 30 % Gross Margin can be expressed as as 42.86 % of your costs. Our costs so far were $32 (product), $10 (dropship) and $25 (expected shipping) or total of $62. If we want to have 30 % Gross Margin - we must add $28.7 to the product cost.

5. Retail price re-calculation
Let`s say everybody else is selling at recommended retail price of $100. Given our costs and target margin we can lower our price to $90 and steal a lot of sales from the competitors who didn`t do the math.

Moreover, given our re-calculated shipping cost is just $17 - we can sell for $84, keep 30 % actual margin and kill the competition by selling $16 lower than everyone else.

Conclusion
In the example above I`ve shown that a table currently selling for $100 could be sold profitably for $84 more than doubling total sales. All we needed to do is to run the numbers.

If this is so simple, wouldn`t it be nice to price right all your products and double the sales overnight? Why people still do numerous pricing errors and what does it take to get prices right?

In my experience, price management is a very scalable process and can be applied to your entire catalogue. It can even be done weekly if you want to take a full advantage of manufacturers` promotions.

Four simple steps:
1. Get the shipping right. Consolidate with fewer carriers, negotiate as hell, leverage my script to recalculate per product cost.
2. Get accurate product costs and dropship fees.
3. Do the math :)
4. Repeat 10,000 times.

I ran number of small scale experiments resulting in 10X increase of per store sales and am in the middle of a large scale one. Exciting times!

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Oh, almost forgot to finish the story about the inventory program. While everybody did a rough calculation similar to mine - 25 % gross margin didn`t cover warehouse fulfillment costs and costs of damaged in transit/ returned products. Two of the products sold had 15 % damage in transit rate making the entire program widely unprofitable.

Reboxing helped a little but the program was still marginally profitable at best. My bet is - if the person who designed the inventory program used a better model - the company would have never bought any inventory.

Magic of Free Shipping

Free Shipping is one of the common tricks to convert visitors into customers. What I found though is that most of retailers neither have an analytical framework to identify products to be sold with free shipping and nor have tools to evaluate results of the promotion. Here are some of my best practices that you are welcome to try out.

Magic of Free Shipping
There are numerous researches on why Free Shipping feels like an irresistable deal. The best books I read on this topic are Predictably Irrational written by Dan Ariely, an extraordinary guy who I took a number of seminars with at MIT, and Free Prize Inside by Seth Godin. Dan dedicated a chapter of his book to the "Magic of Free Shipping" looking at Amazon`s success with Free Shipping program and lack of thereof in France where Amazon tried "1 euro" shipping. There is something magic about free and people (me included) frequently overlook other aspects of the deal buying from a retailer with Free Shipping even if there is a competitor selling for a lesser price.

Presentation: Full Shipping, Discounted Shipping or FREE SHIPPING
Let`s say I am a retailer and sell a coffee table for $100 and charge $25 for shipping. I can present this product in the following ways:

• Table $100, shipping $25
• Table $120, shipping $5
• Table $125, shipping FREE

Just look at these options. Do you feel that one of the deals is superior to another?

I ran my own experiment and asked friends how they feel about three options above. Since most of the folks received an MBA degree from MIT, Stanford and Harvard and know a lot about marketing tricks - I expected them to make a rational choice.

Most of the folks felt like $25 were too much for shipping and they could get a better deal at Walmart. "$5 shipping deal" looked much better compared to a drive to a store. And FREE SHIPPING was a clear winner - friends compared this experience to ordering a breakfast into your hotel room and hearing that "it`s complimentary". Completely irrational but it works.

TEST! TEST! TEST!
There are three major sales channels: Free and Paid Search, Comparison Shopping and Marketplaces. Visitors coming through each of them are sensitive to certain things but Free Shipping appeals to all. There is just one way to evaluate impact of Free Shipping on customers coming through each of the channels - select similar products, offer free shipping on some and regular deal on others. Test!

Search
Landing page quality is extremely important for "search" visitors. They judge potential buying experience based on quality of the page, product selection, promotions and to certain extend price. Free Shipping has huge impact on conversion.

Comparison Shopping
It used to be true that lowest product cost was THE KEY to get customers click on your link. Now almost all engines have shipping costs incorporated and provide an easy way to compare total "landed" cost for all the retailers. My personal experience is that lowest "landed" cost can increase sales 10X. Check out my article on leveraging actual shipping costs to drive sales through shopping engines.

When I`m buying through comparison engines I click on 3-5 links with the lowest total price. My selection is narrowed to just a few retailers and most of the times one with Free Shipping wins. The magic still works!

Marketplaces
Marketplaces provide retailers with more or less uniform "look and feel" for the product pages. There are few ways to differentiate but good product description, price and free shipping promotion. If your competitors offer free shipping - you lose if you don`t.

Increasing average order size with Free Shipping
In certain cases Free Shipping can be used to increase average order size. Amazon`s FREE Super Saver Shipping on orders over $25 is a good example. Shipping cost for 2 books is the same as for just one but variable costs (marketing, shipping etc) are allocated towards two products thus margin goes up.

I`m not entirely convinced the same trick would work for a bundle of a $500 patio heater and $600 set of patio furniture but it`s worth a try. At very least - give free shipping to people buying warranties.

Staying profitable with Free Shipping
It goes without saying - whatever you do - your order margin should always be positive. I`ve written a few articles on Margin Management, here is a one margins and free shipping "How Free is your Free Shipping?".

There is a clear advantage of a structured approach to the Free Shipping dillema. It`s survival of the fittest and smartest. Experiment and you`ll find your great ways to convert "predictibally irrational" visitors into customers.

Customer Returns: 1 % returns = 10 % sales

Liberal customer return policies drive sales, no doubts. However, how nice is nice enough? Where is the line between generating extra sales and losing money? Here is a a simple framework to evaluate impact of your return policies on well-being of your business.

Your return costs = product cost + shipping + marketing

• Product costs: half of your vendors don`t accept returns, others charge 15 % restocking fee. Rough estimate - you lose 57.5 % of COGS or ~ 30 % of retail value of returned products.
• Shipping: typical return policy is customer paying two way shipping. Underestimated shipping costs in your system and other issues result in ~5 % of retail value lost.
• Marketing: you`ve spent money on key words or search comparison engines to get this customer. 10 % of retail value lost.

Total: 1 % returns costs you 0.45 % of sales.

Yes, there is a tradeoff - liberal return policy means higher sales. Let`s calculate how much extra sales do you need to off-set 1 % increase in returns.

On $10 million sales 1 % returns increase means $45,000 lost in costs. At 4.5 % margin to off-set this loss you need $1 million extra sales. Are you getting this much because of a nicer policy?

A rule of thumb - you need 10 % sales increase to offset 1 % increase in returns.

Simple, isn`t it?

Widening hole in your pocket - shipping costs annual increase

It`s a well known fact that UPS and FedEx increase their rates every year for 6-7 %. They are not alone in this "beat the inflation game", freight companies do the same plus they have a few more unobvious ways to balloon your shipping costs without you noticing it.

Let`s take a look at a typical transportation contract and how LTL companies can charge you more:

• Base Rate - Freight companies more or less syncronize their base rates but still some companies have higher base rate (Yellow, Roadway, ABF) and some have a lower one (UPS Freight). The difference I`ve observed was up to 10 %.
• Base Discount - Once you negotiate your contract - it`s difficult for freight companies to reduce your base discount. So this part usually stays the same but keep your eye on any change in the base discount anyway.
  
• Direct/ Interlane discounts - almost every company has certain routes it doesn`t serve directly and outsources deliveries to a partner. Pay extra attention to any change in your interlane discount. This is a perfectly legit yet difficult to see through way to increase your transportation bill.
  
• Minimum charges - If your industry is online retail - significant portion of your shipments will be rated at a min charge. Whenever you renegotiate the contract - make sure that min charges don`t go up. If you paid $80 + fuel surcharge and your new charge - $100 + fuel surcharge - your total shipping costs just got bumped by ~10 %.
• Accessorial fees - there are many accessorial fees that you don`t expect be applied but many of them will. To name a few: Residential, Liftgate, Notification, Single Shipment and many more. Freight companies rely on shippers (manufacturers) to mark necessary services on the Bill of Lading. UPS and FedEx implemented an address verification solution that checks customer address for residence vs. commercial location and applies residential charges even if they were not applied at the time of shipping. Freight companies find their ways to increase the revenue and apply previousely ignored charges. A $30 surcharge applied on 20 % of your shipments -> another 4-5 % increase in your shipping costs.
• Billing errors and refunds - I`ve seen increasing number of wrong discounts applied on my clients` invoices. Errors goes up, time to get a refund goes up to -> unless you catch those errors and claim adjustments - your shipping costs go up.

So, pay attention to your shipping contracts and periodically inspect invoices for unpleasant surprises and billing errors.

Have nice holidays and be profitable.

Expedited shipping: extra revenue or disastrous costs

Economy 101 and common sense suggest that there are people out there willing to pay extra for expedited delivery. But can you profitably sell to these people? Does extra revenue bring you more margin or expose to potential disasters? As Christmas approaches do you want to go extra mile and offer 2nd day, overnight or special services deliveries?

In my experience, most of the companies are actually losing money by offering extra delivery options. Here are a few things that retailers are not used to put into equation while offering expedited shipping.

1. How much to charge extra for Expedited Shipping
In order to calculate an expedited shipping surcharge you may want to take shortcuts and either use a multiple of regular shipping or a fixed surcharge. Both methods are very wrong!

In the era of free shipping, most of the products sold either have a free or subsidized shipping. If retail shipping is very different from an actual shipping - applying a multiple is a hell of a guess. Same with a surcharge, if your ground shipping is $20 - adding a $100 expedited surcharge will likely cover extra costs. But if ground shipping is $60 - with all the likelihood the buffer will not cover extras.

The only accurate way to price expedited shipping is deducting ground shipping costs and adding an exact quote for the expedited delivery. Are your customer service folks trained on this process?

2. DIM Factor - "Air Inside"
Let`s say your customer service folks know how to get rate quotes and can login to UPS/ FedEx websites and get one on the fly. But do you have accurate weight and dimensions for all of your products?

Air is one of the most expensive things to ship. A 30 lbs broken down coffee table can cost you 50 % less than a 30 lbs assembled bench. Because our coffee table is packed densely - it`s rated at the actual weight, while a "full of air" bench packaging is rated at its "heavier" DIM weight (20*40*20/194 = 82 lbs).

While important for Ground dim weight becomes absolutely critical for Overnight delivery. (A 1 cubic meter of a truck is much less expensive than the same volume of an airplane). So, do you know which of your products ship "Air Inside"?

Can you be sure that your expedited quotes are accurate?

3. Cost of an error
The only people who are willing to pay extra for expedited delivery are those who really need the products by date X. Now, what if the vendor didn`t ship on the date promised? What if UPS truck got stuck in a traffic jam and delivery was delayed? What if an address was incorrect and you had to contact the customer for delivery information?

There are many things that can go wrong and result in missing the expected delivery date. Should you be liable for the delay? Are your customer service folks able to treat respectfully irate customers yet decline requests for a refund for a missed delivery date? Do you have a tool to calculate actual cost of extra discounts given to such customers?

4. Internal costs of an "exception" process
Every well-run customer service is efficient performing its daily processes and loses efficiency when in need to handle an exception. Given you have limited resources - how many normal orders do you sacrifice in order to serve an expedited one?

So, while offering an additional delivery option looks like a good idea - very few companies can actually earn extra profit by doing so.

Keep your business simple by serving 80 % of customers well. Your efforts invested into bringing new product lines and entering new markets will bring much higher returns than going after 20 % of customers with special needs. Even niche retailers need to go after mainstream customers.

Happy Holidays and have fun making your business thrive.

35 % Margin: Myth or Reality

Most of the people who started e-commerce businesses were expecting to earn at least 35% margin. The reality is disappointing. To grow you need to price competitively; your fulfillment costs accumulate quickly and actual gross margin drops to low-twenties. But, can you keep high margins and grow?

Many product categories can deliver 35% plus margins. For furniture, for example, reasonable COGS is 50% and shipping is 15% of sales. However, when you factor in returns, damages and other fulfillment problems your costs jump from 65% to 80%. Good news is that these extra costs are driven by only a few products. Identify those products, isolate the problems and enjoy your 35% margin.

Most of the retailers can dramatically improve the margins through better business processes and financial discipline. Here is a four step blueprint to do so:

• Get an accurate snapshot of your business. Focus on the biggest cost drivers: COGS, Shipping and Marketing. Reconcile at least 60 % of your last 6 months of invoices.
• Start with low hanging fruits. If your shipping cost is above 15% - have someone optimize your logistics. With a good partner in 2-3 months your costs will drop creating free cash to finance other process improvements.
• Rebuild your accounting processes to accurately record exceptions. Accurate data is essential for your profitability. Start with monthly per-PO reconciliation for COGS and Shipping and move on to per-product reconciliation. Enhance your chart of accounts to properly record costs of returns, damages and orders shipped after cancellation.
• Re-run your P&L to quantify the impact and identify other issues. Take a look on new line items: Cost of Returns, Cost of Damages, Cancellations etc. Benchmark your costs against the competitors and attack your next targets.

If you can`t find experts in Logistics in your area – look around. LinkedIn is a good networking resource, search is another great one. Google “e-commerce cost reduction” to see what experts are writing about the topic or come back to my blog for some of the best practices.

You will be amazed how much can be achieved in 3-4 months. Your costs go down, business becomes more transparent and you are again driving the car instead of watching it lose oil every mile. Building business is fun. Thrive!

Effective Return Policies

Stan`s article on Returns Policies has been featured in PracticalEcommerce (a leading online retail magazine). Here are some of the advices on elements of simpler and more effective return policies...

If there is one thing that every online retailer hates and fears, it’s returns. Many great stores fight to keep return rates below 2 percent of total shipments. Those merchants work with the carriers and shippers, modify their websites, and send customer satisfaction surveys—all of which are great—but one often overlooked factor that helps in reducing unwanted returns is to simply have better return policies. By some estimates, returned orders will cost online retailers more than $20 billion in 2008. Providing customers with more and better return policy information can avoid unwanted returns and discourage baseless returns.

It could be tedious to consider all aspects of returns in your policies especially when you’re selling multiple products that may be different in nature from one another. But you can derive smart return policies based on the type of return. What follows are several practical pointers about particular “Return Type” policies that can reduce your stores total returns.

Defective Item Policy

A defective item means that the manufacturer is at fault. The policy should be written in such a way that the item can be easily returned back to the shipper before refunding or replacing the item for the customer.

• Differentiate between a defective and damaged item — Don’t let your customer be the ultimate judge, deciding that an item is or is not defective. Have your policy encourage the customer to contact customer service in order to confirm the item as a defective piece.
• Returning a defective item — Depending on the nature of the defect the policy should advise the customer. Should they expect replacement parts if that could solve the problem? Can you provide a replacement product? Should they return the item in its original packing or will you provide a box for the return?
• Send replacement or refund — The customer should in all cases notify your customer service team before returning an item. This could avoid situations where the customer has not assembled the item correctly and assumes the item is defective. This item, if returned, will be a total loss as the manufacturer will not honor the return. Make it very clear that a customer must contact your service department before returning an item. Let them know that simply sending an item back will not guarantee a replacement or a refund.
• Include Instruction Manual/Warranty papers — It is very important to include instruction manuals for all SKUs, also have the manuals available online for each item. Warranty information can make your customers more comfortable and less likely to mistakenly return an item that is really not defective.
  

Damaged Goods

• Refuse shipment – The safest and the most important instruction to the customer should be to refuse shipment when they receive a visibly damaged item. This will allow you to file a claim easily with the carrier and simultaneously facilitate the customer with a replacement.
• Notification of damaged item – You should instruct customers to maintain the original packaging. In cases of concealed damage, pictures showing the damage upon arrival could be of great help in getting reimbursed from the carrier. As customers to notify you of damage within 24 hours since many carriers have a cut off time after which they will not accept claims.
• Contact customer service – Customers should call to report damage, confirming that the damage happened in shipping and is not the result of use or misuse of the product.
  

Wrong Item Shipped

• Order confirmation e-mail – It’s mandatory to send an order confirmation email that substantiates the item number and the quantity ordered. The policy should ask the customer to mail in the order confirmation email or fax in if they received a physical copy.
• Notification – In many cases, customers claim the item to be wrong due to some minor difference in the color or packaging. This is quite common in online retailing. In such cases a talented customer service team could work with the customer, helping with relevant options.
  

Customer Satisfaction Returns
This is a good way to earn customer appreciation by allowing the end user to try the product and return for refund if not satisfied.

• Specify time period/condition of item – Allowing a customer to try out an item for a specified period of time is a good way to boost business. But it is a good idea to make it clear that after a certain date, the customer has effectively decided to keep the item.

Non-Returnable Products
Some items can’t be returned after using them, for example a CD or items that come in direct contact with the body (chest strap). Such items need to have an indication that they need to be returned unused.

Low Value Items
There is no use returning an item worth less than $50, the whole returns procedure could eat all your costs increasing the loss on that item. The customer service team could play a good role in convincing the customer to keep the item or have him discard and reduce the loss.

Cutting cost is better than cutting people

We are in the recession. Consumer spending is decreasing and many experts expect bad times to last for at least next 12 months. Naturally, companies are looking for the ways to reduce burn and many of them are cutting staff. I want to argue that there is a better way to survive the stormy times and letting people go undermines your perspectives.

1. Numbers
Let`s say your G&A is 9 % of sales (pretty high but not uncommon). By letting go 50 % of your team you save 3-4 % of sales. The downsides of a layoff are well known - morale, reduced productivity, loss of expertise and relationships, especially if you cut your vendor management team.

Is there another place you can save more than 4 % of sales??? Oh, yeah, plenty. Ship cost reduction, price optimization and better Out of Stock management to name a few. Each of these initiatives may reduce your costs by 5 % of sales or more.

2. Alternatives in detail

1. Ship cost reduction. Depending on your product portfolio - ship cost benchmark is 10-14 % of sales. If you are above that number - delta is your opportunity.
2. Sales price optimization. Most retailers I worked or spoke with have a disconnect between actual costs and sales prices. They all use estimated COGS and Shipping Cost that are frequently far off from the actual numbers. Bridging this gap and making sure at least your top products are priced competitively (yet earning enough margin) can increase your sales 5-10X and at least 3X your total margin.
3. Reduce cancellations. I`m surprised to see 8-10 % cancellations across the companies. Single biggest reason - Out of Stock (OOS). A simple analysis shows that 10-15 vendors are responsible for vast majority of the cancellations. Assign a "cancellations manager". Have him or her look at the numbers daily and contact these 10 vendors to get accurate back in stock dates or call back the customers and suggest substitutions.
   

Each of these projects can be done internally with a little guidance from a consultant. You keep your talents busy, show them you care and achieve your objectives without sacrificing your future growth. And if consultant works on the performance fee basis (as I do) - it costs you nothing to try.

If you are actively looking for ways to reduce costs - consider my experience and give me a call. I`d be happy to share with you the best practices and help if needed.

Have fun even in these stormy days!

Half your damage in transit in just a few weeks

It`s quite common to think of "damage in transit" is an inevitable part of the business and that little can be done about it. My experience is quite the opposite: 10 % of the vendors are responsible for 90 % of the damage and a couple of simple solutions can half your costs in just a few weeks.

So, why damage is a big problem for some manufacturers and is not for others?

First of all, much depends on whether manufacturer`s primary focus is brick and mortar stores or online retailers. Most of the "problematic" vendors that I dealt with designed their packaging for truckload palletized transportation and not for shipping every single item separately.

Manufacturers tend to care primarily about their own costs and since damage is rare when shipped truckloads - thinner and cheaper packaging is used. So, unless you are very vocal about packaging - some manufacturers may be unaware that something is wrong.

Secondly, certain products are much more prone to damage due to their nature. For example, chairs and barstools are frequently shipped assembled, while beds are usually shipped flat. Bulky boxes get damaged.

Thirdly, some products are just to fragile to be shipped with regular shipping methods and require special handling.

Solving the problem.
Here is a simple algorithm to quantify the problem and reduce your losses.

1. Start with historical data. If you have a damage handling process - analyze your damage per vendor. For vendors shipping on your account - run damage reports per shipper/ vendor.
2. Identify the biggest "contributors" and the most problematic products.
3. Run the numbers to see how much would cost you (a) upgrading shipping method UPS->LTL or LTL->White Glove and (b) reboxing each product.
4. Approach the manufacturers with numbers in hand and discuss the options.

In my experience, extra box with reasonable padding costs $10 per product and reduces damage to a minimum. An alternative is approximately $50 extra if shipped LTL. Obviously, reboxing is a superior option to a shipping method upgrade and should be used whenever possible.

If re-boxing is not an option - discuss extra concessions to offset cost of an upgrade.

In conclusion, reducing your damages is pretty simple and has immediate positive impact on your bottom line.

Good luck and be profitable in these stormy days.

Negotiate FAK or bleed to death

If you ever reconciled your shipping costs on a product level - you`ve ineviteably seen situations when Chair A costs you $50 to deliver and Chair B of the same weight shipped from the same manufacturer only $15.

These single incidents start happening daily as you grow. Shortly you lose control over your shipping costs and can`t tell anymore if you should be selling this product line at all.

The underlying issue is the way products ship. Chair A ships fully assembled while Chair B ships flat. Subsequently, Chair A eats much more space and is graded differently according to the NMFC classification.

Here is how volume density translates into freight classes:
Class 70 or below.. over 15 pounds per cubic foot
Class 85........... 12 to 15 pounds per cubic foot
Class 100.......... 8 to 10 pounds per cubic foot
Class 125.......... 6 to 8 pounds per cubic foot
Class 150.......... 4 to 6 pounds per cubic foot
Class 250-500...... Under 4 pounds per cubic foot

In our example, Chair A is rated as Class 250 while Chair B as Class 125. Difference in classes translates in 3X difference in shipping costs unless you have negotiated FAK (Freight All Kind) with your carriers.

Of 50,000 SKUs you sell -> 10,000 SKUs shipped LTL -> 1,000 SKUs with high classes (and 3X the shipping cost). The more you grow - the more you bleed.

Most reasonable arrangements I`ve seen is
FAK 70 for Classes 70-150
FAK 150 for Classes 150 - 500

If you ship one or two of these chairs with UPS Ground or FedEx Ground - the same issue has a different name - Dimensional Weight. A 30 lbs assembled chair will be rated as 70 lbs.

In my experience, lack of FAK with LTL carriers costs you much more than suboptimal Dim Factor with UPS or FedEx. Therefore, focus on FAK first and negotiate Dim Weight with Small Package shippers once you collect reasonable shipping history.

Good luck.

Goldmines of Invoice Verification

How can we ensure we are being invoiced accurately at all times, are all the rules and discounts in place? These are some of the challenges every retailer faces, the solution really is to regularly verify your invoices and make sure we are not overpaying the supplier.

When a supplier signs an agreement to fulfill your orders, it is important to ensure both parties agree to the set deliverables. This will be the base for negotiation when something is not matching the agreed terms.

The three main aspects of invoice verification could be as follows:

Payment structure

Advance payment to suppliers could be a bad practice; ensure that there is at least 30-45 days time gap before you pay a vendor from the time a purchase order was issued.

• Approve payment - At all times payment should be approved only after an invoice is verified internally, receipt of each payment should be stored at the order level.
• Purchase order - All purchase orders should contain the complete break up of the charges; this would include COGS, shipping charge, drop ship fees etc. Purchase orders usually serve as a legal document that confirms the total cost of an order as agreed by both parties.
• Payment confirmation - On regular intervals we need to seek a detailed manifest for all past orders from the vendor, this will ensure all payments have been received by the supplier.

Internal verification

This is a crucial step and has to be done with a good process document; again, our aim is to ensure the supplier does not over charge us.

• Receive invoices - Request regular invoices from the vendor, this should consist of one invoice per order and must include all the relevant charges like wholesale cost, ship cost, drop ship fees, discounts, return charges etc.
• Reconciliation - All invoices have to be verified against the original purchase order, shipping charges should be cross checked against your master data which confirms whether the vendor shipped on your account or his.
• Additional verification - Check if the vendor has any special discounts that could apply to the present invoice, the discount could be seasonal or product based. Verify accuracy in drop ship fees if applicable, also any additional charges in ship cost due to delay from the vendors end should be identified.

Credit Memo

This would be a sort of rebate for the retailer; every invoice that has been verified and paid should be stored in the database.

• Post payment rebates - Your customer could return a product due to damage or defect, in such cases we need to get reimbursed from the vendor. If the invoice has already been paid then we need to get a credit memo for the referenced order.
• Other payment - There could be situations where the vendor had been charging you for some additional service like palletizing or shrink wrapping and due to inconsistency in this service the vendor has agreed to waive off these charges.

Maintaining a master database of all the invoices and purchase orders is the key; the process could be a bit complex and would need a dedicated team of professionals. Outsource this time consuming process which would give you sufficient time to concentrate on vendor relations and vendor performance reviews.

How to build a great relationship with your vendors

Every retailers challenge is to always keep his suppliers happy; the success of your business revolves around the supplier's ability to source products in a timely manner.

Signing deal with a new vendor and further steps ahead to set up a profitable relationship requires a well structured set up, there are many ways to make the vendors job easy at the same time obtain the relevant info that you need from time to time. Let me share few of the important aspects of vendor management.

Vendor set up

This being the initial setup requires a lot of effort to get the right contact at the vendors end to make your proposal.

• Fulfillment form - Prepare a form that is aligned with your business requirement, clearly mention the payment terms. The key is to have as many options as possible for the vendor; this will put him in a comfortable position.
• Vendor product information - It should be agreed between both parties in writing that the information on any changes between both sides will be communicated within the least possible time; the key is to ensure the vendor provides you with the latest info on any minor changes to product or people.
• Personal visit - It's always a success if you can meet your vendor in person, attending trade shows, invite sales reps to meet you personally. Giving a face to a name builds a lot of confidence in your suppliers.
• Dedicated representative - This is very important, if your vendors don't have a dedicated contact then it's almost confirmed that your relationship with them won't last long. Present a structured contact list that includes more than one escalation point.

Vendor conversion

Another challenging task is to get your vendor to use your shipping account; this will save you costs in shipping (sometimes even drop-ship fees).

• Conversion template - Prepare a conversion template, mention the advantages for the vendor to ship on your account. Email all the relevant documents that the vendor should need in order to follow this procedure, and most importantly - follow up.
• Collect information - Once the vendor agrees then it is time to gather information on who is in charge of shipping at the vendor's end, what are the preferred time slots for pick up and return etc.
• Invoice verification - It is important to ensure your invoices are verifies regularly, there are chances where the vendor has shipped on your account but still billed you for shipping.

Weekly/monthly meetings

There are always issues that the vendor might experience with the set process; the same might be felt at your end. It is therefore important to have regular meetings over the phone/in person to discuss the performance of each of your vendor and any open or unresolved issues.

• Weekly/monthly calls - Involve the vendor in a weekly call to ensure there are no issues at both ends, a monthly performance review is important to ensure the vendor is performing as expected and meeting deadlines.
• Meeting in person - If you need to build a good relationship with your vendor then it is very important to have on site meetings with your vendor; this is a proven method to ensure your vendor has the liberty to discuss their progress and any future plans.

The success of your business is related to the best practices of vendor management, you could learn the art by talking to biz development people at other companies, vendors and reading blogs.

Two ways to reduce your Lost Sales

Lost Sales is a bit of an enigma for every company. How can you know for sure how much revenue did you lose due to uncompetitive pricing and operational inefficiency. I want to share our way of addressing both issues.

Uncompetitive pricing.
COGS and Shipping cost reconciliation will equip you with data necessary to optimize your pricing. In another article on my blog I spoke about some of the secrets behind 10X sales increase for managed stores.

The recipe was simple. We updated shipping costs, recalculated margins on the products and reduced prices whenever possible to beat the lowest price by $5. Practically overnight, sales went up. Despite price reduction total margin for the managed stores increased significantly.

Shoppers coming through price comparison engines are extremely sensitive to the price and retailer with the lowest price gets 80 % of the clicks. Get your costs accurate, re-price and convert.

Operational inefficiency.
In my experience, retailers lose 7-10 % of Net Revenue due to different kinds of order issues. To name a few:

• Customer Remorse,
• Damage in transit,
• Orders shipped after cancellation,
• Out of Stock or Discontinued product,
• Fraud etc.

Most of these issues can be prevented/ resolved through order policies and proactive customer service. General advice – give customers every reason to keep the product and discount if necessary. Frequently, you are better off giving 30 % discount than dealing with the return. Know the numbers and train your customer service folks to calculate discounts on the fly.

Let's take a return of a $999 platform bed as an example. Wholesale price is $500 and shipping cost is $100 each way. Your gross margin is $350. Can you convince customer to keep the order?

Your policy says – if customer wants to return the product he is liable for 2 way shipping and 20 % restocking fee. Walk the customer through refund calculation:

• Retail price $999
• Shipping, both ways (-$100 x 2) = (-$200)
• Restocking fee (-$999 x 20 %) = (-$199.8)
• Customer refund ($999 - $200 - $199.8) = $599.2

Most of the customers do not realize that their refund will be significantly less then the price they paid. Frequently, just doing this calculation with a customer on the phone is enough to save an order. In case he still wants to return – offer a discount. Remember, your gross margin is $350 and it is better to earn some then nothing.

Conclusion.
Accurate cost information is the universal key. It helps you experiment with pricing, catapult sales and reduce operational costs. Define a scalable process to maintain accurate information for tens of thousands of your products and your lost sales will go down.

How to define your returns policies

In any retail business having a concrete policy on returns is very important; this could ensure the loss is minimal due to returns.

It is very difficult to consider all aspects of returns in your policies especially when one is selling multiple sku's that are different in nature from one another, there are however ways to derive policies based on the type of return.

Returning a defective item

A defective item basically means that the manufacturer is at fault, the policy should be written in such a way that the item can be easily returned back to the shipper before refunding or replacing the item for the customer.

• Differentiate between defective and damaged item - In most cases the customer cannot be the best judge between a defective piece and a damaged item. It is very important for the customer to notify your customer service within 24 hrs of receiving the item.
• Returning a defective item - Depending on the nature of the defect our policy should advice the customer of replacing parts if that could solve the problem, also the customer should maintain the original packing in order to be able to return the item in extreme cases.
• Send replacement or refund - All returns due to defective item being shipped should go through the customer service team; there are many instances where the customer has not assembled the item correctly and assumes the item to be defective. Upon returning such an item the manufacturer will not reimburse the retailer and will be a total loss to the company.
• Include Instruction Manual/Warranty papers - It is very important to include instruction manuals for all sku's, we can also have the manuals available online against each item. Warranty papers would make the customers comfortable in keeping the item on a long run and hence increase sales.

Returns on damaged goods

• Refuse shipment - This is the safest and the most important thing that the policy should instruct the customers to do when they receive a visibly damaged item. This will ensure that a claim can be filed with the carrier and the customer can receive a replacement.
• Notification of damaged item - The policy should inform customers to maintain the original packing, in cases of concealed damage pictures showing the damage upon arrival could be of great help in getting reimbursed fromt he carrier. Customers should notify us within 24 hrs of receiving damaged item, this is important because many carriers have a cut off time before they could accept claims.
• Contact customer service - Customers should call in to report damage, this will confirm to us that the damage is upon arrival and not because of misuse of the product. We could request relevant documents (pictures etc.); provide a unique return authorization number. There is also a good chance to convince the customer to keep the item for a discount If the damage is very minor. Remember, the key is to reduce returns, the longer  a return issue is open the more loss to the company.

Wrong item shipped

This could be a win-win situation for the customer; the only parameter is to ensure the customer did receive the wrong item.

• Order confirmation e-mail -  It is very important for any retailer to send an order confirmation email that mentions the item number and the qty ordered, the policy should request the customer to mail in the order confirmation email or fax in if they received a physical copy.
• Notification - Some times customer's claim the item to be wrong due to some minor difference in the color, this mostly happens in online retailing. In such cases a talented customer service team could convince the customer and help him/her with relevant options.

Customer satisfaction returns

This is a good way to earn customer appreciation by allowing the end user to try the product and return for refund if not satisfied.

• Specify time period/condition of item - Customer could try out the item for a specified period of time before deciding to return for a refund, he/she needs to ensure that the item is in "new or like new condition" and is in its original packing. All such returns should be subject to inspection and deduct costs for shipping and re-stocking fees if any.
• Non returnable products - Some items can't be returned after using them, for example a CD or items that come in direct contact with the body (chest strap). Such items need to have an indication that they need to be returned  without being used.
• Low value items - There is absolutely no use returning an item that values less than $50, the whole returns procedure could eat all your costs increasing the loss on that item. The customer service team could play a good role in convincing the customer to keep the item or have him discard the item and reduce the loss.

Conclusion

The policy could be derived individually per sku or could have a general returns policy, in any case we should always remember that the customer is the King and he should be comfortable with the returns procedure that will enable him to come back and give more business. Handling returns issues cannot be completely automated, it requires human intervention as there is a lot of negotiation that will reduce your loss due to return...All the best...

6 simple steps to turn around your returns management - (Part 2)

Returns management is a big challenge for any retailer; you always wonder how to ensure customers don't return the item. Well it's quite possible with a strong process - read on..

In this part I want to share a little more specific steps to diminish returns. The aim should be to have a return rate of less than 2% for any type of sku in any given month. I want to discuss three different catogories where you can reduce returns.

Returns Policy

Returns could be classified into different types based upon the type of policy you have stated for each sku, one could have a general returns policy for all items and some may have returns specific to each sku.

• Define rules for return - It should be very clear as to why and how the customer can return an item, the policy should be easily accessible to the customer before and after purchase of the item.
• Warranty replacement - Most items by default will have a manufacturers warranty, setting up a contract with an insurance company for additional warranty could save returns. The policy should be explicit on part replacement, service arrangement - all under manufacturer's warranty.
• Damage returns - This could be very tricky; it should be clear as to when and how returns will be accepted upon report of damage. Customers should be able to classify between defective and damaged items.
• Returns procedure - Most of the time customers don't understand the policies and end up returning an item directly to your head office and claiming a refund for damaged item, this could cause a lot of confusion and we might end up with additional shipping and handling costs. Inform the customer what steps should be followed when he/she wants to return an item.

Handling returns cases

Whenever there is a returns issue, there are several ways to convert it into a sale or atleast reduce the loss.

• Identify type of return - There are several reasons for return, we need to identify the type of return before we could dive into providing easy solutions. Our policies should be referred to in any case of returns; if the customer has not followed the rules in the policy you can be candid and not accept return.
• Offer discounts/Goodies - This is a great strategy and works well, when a customer calls for minor damages or defect, offer discount based on the gross profit that you make. This is a better method than getting the item back, paying for storage, liquidation etc. If it's a manufacturer's fault (wrong color etc.), have the manufacturer ship out some accessories free of cost to the customer.
• File claims - Claims should be filed promptly on any case of damage, this is a good way to claim the additional amount on saved returns.
• Time frame - Ensure all your return cases are solved within a week's time, the longer you try to work on a returns issue the more loss you will incur. Your customer service team can use that time to bring in more sales; don't waste time on negotiating on items less than $50. Have the customer keep the item and refund, the longer this case is open the greater the loss.

Returns Analysis

This is a very crucial set up that could help you understand what's going wrong and implement corrective action that will help maintain the returns rate per sku to be less than 2%.

• Data collection - A dedicated team of analysts could collect the daily shipping and returns report, find ways to identify returns per sku and maintain a databse to view monthly return rate.
• Returns classification - Its important for us to classify the type of return, each sku could have a specific reason for return. Furniture items usually have damages due to inadequate packaging, the relevant data could help us bring out a solution.
• Negotiating with vendors - This is a very crucial step, upon identifying the issue for returns per sku, If the problem is relating to the way the item is shipped at the vendors end then we need to get in touch with the vendor and request for better service (better packing, shipping etc.)
• Invoice verification - This final step is to ensure that the vendor is not billing us for having shipped a defective item that was retunrned back or if the vendor had promised us a discount for having the customer keep the item.

Aim at 2% return rate, use combination of in-house and outside expertise, outsource whatever makes sense or if returns management is not your core expertise. I will continue with more in-depth returns management sreategies in the following article.

Dude, Where`s my margin? (part 3)

In the second part I`ve argued that most of the retailers call COGS is a sum of actual Cost of Goods Sold and costs of fulfillment inefficiencies (for some of which vendors should issue credit memos). In this part I`ll share some of the benchmarks and cost reduction practices for shipping costs.

Shipping costs are likely to be your second biggest cost on P&L statement. They range from 10 % to 25 % of sales depending on your product portfolio and state of operations. While every company is different - it`s possible to benchmark costs by a "delivery" channel. For small packages shipping cost of 6 % of Net would be an excellent result, for LTL (Less Than Truckload) - 12 % and for White Glove - 15 % should be considered as benchmarks.

Let`s say you are 50 - 50 small packages and LTL (in terms of number of packages). Then your goal is 10 % (since LTL is on average 2X more expensive then UPS/FedEx). So, if your costs are above that - stay with me for a bit longer...

There is no magic in lowering your shipping costs. You can lower your costs by 7-10 % of Net Revenue by following a 4 step approach:
1. Consolidate shipments with fewer carriers and renegotiate pricing,
2. Convert vendors to ship on your account,
3. Inspect shipping invoices for errors,
4. Reconcile shipping costs on the product level for the best pricing decisions.

Consolidate.
Shippers love big accounts. Even if you are small you can still present yourself as a desirable client by consolidating your shipments and demonstrating significant growth of your business. For specific advices on negotiation strategies check out my article Retailers and Shippers: Friends or Foes.

Convert vendors to ship on your account.
Having vendors ship on your account is the cornerstone to lower shipping expenses. Most of the vendors are happy to switch. They need a simple process; you need PO numbers on the shipments. Help them create your company profile in the UPS/ FedEx systems and send a PDF of a Bill of Lading with your details pre-printed for LTL and White Glove carriers.

Once you made vendor`s life easier you can expect them to put your PO numbers on each of the shipments as a return favor. Follow up on every order missing the reference and pretty soon you will have a perfect process.

Inspect your shipping invoices for errors.
Stuff happens… Vendors ship somebody`s else orders on your account, shippers apply wrong discounts… Catch them and call the party immediately to find the cause and prevent errors in the future. I`ve reduced shipping by 10 % by identifying and correcting the errors.

Reconcile costs on the product level.
You will be amazed how different your actual costs are from expected. In the article How Free is your Free Shipping? I made an argument that incorrect shipping costs lead to the situation when several highly profitable products subsidize the rest of the catalog suppressing your sales on one side and diluting margins on the other.

Shipping cost reconciliation can be a part of COGS reconciliation and should be run monthly for top-selling SKU`s.

Conclusion
You can reduce your shipping costs by 7-10 % of Net Revenue through negotiating better shipping discounts, converting vendors to ship on your account and monitoring your invoices.

My strong recommendation is to outsource logistics management and offer a performance fee arrangement. There are teams of experts that will work hard to get you the last cent possible. You get the expertise and pay only when it saves you money.
Perfect arrangement, isn`t it?

Purchase Orders: small details are important

Purchase order is a basic component of the retail order flow yet flawless communication between you and your manufacturers is essential to reduce errors and be able to properly reconcile costs with your sales data.

The format used to raise PO’s should be carefully reviewed; you could save a lot of steps in re-confirming the details of your order each time to the supplier. Let us look at two different aspects of PO’s below.

What details to input into a PO?
While raising a PO the most important thing to keep in mind is that the supplier should not get confused with what product has been requested - because if you mess up – wrong product will be shipped and you end up paying the costs…

• PO number – All PO’s should have a unique PO #, this could be a combination of letters and numbers and could be used later to track your orders, it also acts as a comparison between the original order against what was shipped.
• Sku number - Every item/product will have unique sku # and it should be mentioned in the PO. This will ensure that the vendor rightly knows what item we are referring to, entering the right sku will ensure the correct size and color is shipped as all sku’s are unique.
• QTY – Enter the right qty against the sku #, this is very important and can avoid confusion in multi piece shipments.
• Wholesale cost – It is very important to mention the wholesale cost in the PO, this is the agreed cost between both parties and could serve as a document when there is a wrong invoice..
• Shipping cost – It would be necessary to mention the shipping cost If the vendor is shipping the item through his carrier a/c, this is not required If the vendor is using your carrier a/c.
• PO date – Many buyers fail to mention the date the PO was generated; this will help us find out the delay in shipping if any.
• Shipping address – The complete ship to address should be mentioned along with the phone number, email address and the contact name. If the shipment is going to a warehouse then we need to mention the hours of operation.

Purchase Order as a document represents the buyer’s intent to purchase specific quantities of product at specified prices. In the event of non-payment, the seller can use the PO as a legal document in a court of law to demonstrate the buyer’s intent and to facilitate collection efforts.

Best method to send a PO to the shipper

There are several ways to send a PO to the shipper, the idea is to try and reduce manual intervention as much as possible.

• Email – We could email a PO to the manufacturer, this could be time consuming if there are several PO’s sent on a daily basis.
• e-Fax – This is not a very popular method to issue a PO, there are good chances that the fax did not get delivered.
• EDI - An inter-company, application-to-application communication of data in standard format for business transactions, Electronic Data Interchange (EDI) is a set of standards for structuring information that is to be electronically exchanged between and within businesses, organizations, government entities and other groups.

EDI can be formally defined as 'the transfer of structured data, by agreed message standards, from one computer system to another without human intervention’; building a simple system to issue PO’s via electronic documents will speed up reconciliation.

Having unique PO numbers is THE KEY you will use reconciling your shipping costs, cogs and other fulfillment costs with sales orders. Make sure your vendors are mentioning the PO number on each invoice and shipment document.

ABC of Inventory management - basic terms and applications

Often you need to make a decision - buy products into inventory or dropship. In this article I review some basics of inventory management and share a couple of hints to help make this decision.

Inventory is a list for goods and materials, or those goods and materials themselves, held available in stock by a business. Inventory are held in order to manage and hide from the customer the fact that manufacture/supply delay is longer than delivery delay, and also to ease the effect of imperfections in the manufacturing process that lower production efficiencies if production capacity stands idle for lack of materials.

Allotting space for your own inventory or working with a 3PL warehouse could be beneficial, the idea should be to set up the most cost effective process that will help you earn at least 35 – 40 % margin on your inventory products.

1. Basic terms

• Order quantity - Number of units of product A on the purchase order. Manufacturer may require minimum order quantity (case, pallet, and truckload).
• Payment terms - Number of days between shipping your order and due date for the invoice. Payment terms are typically 30-90 days.
• Lead time - Number of days between placing the PO and having products available in stock (at your warehouse). It includes vendor PO processing time, delivery and warehouse processing times.
• Safety stock - Quantity of the product enough to protect you against out of stock situation. If manufacturers are reliable - 3 weeks should be enough.
• Reorder point - Time to send a replenishment PO to keep stock above safety stock at any time. Example, you sell 1 unit a day, safety stock is 21 units, lead time 7 days. To keep safety stock intact you need to place a PO when your stock equals 1 (unit/day) * 7 (days) + 21 (units) = 28 units.
• Overages/ underages - Units shipped by the manufacture above/ below ordered quantity. You placed a PO for 100 units of product A and 100 units of product B. Delivery has 104 units of product A and 92 of product B. This means 4 units of product A overshipped and 8 units of product B undershipped. If vendor bills you against the PO - you should request credit/debit memo for the differences.

2. Costs and Margins
How much can you save by inventorying your products; will this equal the same margin you make out of drop shipping? - The advantage of inventorying against drop shipping is that when you buy items in bulk you can expect a better discount wholesale prices and better margins.

To check if this is true – do a sample calculation for a dinner table

• Retail price with Free Shipping = $400
• Wholesale price = ($200)
• Shipping cost = ($60)
• Warehouse order management fees = ($20)
• Expected Gross Margin = $120 or 30 %

At 30 % you are probably indifferent whether you dropship or sell from the inventory. But, by taking the products into inventory you are suddenly responsible for damaged in transit and returned products. Let`s adjust our calculation for these charges:

• Expected Gross Margin = $120
• Damaged in transit (4 % of product, shipping and warehouse costs) = ($11.2)
• Returns (5 % of product, shipping and warehouse costs) = ($12.6)
• Real Gross Margin = $96.2 or 24 %

Most of the costs are fixed, so the only variable is wholesale cost. To achieve 40 % Real Gross margin you need to be buying the dinner table at $140 or 35 % of Sales price. For some products it`s realistic, for some not. So, use our sample calculation for all your products to decide whether you want to inventory them or not.

3. Setting up your inventory management

• Gross Margin calculation – If the gross margin of any of your products are >35 % - proceed with next steps
• 3PL warehouse – 3 things to look at:

a. Should have own warehouse space to rent out.
b. Should be able to support all basic functions of the warehouse.
c. Must have a good reporting system.

• Business requirements –

a. Daily cut off time - The daily cut off time is for orders that are sent for fulfillment to the warehouse everyday, all orders sent within the cut off time will be shipped the same day. There will be additional charges to hip out side the cut off time.
b. Additional services – Any additional services like expedited shipment, additional packing, white glove delivery etc. should be communicated in advance to the warehouse in writing.
c. daily/weekly cycle counts – Periodic manual cycle counts could be expensive as it requires additional man-hours, automated cycle counts from the inventory reports is a recommended method to ensure inventory accuracy.

• Master data –

a. Product specs – Maintain a list of all products with the correct master sku along with sub sku’s (wherever required).
b. BOMs – Any multibox item should have a master sku # followed by unique sub sku’s, the warehouse will be able to identify and ship out the complete set on any such instance.
c. Shipping Methods – All of the sku’s that are a part of the inventory should have individual description of weight and dimensions and corresponding to which there will be a preferred ship method.

• Electronic order exchange interface – How do you want your PO’s to reach the warehouse for fulfillment? Set up an EDI method of transferring PO data or an efax set up would be recommended.

• Exceptions management process –

a. If any orders have special shipping instruction, the warehouse should ensure it is shipped correctly. Warehouse will be liable for wrong ship methods.
b. Orders should be processed normally even if the warehouse order processing rep is on leave, if there is no back up then warehouse should be help responsible.
c. Any items missing from the inventory should be accounted for by the warehouse and file a claim immediately and recover the full cost of the item.

• Inventory purchasing process –

a) Product id
b) Product Name
c) 90 days Sales – Average sales for the past 90 days.
d) Sales per day – Divide the total average sales for 90 days by the total number of days
e) Vendor payment Terms – This is the payment term set up with the vendor and will be unique for each vendor.
f) Vendor fulfillment Time – The average lead time including shipping time, different for each vendor.
g) OnHand – The quantity available to ship from the warehouse at present.
h) Days of Supply – Qty on hand / sales per day.
i) Re-ordering stage – The formula would be as follows: If “Days of Supply” <= “Vendor fulfillment Time” then Re-ordering stage = (YES), else Re-ordering stage = (NO).
j) Re-ordering qty – Vendor lead time * sales per day.

• Vendor relationship –
  

a. Set up a contract with the vendor and agree upon a payment term anywhere between 45 – 90 days.
b. The vendor will have to agree upon an average lead time, this is important and the vendor should inform well in advance of any delay in shipment or take the full responsibility of the loss.
c. Have the vendor ship on your carrier a/c; you could get a good deal with carriers on full truck load shipments.

4. Conclusion
In conclusion warehouse set up could be profitable if it is done right, there are lot of steps involved in the whole process and would require a dedicated team from your end to monitor and execute the process to yield positive results.

Good luck and happy savings :)

Shipping cost reduction strategies: consolidate or shop around

There are two most commonly used strategies to reduce shipping cost: negotiate volume discounts or shop around each time for the best price. While both strategies produce results consolidation is better one for rapidly growing online retailers.

Strategy 1. Consolidation
Do an assessment of your current shipping agreements. Are you shipping on your account? Using vendor`s accounts? Working with a freight forwarder? If you work with many partners - likely you are a small fish for each fo them. Promise to become a big one, share your shipment statistics and ask carriers to make you a proposal.

Even small retailers can significantly improve their shipping discounts by just doing the math and discussing their business. Shippers love volume and growth. Demonstrate both and 8 out of 10 carriers will offer you better discounts.

I dealt with 70,000 products being shipped from anywhere in the US to anywhere. Consolidating shipments with 2 carriers for each delivery method - UPS and FedEx for small parcels, Roadway and BAX for LTL and Sun Delivery and Home Direct for White Glove orders - proved to be the best strategy. By doing so I justified better discounts yet kept some flexibility to chose better shipper for specific cases. After figuring out BAX had excessive damage rate in one of their terminals I promptly switched vendor to Roadway and prevented further issues.

The choice you are to make is do you want to ship on your own account or work with a freight forwarder. To set up your accounts you need to learn a bit about the transportation industry and negotiate a lot. Freight forwarders usually look at your data and make a prompt offer. In your case going with a freight forwarder may be a better decision, but none of the forwarders came close to the discount rates I negotiated myself.

Along with reducing shipping costs you make your fulfillment transparent. Vendor ships the order using your UPS account, specifies your Purchase Order in the Reference Field and, voula, you have ship confirmation, expected delivery date and actual shipping cost.

Third benefit is scalability. By putting your logistics on autopilot you simplify vendor setup process. With a system in place setting up a new vendor takes less than an hour.

For the reasons above I believe that consolidation is a better strategy for online retailers. Having said this I still think that in some cases shopping around is a great strategy.

Strategy 2. Shopping around
The underlying assumption of the strategy is that shippers have underutilized routes (true), are willing to deliver your shipment for pennies to increase utilization (true) and you can catch those deals (sometimes true).

Some companies prefer to maintain rate tables for multiple carriers in their system and run a rate comparison for each shipment internally. Others utilize services like FreightQuote. Both ways have significant maintenance cost. Either you need to constantly syncronize rate tables with the carriers or you need a person who would manually obtain quotes from the freight comparison websites.

A sweet spot for the Shopping Around strategy is single large shipments and exceptions. Let`s say you have a container coming from China, or one of the customers wants a delivery to a lonely rock around Hawaii. These cases are to rare to focus on during your discounts negotiation and your default rate will likely be suboptimal.

In conclusion, I want to restate my recommendation for online retailers to consolidate shipments. Along with lower shipping costs you will make customer happier by providing them with accurate information about their orders and simplify your cost reconciliation process.

Best Practices to maximize damage claims recovery

Claims as a whole could get very complicated if it is not done correctly. When we set up the process for the first time our recoveries were below 20 % of the product value. By identifying specific issues and reworking the process we have increased recovery to 35 % of retail price. Our damage rate was about 4 % of sales, so process improvement resulted in savings of (4 % * (35 % - 20 %)) = 0.6 % of Sales or $180,000 on $30m annual revenue.

Here are some of the key elements of an effective process:

Acknowledge the claim to the carrier.
Damage must be noted at the time of delivery, if the POD is signed clear and then we find the item damaged and report to the carrier there are good chances that the claim will get rejected. It’s mandatory to check for damages before letting the carrier go out of sight. Another safe way would be to sign the POD stating “Subject to Inspection”.

Provide pictures of damaged item.
When there is a damage reported, the carrier will need pictures which will prove the extent of the damage (This is a must in case of concealed damage). In many case the carrier will decide whether the item needs to be inspected or not and If the inspection does not happen on time the claim will be rejected.

File claims on time.
All carriers have a time limit within which a claim has to be filed, with parcel carriers like UPS, FedEx etc it is anywhere between 21 days to 3 months. Some carriers allow us to file claims within a year (provided the carrier is notified of the damage).

Furnish supporting documents.
The key to get the best recovery on claims is by providing all the required documents along with the claim form.

• Claim Form – This form can be downloaded from any carrier website, these forms are unique for each carrier. With some carriers we can file the claim online whereas the others would require us to fax over the claim form.
• Copy of the invoice – This will prove to the carrier the actual value of the merchandize, If this is not provided the carriers usually tend to look up similar products and average out the cost.
• Tracking number – Download a tracking sheet for the particular shipment from the carrier’s website, this will help the claims adjuster to verify the shipment to be one of theirs.
• Damage pictures – It is very important to attach pictures while filing claims, the pictures should be taken at the time of delivery that will show exactly how the package appeared when it was delivered. Pictures are absolutely mandatory if we are filing claims on concealed damage.
• Waiver form – Some carriers insist that only the shipper can file a claim, in such a case we could take ownership of claim by submitting a waiver form that will give rights to the third party to file claims.

Calculate fair Claim Value.
Some carriers only allow you to file a claim for the costs of the product; in some other cases you can include full retail price and delivery fees. There is an adjustment mechanism but you still should claim the maximum reasonable amount. If order was damaged in transit – file the order value, provide carrier with supporting documentation and start exploring different liquidation options. Sometimes, the products you consider to have zero value can be refurbished thus providing you with the buffer against claims adjustments on other orders.

In conclusion, efficient claims management process pays off. If your internal efforts bring less than 35 % of retail value of the damaged goods - consider outsourcing your claims management.

Good luck and have fun!

Dude, Where`s my margin? (part 2)

In the first part we looked at a P&L statement and identified biggest cost saving opportunities. Now is the time to look into Cost of Goods Sold and share some of our best practices making it accurate.

Cost of Goods Sold (COGS) - 59 % of sales
When was the last time (if ever) you compared vendor invoices against the costs in your system? Were your expected costs close to the invoiced amounts? Or, maybe, you have a process to actualize your expected COGS using the invoices?

First issue with COGS is that product wholesale costs do not reflect your current pricing.
Once the vendor is set up, products are created in the system and wholesale costs are rarely updated. As sales grow retailer qualifies for additional discounts yet expected wholesale cost for the products stays the same.

Second problem is that your P&L does not reflect actual cost of goods sold.
Let`s take a look at a customer return - one of the scenarios affecting your COGS accuracy:

• Product is shipped, vendor invoices you for $500, COGS goes up by $500.
  
• Customer wants to return the item, vendor authorizes the return.
• Vendor receives the product, deducts 20 % restocking fee and sends you a credit memo for $400.

In this scenario COGS should be reduced by $500 to it`s original state and $100 restocking fee should be reflected on the Returns account. In practice, COGS is not adjusted and credit memo is not reconciled with the original purchase order increasing some "other sales" account for $400. The very same thing happens with double shipments, damaged in transit etc.

One might argue that this is a small accounting technicality; yet numbers speak for themselves. Returns, damages and other errors constitute 7 % of sales, so COGS is overstated by 7 % * 59 % = 4.1 % of sales.

Running the numbers our way does not increase your Gross Margin but uncovers real issues (returns, shippers` and vendors` errors). Additional benefit - by changing the cost allocation you force yourself to improve the Invoice Verification process. My experience - lack of the "PO - Invoice - Credit Memo" process can result in vendors "forgetting" to issue credit memos. Your losses here can run around 1.5 % of sales or $150K annually for a $10m company.

In conclusion, I would like to like to restate the three problems with COGS and suggest solutions:

Problem:

• Product wholesale costs do not reflect current discounts and are overstated.

Solution:

• Collect 6 months of order history, reconcile purchase orders with vendor invoices and update the wholesale costs. Repeat every 6 months.

Problems:

• COGS line item on P&L is overstated because of returns, damages and double-shipments.
• You under-collect thousands of dollars in Credit Memos.

Solution:

• Change the way you account for product costs for returned/ damaged/ double-shipped goods. Implement a per-PO invoice reconciliation process. Get vendors send you invoices in CSV or XLS format to speed up reconciliation.

In the next article I will go into specifics behind the Shipping line on your P&L and suggest a couple of strategies to drive the costs down.

Good luck and have a great Labor Day weekend.

Retailers and Shippers: Friends or Foes

It sounds counterintuitive, but reducing your shipping costs is in the shippers’ best interest. Lower shipping costs allow you reduce prices, your sales increase and so does your shipping volume. As a result, by giving you better discounts carriers increase their sales and total margins.

Shipping contracts negotiation is never a zero sum game. It is a great opportunity to understand the other party’s business and build a contract that addresses needs of both partners. Here is what you need to know to sign a win-win contract with your shipper:

Things that your Account Manager cares the most about
1. Shipping volume
Calculate your annual shipping budget, split it by shipping method (LTL, Small Packages, White Glove) and by carrier. Make it visual, prepare pie-charts for the last year and project a couple of years in the future.

2. Opportunity
Apply realistic (yet aggressive) growth rate and tell upfront what % of your budget you are ready to commit to a single carrier. In my experience, consolidating shipments with 1-2 carriers is a better strategy than shopping around for every single shipment. It gives you more leverage and simplifies operations. Be visual, demonstrate how quickly your company can become a $1 million client for the shipper.

3. Commission
Most of the Account Managers have sales goals. Their commission depends on shipping volumes from the clients. By converting vendors to ship on your account you assign Texas`, North Carolina`s etc revenue to the area where your headquarter is located and directly impact your Manager`s paycheck.

By being upfront about your needs and consolidating your shipments you can frequently get a growth oriented discount plan that would be better than any offer you can get by shopping around for each shipment or from freight forwarders. Not a secret that many carriers practice a discount cap for freight forwarders on 75 % - you can do better!

4. Asset utilization
Online retail is about delivering single orders from point A to point B. Yet many carriers are used to thinking in terms of truckloads and routes. Be mindful about this issue, identify 4-5 major routes (e.g. Atlanta to SF Bay Area, NY to Florida, LA to North East) and approximate number of shipments per month.

Utilization may never come up in the conversation as a concern but having these numbers ready will help your account manager justify your discounts internally. Remember, shippers have a lot of fixed assets (trucks, planes, distribution centers) and utilization is one of the most important metrics.

Things that you should care the most about
1. Discounted price
Be prepared for a complicated discount structure. Typically, it will be a combination of Base and Earned discounts. Discounts may depend on weight band and freight class. To compare offers you need to simplify and drive for a common denominator.

In the Freight Class Demystified article we argued that FAK (Freight All Kinds) is what you should drive for with LTL carriers. For small packages, on the other side, you need to know your typical shipments weight. Unless you already ship on your account and can get weight distribution from your UPS/ FedEx report - use your common sense and select a couple of weight bands you really want to negotiate about. For example, for furniture and fitness products the best discounts possible are the most crucial for 30-70 lbs range.

Once you simplified the comparison - simulate 10-20 shipments from your most important vendors to the most typical destinations. This can be done in 3-4 hours by utilizing an Online Ship Rate calculator (that almost every major carrier has) and applying expected discounts to the public rates.

2. Accessorials
A few things you need to know about accessorials: they are unavoidable and can double your actual shipping cost. Three most important charges are:

• Residential delivery. Additional charge to deliver to a residence.
• Liftgate. A charge applied to shipments over 100-110 lbs for using a liftgate mechanism on the truck
• Fuel Surcharge. A surcharge applied after all the discounts and surcharges.

Best results can be achieved by negotiating lower residential and liftgate rates with LTL carriers. In other cases you just need to be aware of the costs and plug them into your calculation.

3. Your total price
This is the final step to get your expected shipping costs. Take your discounted prices and add applicable surcharges. Total price for each of the scenarios is the ultimate common denominator for the offers you receive from different shippers. Come back to the shippers and tell them where they need to be in order to win you as a customer.

In conclusion, I have been lucky to work with very bright and patient account managers at FedEx, UPS and Roadway. Together we achieved great results both in terms of discounts and shipping volume. If you would like to explore how this great relationship can help you reduce your shipping costs and help grow your business - send an email or give me a call.

Good luck and have fun!

Dude, Where`s my margin?

You started a business to make profit, right? Buy for $50, sell for $100 and net at least $20 after all the expenses. Well, what looked good on paper is more complex in the real world. Suddenly, you realize that competitors sell for $90 and your costs are out of control. Let`s look under the hood of your business and tune it up.

1. Start with the P&L
Profit and Losses statement is the ultimate diagnostics tool. It shows you where every dollar you earned goes. QuickBooks and other accounting packages have a standard report that can be used under certain circumstances.

Most of the vendors give you 30-60 days terms whether you dropship or buy in into inventory. This means your costs lag the sales. And if you have a terrific month – P&L will overstate the profits because you have collected the money but have not paid the bills yet.

For diagnostics purposes it is enough is you use one of the two months with approximately the same revenue and similar product mix. For most of the products July is a perfect month to run the numbers. Sales for June and July are very close and unless you launch new stores – your product mix will be similar too.

So, take July and use your accounting software to generate a P&L.

2. Look at the big picture first
Here is a P&L of a hypothetical $10 million company selling furniture and fitness products:

		Total, $	% of Net Revenue
Gross Revenues		10,700
Cancellations, Returns and Chargebacks		-700	7.00%
Net Revenues		10,000	100.00%
COGS		-5,900	59.00%
Shipping		-1,500	15.00%
Dropship and warehouse fulfillment charges		-200	2.00%
Credit Card Fees		-250	2.50%
Total Cost of Revenue		-7,850	78.50%
Gross Margin		2,150	21.50%
Marketing		-1,200	12.00%
G&A		-900	9.00%
Net Margin		50	0.50%

A couple of high level observations

1. The company is barely profitable. A tiny fluctuation in returns, COGS, Shipping or Marketing costs can put it out of business.
2. Cost of revenue is 78.5 %. Investors should be very concerned about operational efficiency.
   
3. Company is losing 7 % of net sales due to Cancellations, Returns and Chargebacks. There is not enough data to make conclusions but this line item is worth investigating closely.

3. Identify your improvement targets
COGS is by far the biggest cost driver. In theory there is one invoice for one order. In practice, there are numerous occasions when you overpay or do not receive appropriate credit. To name just a few:

• Incorrect wholesale discounts/ dropship fees applied.
• Double invoices for for double-shipments or wrong/ defective products.
• No credit memos for manufacturer-approved returns.

These incidents are more frequent than you might think. In my experience, by having proper controls in place you can reduce your COGS from 59 % to 55 % or by 4 % of sales.

Shipping costs would be the second target. Our hypothetical company pays 15 % of it`s sales to shipping companies. My benchmark is 10 %, so there is a 5 % of sales savings opportunity.

Marketing costs are 12 %. Since this is a bit outside of my focus, I will only mention that I`ve seen companies doing much better and paying 9-10 % of sales for their Marketing.

Finally, Cancellations, Returns and Chargebacks result in 7 % lost sales. This number is on the high side too and is worth further inspection.

So, we have identified 4 areas to focus on. In the second part of the article I will focus on Cost of Goods sold and how inaccurate numbers take back your business.

Till then - ask yourself - Dude, Where`s my margin?

Are you still turning away your Canadian customers?

Have you realized that Canada is the 7th largest economy and close to California in terms of population? Weak dollar drives more and more Canadians to buy cross-border. So, unless your sales to Canada are about 10 % of your US sales – you are overlooking a significant opportunity.

Here are three components of the Landed Cost (full price customer pays) that Canadian customers need to get from US retailers to compare price with a local seller.

1. Base price
In just a few clicks Canadians can get US price for the product and compare it with local prices. Because of current exchange rate US price is frequently below than that of Canadian retailers. Noticeably, 70 % of eBay Canada furniture and fitness products are listed by US retailers and shipped from US.

2. Shipping cost
Every major US carrier delivers to Canada. Delivery time is almost identical to US deliveries and shipping costs are only 10-20 % higher than those for US orders. Still, very few retailers advertise shipping to Canada and can calculate shipping cost on the fly.

3. Taxes, duties and brokerage fees
Taxes depend on what province customer lives in. Duties is a percent of retail value based on product customs category and country of origin, brokerage fees can be anywhere between $10 and $100 depending product value and retailer`s negotiation skills.

Given, two out of three numbers are difficult to obtain – many Canadians give up and buy locally. However, Landed Cost calculation can be easily automated and integrated with your shopping cart.

Our solution.
Take a look on our solution for phone sales teams.

Customer calls for a price quote. Sales person logs in to www.Ship2CAN.com, finds the product and enters customer postal code for shipping and taxes calculation. In a couple of seconds detailed quote is available with details on each component of the landed price. If product is sold with Free Shipping – US expected shipping cost is deducted from shipping cost to Canada.

This makes selling to Canadian customers a piece of cake and significantly increases customer conversion rate. Customer doesn`t have to wait days for a quote and can make decision instantly.

If you are curious about www.Ship2CAN.com or some other ways we can help you increase your sales to Canada – let us know.

Liquidation - cash from trash

Most of the retail companies consider returns and damages to be unavoidable cost of doing business. Every return refused by the manufacturer is deadweight for a retailer. Good news is there are simple ways to reduce your return rate and recover some hard cash from the trash.

1. Prevent "negative value" liquidations
Pre-calculate value of each return scenario; train your returns specialists on making the most cost effective decisions on the fly.

1.1 Customer remorse
Let`s take a $129 end table as an example (free shipping). Wholesale price for the product is $50 and your shipping cost is $35. If you accept the return – customer’s refund will be $129 – 2* $35 – 20% * $129 = $33.2. Quite a difference with $129 someone paid in the first place!

Frequently, just doing this calculation together with the customer is enough to save the order. You can always add a sweetener and give a $10 discount making your customer feel appreciated (and prevent liquidation).

1.2 Damaged in transit
In this scenario the same table was damaged in transit. You can file a claim for the invoice amount and depending on how good your claims process – recover 20-40 % of the retail value or $25 - $50. Keeping in mind that you still pay the vendor his $50 wholesale cost – you are at a loss. Obviously, you want to discount the order all the way to your costs – meaning $50 wholesale and $35 shipping giving you $129 - $50 - $35 = $44 as a “discount bucket”.

If you can not convince the customer to keep the order – request him to send you the pictures showing damage and ask to scrap the product. This way you will still be entitled to recovering money from the carrier and save on return shipping/ storage. To help you make decision scrap/ return use a similar logic: Liquidation value of the table is 10 % of the retail meaning $12.9. Returning the table will cost $35 in shipping and $10 in inspection/storage warehouse fees. Expected value of the return is $12.9 - $35 – $10 = -$32.1!

1.3 Missing Parts
Do your best to avoid picking up products for this reason. Those products have almost zero liquidation value and will become a struggle between you and your vendor.

Let`s say the table is missing a set of screws. Most of the vendors I worked with would ship parts without a problem. Be mindful about shipping cost. Sending a small box on your UPS account can easily cost $5-7. Given is vendor`s fault - do you want to bare the costs?

My advice is to outsource parts requests to a third party and have them collect statistics on all such requests. Based on their numbers you should invoice vendors to pay your shipping and handling costs. $5 for shipping plus $5 for order processing looks small till you realize that there are dozens or hundreds of parts requests a month that are eating into your profits.

2. Design an efficient liquidation channel
In the brick-and-mortar retail world liquidator comes to your warehouse, picks items they want to sell (leaving trash to you) and cuts you a check for 50% of the recoveries. Downsides of such arrangement are - liquidator will only take good items (that you could re-box and resell for a full retail value) and you keep paying storage charges (that accumulate fast and hide inside your other warehouse fees). At one point, one of the companies I worked with was paying $6,000 monthly just for storing the returns.

The best solution is a centralized liquidation location. Your returns team categorizes the return and if the product is worth liquidating and can not be returned to the manufacturer arranges the return to be shipped to the liquidator. Upon the receipt product gets photographed and inspected. Then liquidator sells the product through eBay or other channels and splits the recovery with you.

3. Outsource liquidation management
A rule of thumb - liquidation value for most of your products will be about 10 % of the retail value. Unless you have a lot of returns - having a dedicated person is not cost effective. I am a very strong advocate for outsourcing scriptable and repetitive processes. This is a perfect example - offer a flat handling fee plus a % of recoveries, define Key Performance Indicators, request detailed reporting and stop wasting your time on something that is marginally profitable.

Liquidation management (along with returns and damage claims management) is something that is worth doing in-house only if you have significant scale and can afford a full-time specialist. Otherwise it distracts you from growing your company.

Remember, even if returns are unavoidable - your costs can be significantly reduced through smart policies and efficient processes. Come back for more of our articles on Returns and Liquidations or follow-up with me directly at max@optimalogica.com to discuss how my team can help solve your returns puzzles.

Damage Claims - How much money do you leave on the table?

Products damaged in transit tarnish retailer`s reputation. To make the matter more complicated - customer`s cooperation and help are needed to recover the damages from the carrier.

We created a very efficient damage management system to reduce customer dissatisfaction and recover 40% of the retail value from carriers. In just 8 months our recoveries surpassed $300K.

Efficient claims management process has three major components: (a) Understanding the claim process thoroughly (the process differs with carriers), (b) Educating customers on the procedures to be followed when they received a damaged item, (c) Regular following up with carriers on pending claims.

Let me share a few important things that one must keep in mind while implementing a claims process.

a. Steps to effectively file claims

• Always be on top of the procedures involved in filing claims, the process differs with each carrier. For example: With FedEx we can file claim and check for the status online whereas other LTL carriers require us to fax over claim form, with FedEx we need to file a claim within 21 days for ground shipments whereas with Roadway we can file claim anytime within 12 months provided the carrier is notified of the damages.
• With a few carriers like UPS, only the shipper can file a claim and If you are not the shipper then you need a waiver form signed from the shipper authorizing you to file claims.
• The receiver must always note damages on the POD or the safest way is to refuse delivery and notify the retailer within 48 hours.
• Submitting pictures on damaged goods is very important when a delivery is accepted; this is the only effective way to prove to the carrier that a claim is required and shows the extent of damage.

b. Regular follow ups
Whenever a claim is filed one need to regularly follow up until the claim is paid, re-filing a declined claim is also possible with few carriers. The stages that a claim goes through at the carriers end after its filed are:

• Acknowledging a claim
• Assigning an adjuster
• Reviewing the documents submitted
• Inspect the package if required
• Finally approve or disapprove the claim

c. Steps to follow after a claim has been paid
Once the carrier approves a claim for a specified amount, we need to keep the case open until the payment has been cleared at the bank.

• It is very important to provide the carrier with the right mailing address for the claim checks to be sent to, a lot of times the checks are mailed but never received.
• Understanding the time taken by each of the carrier to resolve claims is important, this will help us conveniently track and close open claims issue.
  

Our biggest effort always have to be towards reducing the damage rate, at any time our target should be to have < 2% damages per sku. This can be done effectively through corresponding damages with your sales reports, identifying problematic sku’s and working with manufacturers to improve product packaging.

If our advices help you or you found another great way to manage claims - please let us know.

How free is your Free Shipping?

Every retailer knows that customer conversion is critical. It costs you money to attract customers to your store and you want to do whatever it takes to have them make a purchase. Free Shipping is one of the well-known ways to make one`s purchasing experience smoother but requires per product cost info when applied to your entire catalogue.

While product wholesale costs are usually more or less accurate, shipping costs are either vendor’s estimates or educated guesses. Here are some real life examples:

Product	Retail	Expected shipping	Actual shipping	Shipping off by	Error/ Retail
Treadmill	$1,099	$250	$135	$115	10.50%
Exercise bike	$599	$45	$90	($45)	-7.50%
Platform bed	$599	$180	$110	$70	11.70%
Jogging stroller	$299	$58	$32	$26	8.70%
Espresso Machine	$499	$32	$54	($22)	-4.40%

And these are “core” products that generate most of the revenue for one of the retailer I worked with. Needless to say errors for “long tail” products are even more significant. It is very typical to have a few high selling SKUs subsidizing thousands of less frequently sold products.

Four most common sources of errors:

1. Commercial carrier pricing varies significantly. Discounts can range from 60% to 85% of the base price. On the $1,000 base price shipment (a 150 lbs box shipped from Dallas to San Francisco) vendor`s shipping cost estimate may be $400 while your discounted rate may be $150 – a $250 delta.
2. Wrong shipping method assigned. A 90 lbs recumbent bike had FedEx Ground as a default shipping method. Due to improper packaging our damage rate was about 25% leaving with no other option but to ship LTL.
3. UPS/FedEx shipping price is calculated based on weight only (dimensions are ignored). While weight is frequently sufficient to determine shipping cost for parcel carriers – volumous products trigger DIM Weight (dimensional weight). An espresso machine can be 30 lbs but charged as 55 lbs because of the box size.
4. Rates change every year. Shippers increase fuel surcharges, do inflation adjustments and other rate changes. Costs calculated 2 years ago will likely be different from your actual costs.

Are the errors expected? Yes! Unavoidable? In no way! There is a relatively simple way to keep costs accurate and make sure your Free Shipping doesn`t eat your margins.

• Negotiate the best with UPS/ FedEx and a couple of commercial carriers.
• Convert vendors to ship on your accounts. In cases when it`s not feasible (efficient) – set up a feed to get actual shipping costs on the PO level.
• Recalculate expected shipping costs for your entire catalogue. (We have a tool that connects to the major shippers and returns per product shipping cost based on your criteria and discounts).
• Once a month update your expected costs with actuals.

If it sounds difficult – give us a call and we`d be happy to help you keep your Free Shipping free.

6 simple steps to turn around your returns management.

Returns are a necessary evil of any retail company. Some fitness products have less than 1 % returns rate, other product categories can be returned by 20 % of customers. Even in the same category product quality and brand play significant role.

I want to share my experience with a dropship online retailer selling over 50,000 different products. Some of our vendors accepted returns but vast majority did not. So, we were stuck with one-off situations and needed to develop a system to turn around our returns management.

Here is how our returns section at our 3PL warehouse looked. Needless to say that liquidation value of these products was extremely low. Not only did we let the returns spoil but also paid hefty storage fees for these boxes.

There were three main reasons for customers to return our products: damage in transit, missing parts/ manuals and customer remorse. In each of scenarios product have different liquidation value and must be processed differently. I`d like to share the process that worked marvelously for us:

1. Each return request gets categorized (damage – D, missing component – MC, customer remorse – CR).
2. Damages are approved for a return upon receiving photos demonstrating the damage, missing components and customer returns are forwarded to Customer Service for a follow up.
3. Frequently, customers missing parts or dissatisfied with the products can be convinced to keep the products by offering them a discount and (or) arranging a part to be shipped (thus keeping the profits and avoiding returns expenses).
4. First three steps help significantly reduce returns and collect per product statistics for further analysis. Now, if return is unavoidable – customer is asked to write on the box the Returns Authorization number in a format “PO number – Returns Reason”. For example PO#124632-D for a PO#124632 damaged in transit.
5. Warehouse receiving team inspects each customer return and records appropriate Returns Authorization number along with the product state (Back to stock, Re-Box, Refurbish, Discard).
6. Returns team reconciles the data and arranges consolidated shipments of salvageable returns to a liquidator.

This simple process had a huge impact on our operations. Returns fraud went down to almost zero; our return rate dropped a few percentage points and we recovered over $250,000 by liquidating what used to be a pile of crap.

Look at how our warehouse looks now – better isn`t it?

Retailers say unnecessary returns cost stores $16 billion dollars a year, so more and more chains are fighting back with policies and practices that make it tougher to return things. They're shortening the time you have to return items after they're bought, hitting customers with hefty "restocking fees" on returned items, and cracking down on "serial returners" with new, sophisticated ways.

The retailers started imposing a restocking fee of 15 percent of the purchase price on all electronics products that are returned after they've been used, or with missing parts or manuals. And while they give you 90 days to return other products, you now have only 30 days to return electronics items.

Many major retailers are even using hi-tech computer systems that track every return you make, and put a red flag on serial returners. For instance, Wal-Mart has a system that automatically flags customers who try to return more than 3 items without receipts in a 45 day period. If you surpass that limit, they won't accept your returns. If you don't make any returns without a receipt within a six month period, the red flag goes away.

Good news is you can turn around your returns without fighting with your customers. Use our blueprint or give us a call and let us solve your returns puzzle.

Outsource troubles – focus on sales. Thriving is fun!

Actual shipping costs - "super-fuel" for your comparison shopping engines sales

Comparison shopping engines is a tricky sales channel. Get it right - sales are sky-high, otherwise customer acquisition costs are likely to ruin your profits.

Low total price is the simplest way to drive sales. First reputable seller with the lowest price gets 80% of leads.

Most of the retailers ship directly from manufacturers and have the same product wholesale price, thus lower and more accurate shipping cost becomes a competitive advantage.

My firsthand experience - sales of managed stores went up 10 times to $100K a month after we recalculated shipping costs for each of the SKUs and adjusted our sales prices to reflect savings. There was no magic - you can do it yourself or hire my team to help:

1. Negotiate volume based discounts with the shippers to get lowest possible shipping cost
2. Identify best shipping methods for each product category (parcel, LTL, White Glove)
3. Convert vendors to ship on your account
4. Recalculate your expected shipping cost for each of the products (we have a script to update your entire catalogue in just few days)
5. Re-price your top-sellers and other key products to find lowest possible selling price yet providing you with enough margin

We had great success with our stores and would be happy to help you drive your sales up. Thriving is fun!

Freight Class De-mystified

If you ever shipped something through a commercial carrier - you are definitely familiar with Freight Classes. This classification was created to simplify load optimization for carriers and became a nightmare for online retailers.

Whether you dropship or ship from your warehouse Freight Class plays a prominent role in calculating your shipping charges. Classes are defined in National Motor Freight Classification Tariff (NMFC) and are pretty complex. Check the link and imagine you are doing it for every product you sell... http://classit.nmfta.org/all/Tutorial.aspx.

Frequently, Freight All Kinds will be a win-win. You avoid a pain of classifying thousands of your products and carrier saves on class verification. Here are some of the ways to get carrier on your side:

• Ask your account representative to explain how freight class impacts your pricing. Go into extreme detail about your business and discuss all possible scenarios.
• Find the most typical class and assign it to all the shipments (in our case FAK70 was the most appropriate one).
• If shipper is hesitant to assigning a single class to all your shipments - negotiate FAK on the vendor/ product line level (for example, Powell - Platform Bed).
• Define the invoice verification process so that there is a simple way to correct discount if a mistake in class determination happened.

If you still have difficulties getting a simple pricing - keep in mind - you are in the retail business, not transportation. Talk to Freight Forwarders. They may be able to leverage their current shipping volume and get you good discounts along with FAK.

Outsource troubles, focus on sales. Thriving is fun.

Control your shipping bills and reduce costs by 10 %

Managing a ship cost reconciliation project I noticed that carriers frequently miscalculated accessorial charges (liftgate, residential charge etc.). An analysis shown that even though incidents were rare - our total bill was inflated by 10 %. To address this issue we set up an invoice verification and price adjustment processes.

Setting up an account, negotiating better discounts and converting everyone to ship on your account is a great first step, however not the last. Here are a few advices I would like to share:

1. Understand your pricing. Each service type can have a different discount rate.
2. Subscribe to weekly invoicing file in XLS or CSV format.
3. Verify all your invoices, look for anomalies (pivot tables and Excel macros make miracles).
4. File a weekly price adjustment request specifying each erroneous invoice.
5. Work closely with the carrier - prevention is the best medicine.

In conclusion, a comprehensive invoice verification process requires 8-10 hours a week of a trained person. We kept it internally and did quite well. Nevertheless, outsourcing invoice verification would be a smart move as it is a laborous work and results are easy to measure.

Time to start saving is now! Happy Savings.

Success story - over $5 million saved in shipping costs and counting.

Shipping cost is a big black hole for many retailers. If shipping costs are 20 % of sales, is it good or bad? How to benchmark costs for 100,000s SKUs the company is selling?

My team helped a rapidly growing retailer reduce shipping costs from 25 % to 10 % of sales saving over $5 million in 2 years. Replicating our success is easy and I`m happy to share the blueprint:

1. Perform careful per vendor analysis of ship costs (packages volume, ship methods, carriers, damage rate and recovery)
2. Negotiate better discounts with shippers by giving them more of your business and sharing data about your customer geography and shipments volume
3. Convert vendors to ship on your account
4. Perfect your damage claims process to maximize recovery from damaged in transit orders
5. Work with your vendors to make sure they put your PO number on every shipment (makes reconciliation easy and guarantees that your shipping account will not be abused)

Now it is the time to ask yourself - do internally or outsource. My strong suggestion - outsource! Instead of one in-house person you`ll get a team of experts looking at your shipments daily preventing and fixing issues before you even know about them.

Each day of not being perfect costs you money. Get an expert look at your logistics and help reduce your shipping costs.

Time to start saving is now! Happy savings for your Holiday Season.