You Can Expand Your Online Business to International Sales

This is a guest post by Colleen Hazelrigs. I was very impressed by thoroughness of her approach and hope that the article will be a valuable insight into international shipping.
There is growing interest throughout the world to buy from the US because of the shrinking dollar and the lower cost of many items in the US. You may have let go of potential sales to international purchasers because of the hurdles of dealing with customs, high shipping costs, and potential fraudulent payments. You may hesitate to allocate valuable resources to research and maintain an international shipping system with an undeterminable return on investment.
There is a simple way for you to expand your sales beyond US borders without the risk and expense of the learning curve and maintenance of such a system. Partner with a package forwarder. Their business is international shipping. They ship overseas every day to every available country, have experience with customs regulations, and have negotiated discounted rates with carriers based on volume.
Package forwarders have a system to screen their members for legitimate and available funds. In addition, you may choose to require international customers to use PayPal or prepaid systems such as Entropay, which offer an additional level of fraud protection. These systems provide a layer of protection between you and your customer and vice versa.
Partnering with a package forwarder allows you to breathe a sigh a relief as you take advantage of international interest in your product and the new stream of revenue with little or no additional cost or risk to your business. This system takes the process, cost, and risk of international shipping entirely out of your operations as a merchant and shifts them to the forwarder.
An Example Shipment – US to Pakistan
First, I want to touch on shipping weight. International carriers will charge on the actual or dimensional weight. To get dimensional weight (dim wt) you multiply the three dimensions of a package in inch increments and divide that by 139 and round to the next pound.
So, let’s take a look at an example shipment that we recently processed at our company, OPAS. Our customer from Karachi, Sindh, Pakistan ordered gaming equipment from K-mart in three packages, had them shipped to his personal address at OPAS in Portland, OR, and, the same day the last one arrived requested us to consolidate and ship them to his home.
The details of the shipment look like this, (funds are in US$):
Package 1: Play Station 3 $249.99
Controller $54.99
K-mart S&H $44.96
Total Purchase $304.98
Weight: 14 lbs, 16 oz; dimensions, 16 x 14 x 11 = dim wt 18 lbs
Received at OPAS 9/22/11
Shipped form OPAS 10/4/11 in consolidated package (stored in our warehouse 12 days)
Package 2: Six Play Station games ranging in cost from $19.99 to $39.99 each
K-mart S&H $0.00
Total Purchase $159.94
Weight: 1.84 lbs; dimensions, 13 x 12 x 3 = 4.0 lbs dim wt
Received at OPAS 10/4/11
Shipped from OPAS 10/4/11 in consolidated package
Package 3: God of War PSP Entertainment
Pack $159.99
K-mart S&H $11.36
Total Purchase $171.35
Weight: 2.34 lbs; dimensions, 13 x 18 x 4 = 7 lbs dim wt
Received at OPAS 10/4/11
Shipped from OPAS 10/4/11 in consolidated package
OPAS Shipment to Karachi: One Package
Weight: 14 lbs; dimensions, 16 x 14 x 11 = 18 lbs dim wt
OPAS Consolidation Fee $10.00
Insurance requested by customer for $681 $13.62 (2% over $100 value)
DHL shipping fee: $155.00
DHL Fuel Surcharge $22.48
Total Shipping from OPAS to Pakistan $201.10
Customs and Shipping
As we prepare packages for shipment we pull items that are hazardous and not approved for international shipping by the carrier and the receiving country and ask the customer what they want us to do with the item. In this shipment we found no such items. The customer also states in our system the value of the shipment. That information is provided to the carrier for customs in the receiving country.
The package was shipped via DHL at the customer’s request, with DHL’s Express Worldwide service, our negotiated service with DHL, which guarantees delivery by the end of the next possible business day. It was a non-doc shipment meaning it was not documents but items that were dutiable and taxable. The package went through London and arrived in Karachi, Pakistan on the 10th where it went through customs clearance. Customs notified the customer of duty and tax fees due and the package was delivered upon payment of those fees by the customer.
Customer Savings on Shipment
If we had shipped each box as we received them the estimated cost for each, including insurance and DHL fuel surcharge, would have been:
Package 1; $183.58
Package 2: $78.77
Package 3: $102.82
Total: $365.17
Savings from consolidation: $365.17 – $201.10 = $164.07
In addition, because Oregon is a tax-free state, the customer saved anywhere from 5% (North Dakota) to 11.5% (Illinois) which would have been $28.50 to $65.54.
The customer essentially got free shipping of the second two packages because Package 1 had the same actual and dimensional weight as the final, consolidated, package.
The customer also had an opportunity to add more items to the box for additional free shipping because of the 4 lbs of dimensional weight over the actual weight of the package. This is a great opportunity to save on shipping, especially for lightweight high ticket items like electronics.
We checked on prices of his items in Pakistan to see what the savings was for purchasing in the US. The God of War Entertainment Pack retails in Pakistan for $329, $79 more than K-mart. But we could not find it in stock in his country. Neither could we find the Play Station 3 retail in Pakistan.
We did find the games. Retail prices ranged from $47.25 to $8.50. Our customer could have saved $7 on retail price + the shipping, less any sales tax by buying at home. But he must be like me; the simplicity of getting everything at one place in one shipment overrides the hassle of extensive internet research and shopping multiple places for a few dollars savings.
To summarize the total cost of purchase door to door:
Purchase price + K-mart S&H to OPAS $569.92
Shipping from OPAS to Karachi $201.20Total Cost $771.12 + customs
Consolidation services saved him $164.07 on shipping.
Domestic shipping to a US state with no sales tax saved him as much as $65.54.
And because he could buy in the US he has what he wants rather than not. And that is priceless.
How would this work for my business?
For your on-line business to take advantage of international sales you would do a few simple things. First, you would state in your shipping policy and order page that international shipping is available via package forwarding. This lets anyone browsing your website from outside the US know that they can buy from you, one of the first things customers look for when shopping in the US from outside US borders. Letting them know early and up front that you can ship to them will whet their interest and keep them looking.
Your international customers will get a US address from your package forwarder. The forwarder will work with you to make sure the process is smooth for your customer. Then, the customer will place their order with you using their new US address. You simply treat the order as a domestic sale and shipment.
You can do it!
As a small on-line merchant you can easily access new streams of revenue by expanding to international sales। Partnering with a package forwarder shifts the risk and cost to an expert international shipper. Your product can serve more people and your business can thrive like you knew it could when you envisioned and created it.
Colleen Hazelrigs is Research and Development Director at OPAS, a fully owned brand of World Address, llc in Portland, Oregon. OPAS was the first package forwarder in the world, opening their doors in 1990, and provides addresses in the US and Japan for international shoppers.

Do you trust your financial statements? Reconciliation tools for Online Retailers

Do you trust your financial statements? Does your cash account in Quickbooks match your bank statement? Would you like to reconcile costs with sales on an order/product levels and see how profitable your business really is?

Practically every company I work with desperately needs real time accurate financial data to make best pricing and marketing decisions and Quickbooks wasn`t simply designed to handle tens of thousands of transactions, follow a "reasonable proof of shipment" revenue recognition rule or accrue for cost of goods invoices due in 30-90 days. So, what`s the best way to do managerial accounting in the high velocity negative cash cycle online retail world?

Periodic audit is one way. This is the best solution if you are entering into a business deal and need an external verification of your numbers. Downsides are:
  • A $10-15K fee for something that was obsolete before it was completed;
  • High internal costs (e.g. having your accounting department paralyzed for 2-4 weeks);
  • You have to do everything all over again every time you need accurate financials.
A massive export of transactional and financial data to Excel is a better option. However manual and time consuming, you reconcile tens of thousands of orders with appropriate costs, get to the real margins and can identify the products that either have too much margin built in or too little. Downside - maintenance becomes an issue. Once the person who built the table moves on to other projects - the system becomes less and less accurate and you lose the temporary advantage over competitors.

The very best solution is a database connected to your Order Management, Quickbooks and shippers` billing systems. There are multiple buzzwords for something that stores the data and produces reports: Data Warehouse, Business Intelligence, Business Warehouse etc. For simplicity I will call it by it`s primary function - a reconciliation system.

Benefits of reconciliation system are numerous:
  • Verification of your company`s tax return numbers;
  • Practically real time vendor/ product margin analysis;
  • Easy way to compare accruals with actual expenses (COGS, Shipping, Marketing etc).
Having built such systems for two clients I highly recommend starting with a standalone solution, replicating your chart of accounts, fine-tuning allocation rules and check consistency of the data. Then test on a large amount of historical data (e.g. FY2008) and compare with your year-end results. Since we have replicated your chart of accounts - comparison is easy, just print P&L statements from QuickBooks and the reconciliation system and compare them account-by-account. I bet there will be a lot of interesting discoveries.

In addition to accurate historical statements such system gives you a real edge over the competitors. You become able to make pricing and investment decisions on the fly.

Let`s say you want to experiment with a free shipping - run it on a product category (or a store) for two weeks. Compare sales/ net margin with prior two weeks and see if free shipping is the right solution for this particular product set.

Or, throw in free gift-wrapping for one week and see if you should keep it for the rest of the holidays season.

Or, reduce your target margin from 30 % to 28 % and see what impact it has on your sales/ total net margin for the specific product line. Opportunities are endless.

I believe that systems should help people manage complex businesses through simple decisions such as Set target margin at X %, add free shipping or spend Y % of sales on PPC marketing. Therefore, every system I build addresses a specific need:
  • Reconciliation system to get accurate financials and identify products with excessive/ inadequate margin requirement;
  • Shipping script to calculate per product shipping costs using negotiated rates with the shippers;
  • Pricing script to automate retail price calculation based on actual costs and target margins; and
  • Product sourcing solution to enable retailers build "One Store A Day" and double their sales every three months.
If you have questions about one my solutions - please send me a note to or call at 650 209 6570. My clients win - I win.

Have fun growing your business and happy holiday season.

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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 to 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!

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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.

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!

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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.

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!

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.

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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.

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!

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 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.

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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?

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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.

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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.

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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!

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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.

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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!

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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.

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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.

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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.

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