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
off by
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.

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Blogger ben said...

"...vendor`s shipping cost estimate may be $400 while your discounted rate may be $150 – a $350 delta."

Isn't that a $250 delta?

August 8, 2008 at 10:46 AM  
Blogger Maxim Mironov said...

you are absolutely right, thank you for catching my typo

August 10, 2008 at 12:09 AM  
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