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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August 24, 2012 at 12:54 PM  

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