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.

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.

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.