Shipping, shipping, shipping. Oh, what a pain in the tuckus you are!
We all know that if we’re not physically handing over a product to an in-person Customer at the time of sale, shipping is likely to be involved in getting that product to that Customer.
Fine, fine, it’s the way many of us, and many of our Customers, choose to do business in this day and age. Egads I’m old, using that phrase, “in this day and age”. In public and everything. Ah well.
Anyhoot, we’re shipping something to someone and any reasonable human being also knows that there are costs associated with shipping anything anywhere. But what about who should pay those costs? And how?
First, let’s look at what those costs might include.
|Packing (e.g. box, filler, tape, etc.)||$3.00|
|Add-Ins (e.g. business card, flyer, coupon, etc.)||$1.00|
|Carrier Fee (e.g. USPS, FedEx, UPS, etc.) – Small, Flat Rate Box||$9.45|
Alrighty, now on to the who and how.
Let’s say I sell a $50.00 item to a Customer and shipping is required. In some scenarios, we’ll add on other items as well. For simplicity, all of my items are deemed to be marked up so that each produces a 30% gross profit margin — (revenue – profit) * 100 — thus we can calculate profit on each item as (List Price)(0.30).
|Should I add the costs as a Customer-paid charge separate from the items being purchased?||This seems fair. Fair to the Customer, fair to me. And awesomely straightforward. The Customer wants the product, I detail shipping costs based on the total items being sent in a given shipment, and the Customer pays the total. They get their purchase and I get my expected profit margin.
Buuuuuuut, it’s not so simple. The human psychology of online sales indicates that products sold with “free shipping” — even at a higher List Price, even if that difference is MORE THAN what shipping would have added if done as a separate charge — sell “better” than products sold with shipping added onto the total. Feel like going down a rabbit hole? Just Google the “psychology of free shipping” and wander through the warren.
|ORDER: (1)$50.00 item + $13.45 shipping ==> $63.45
PROFIT: (1)$50.00(0.30) ==> $15.00
|Should I include total shipping costs in the List Price?||If I include the total shipping costs into my List Price I still get my expected profit margin and shipping is “free” for the Customer, right?
Buuuuuuut it’s not really “free”, is it? The Customer is still paying for it. It’s only perceived as free because it’s not being called out as a separate charge. And I feel a little slimy calling it free; I prefer to call it “shipping included”. Because it isn’t free, is it? Am I going around in circles here? Yes!
Plus, when shipping costs are fully included in the List Price of a single unit of a single product, and then then Customer purchases multiples of that unit and if those items could all fit into the one shipping container, well, now they’re paying for shipping costs more than once.
More units, and/or more products and well, you can see where I’m going, right? Not only are they not getting “free shipping”, they could be paying for it many many times over. Sure, it increases my profit margin for every additional product they purchase for which shipments can be combined, but that doesn’t seem fair to the Customer, does it? Back to that slimy feeling for me.
|ORDER: (1)$63.45 item + $0.00 shipping ==> $63.45
Customer-paid shipping = (2)$13.45 ==> $13.45
PROFIT: (1)$63.45 – $13.45 ==> $50.00(0.30) ==> $15.00
ORDER: (2)$63.45 + $0.00 shipping ==> $126.90
Customer-paid shipping = (2)$13.45 ==> $26.90
PROFIT: (2)$63.45 – $13.45 ==> $113.45(0.30) ==> $34.04 or $17.02 each
|Should I include total shipping costs in the List Price, then refund “overpaid” shipping costs depending on the makeup of every individual order?||If I decide to refund the above Customer the difference in shipping costs vs. what was incorporated in List Price to cover shipping costs, making their actual total the same as if they had paid the shipping directly, that’s great for the Customer and my profit margin stays as expected.
But then I really should do this for *every* Customer order as applicable, and that becomes time-consuming and adds to my accounting headaches.
Too much so? Maybe not. It rather depends on how many multi-item orders one gets for which shipping can be combined. And Customers seem to appreciate when the Seller takes the time and effort to refund a portion of the total paid based on the savings from combined shipments.
|ORDER: (2)$63.45 item + $0.00 shipping ==> $126.90 – $13.45 ==> $113.45
PROFIT: (2)$63.45 – $13.45 (actual shipping) – $13.45 (refunded) ==> $50.00(0.30) ==> $30.00 or $15.00 each
|Should I include only a portion of the total shipping costs in the List Price and not refund the difference?||On the surface, including only a portion of the expected shipping costs — and not refunding the difference — might seem like a fair compromise. Recoup some of the shipping costs in the List Price of a single unit of a single product, and then recoup some with combined shipments. Hopefully it all comes close to evening out in the end.
This could work well if an item typically sells in quantities greater than one. Just divide the anticipated shipping costs for one unit by the number of units typically expected to be ordered at a time and add that amount to the List Price calculation.
But depending on the actual quantity ordered at once, some Customers still end up paying more than would cover the costs of a single shipment, and others less. I’m sure the one who pay less would be happy if they knew, but the ones who paid more, maybe not so much. Except, psychology as noted above, maybe they really don’t care.
And I would be very happy-yet-sad if a given product started selling very well but for whatever reason sold only as one unit to each Customer with no other products purchased at the same time. Happy — product is selling well. Sad — my profit is reduced on every order due to my true shipping costs paid.
|ORDER: (1)$56.73 item [$50.00 item + (1/2)$13.45 shipping] + $0.00 shipping ==> $56.73
Customer-paid shipping = (1)$6.73 ==> $6.73
PROFIT: $13.45 actual shipping – $6.73 recouped ==> $6.72 paid by me
(1)$50.00(0.30) ==> $15.00 profit – $6.72 shipping paid by me ==> $8.28 actual profit
ORDER: (3)$56.73 item + $0.00 shipping ==> $170.19
Customer-paid shipping = (3)$6.73 ==> $20.19
PROFIT: $13.45 actual shipping – $20.19 recouped ==> $6.74 “in my favor”
(3)$50.00(0.30) ==> $45.00 profit + $6.74 extra shipping paid by customer ==> $51.74 or $17.24 each
|Should I charge for shipping separately until the Customer’s order reaches a minimum $ amount, then provide “free shipping”?||Let’s pick apart the scenario calculations on this one.
The original order would have been one item for a $15.00 total profit.
The actual order without free shipping would have produced a $30.00 total profit.
The actual order with free shipping produces an actual profit of $16.55.
That’s only $1.55 more profit than the original order would have produced.
For selling three more items!
Those extra three items that should have produced an additional $15.00 in profit only returned an $1.55 in additional profit.
That math hurts my head.
And yet, this is how the major online sales channels want us to function these days. Some even “deprioritize” Sellers who do not offer free shipping after a minimum order has been met. And that minimum can be very low.
So how do we offset the profit hit from offering the nearly-obligatory-these-days free shipping? Circle back to the options above, or check out the last one below.
|ORDER: Customer puts into cart (1)$50.00 item + $13.45 shipping ==> $63.36 but at the last second notices that I offer “free shipping” for orders totaling $100 or more, so decides to buy two other items:
(1)$50.00 item + (1)20.00 item + (2)15.00 items + $0.00 shipping ==> $100.00
PROFIT: With the original order would have been (1)$50.00(0.30) ==> $15.00,
and with the additional items my profit would have been
(1)$50.00(0.30) + (1)$20.00(0.30) + (2)$15.00(0.30) ==> (1)$15.00 + (1)$6.00 + (2)$4.50 ==> $30.00
but because I offered free shipping once the order minimum was hit, now it’s
$30.00 – $13.45 shipping costs paid by me ==> $16.55
|Should I not charge the Customer for it in any way?||“Shipping is just a cost of doing business”, right? That shipping cost becomes an overhead expense, and expenses are deductible, right?
Yes, it is true that these expenses can often be deducted from income at income tax time.
But that only impacts the income tax bill, it doesn’t help us make enough profit to stay in business.
NOTE that some companies often can and do offer free shipping and some even “eat” the costs in whole or in part, (and/or discount the List Price substantially which results in a loss) but those companies use those items as what’s called a loss leader, in the hopes of getting new Customers and/or selling additional products or services to new and existing Customers.
If that’s something you’re considering, I encourage you to give it some thought, and if you choose to do it, do it deliberately and with purpose. Ask yourself and know your answers to questions such as: What other item(s) or service(s) am I hoping my Customer will purchase as a result? What else am I doing to help encourage that conversion? How will I track that conversion? What indicates whether or not the overall strategy is successful? And so on.
|ORDER: (1) $50.00 item + $0.00 shipping ==> $50.00
PROFIT: (1)$50.00(0.30) ==> $15.00 – $13.45 shipping costs paid by me ==> $1.55
At income tax time maybe that $13.45 gets deducted as an expense and reduces my total income tax bill. Or maybe it does this year but not next year; tax laws change all the time.
In the meantime, is that $1.55 profit enough to keep my business afloat? Help it grow?