A Little or a Lot? How to Set Fair Shipping Rates for Customers

The question of how much to charge for shipping is one that all business owners struggle with. If you don’t struggle with this questions, and you do in fact ship physical products, you’d better take another look at your pricing model! Shipping rates that are too high are very obvious to savvy online customers — we all know what it typically costs to ship USPS from A to B.

You’re not the only one selling that product, are you?

Seasoned customers also know that sellers in China, Southeast Asia, and many other far off destinations charge nothing — or next to nothing — to ship products to us from their country. This reality can make for easy decisions when buying products on Ebay and similar auction sites. Pay ridiculous shipping for an item located in North America or the UK and get it in 10 – 14 days, or wait 3 weeks and get the same item from China for no or little additional costs? Then there’s the allure of Amazon’s fulfilment center network and their fast free, and lightning-fast discounted 1 and 2 day shipping.

There’s indeed competition and small and medium sized business owners need to not just recognise that customers have other options, they have to adjust their pricing models in order to stay solvent. You can’t draw people in with low product prices, then charge a 200 percent markup on shipping. Only fools would slap down their money without comparing prices elsewhere.

Charge too little and you’ll go out of business. Charge too much and your shopping-cart-abandonment rate will lead you and your marketing team into a deep depression. Unexpected costs like jaw-dropping, off-the-charts shipping costs, are the main reason shoppers leave their carts without paying. Always has and always will be the main reason too. Unless you’re operating in a market monopoly with your product(s), shipping costs need to be high enough not to cut into profits, yet reasonable enough that customers don’t feel obliged to look elsewhere.

shipping rates for customers need to be reasonable

Shipping costs are typically arrived at using one of the following 2 methods:

Calculated Shipping Model

This one is easy to do and customers are most likely to view your shipping costs as reasonable compared to most of your competition. This model works well regardless of package size, but is more common among companies that ship heavier items who don’t want to lose revenue on the shipping/fulfilment end.

Calculate all costs involved in shipping an item — package dimensions, weight, and other factors your shipping and/or fulfilment center charges to ship a given product to a location, either domestic or overseas. After arriving at a number, it’s typical to round up to the next nearest dollar amount, perhaps padding that number with a few dollars to account for unforeseen shipping errors and such.

Flat Rate Shipping Model

Flat rate shipping involves more maintenance, but can be also viewed favorably by your regular customers. This model works best with high volume, low weight, smaller items that don’t typically cost much to ship. Flat rate shipping can also take a bit longer to refine a great price point for both you and your customers.

Flat rate shipping involves totalling all of your company’s shipping costs, both foreign and domestic, and coming up with an average cost per shipment to a given country, state, or province. This average must be a running week-to-week, or month-to-month calculation based on the most current data. These numbers will change and as a responsible shipper, the cost to the customer needs to change as prices rise or fall significantly.

Decide What the Customer Sees on the Invoice

Once you’ve nailed down a model for calculating shipping costs, it’s time to decide what the customer is going to see on the order page, and there are a couple of ways to go about this:

  • Combine shipping costs and product price: This way, you can offer “free shipping” to your customers. If the overall product price is reasonable in the market you operate, this not only makes the customer feel like you’re offering them a great deal by not adding additional shipping costs, it also makes the checkout process more seamless, leading to lower cart abandonment rates. Many deal hunters dread having to calculate shipping, or wait until they’re at the final part of the checkout process before seeing shipping costs.
  • Show shipping and product price separately: There’s nothing wrong with doing this either, provided your shipping costs aren’t grossly inflated. In fact, for heavy or bulky items that are expensive to ship, customers will understand the higher shipping costs and be willing to proceed to the checkout. Combining costs into one price might scare away thrifty customers who see your competitor selling a product for $XXX cheaper — even if that competitor charges the same overall shipping as you do.

It’s worth mentioning that split testing at this stage is a very effective way to figure out what visuals offer the most order completions. Don’t assume you know what works best — test, test, test!

Image Credit: Templates-master.com

Offer Shipping Speed Options (If You Can)

Don’t assume the majority of your customers will want overnight, minute-by-minute tracking updates (ie., the most expensive kind). Offer overnight, express, and even snail mail shipping methods to customers. If you can afford to overnight all your products at cheap rates, go for it. Best Buy offers free two-day shipping on all orders over $35, making them a very attractive option for consumer electronics.

You might not have that kind of revenue leeway, but make sure you at least offer options for impatient customers who’re willing to pay more to have it tomorrow, as well as the frugal who’ll wait weeks to save a few bucks.

FedEx, Purolator, and many other national and international shipping companies offer loyalty discounts to companies who do a lot of shipping. Purolator offers up to 30% savings — savings that can be both passed on to customers and also added to the company bank account.

How do you currently handle customer shipping costs?

Main Image Credit: stavos/Flickr