How Much Should You Spend on Shipping?
Wouldn’t you love for the answer to be zero? Well, short of delivering your own orders, that’s sadly out of the question. And let’s be honest, if you were to try delivering your own orders, I’d bet that you’d be begging the USPS to start taking your money after realizing just how much time and effort deliveries take.
But, that doesn’t mean that you don’t have opportunities to reduce and optimize your shipping spend. Good news is that we’re here to walk through how you can evaluate your shipping, what you should be looking for, and ultimately help you find the right balance between cost and quality for your business.
While shipping can be both complex and expensive, once you’ve figured out how best to structure it for your business—in terms of both spend and services involved—it can be a major competitive advantage for your business.
The right shipping spend will be different for every business, but the principles for optimization are the same.
The correct shipping spend is a balance that involves delivering the best experience for your customers (one that leads to high conversion rates, customer satisfaction, and repeat purchases), while doing so in the most cost-effective way possible.
For example, if you find that 2-day shipping with free returns is what works best for your customers, your task should be to figure out how to deliver that in the most economical way.
If you’re optimizing for costs alone, you run the risk of sacrificing quality and speed of delivery for the sake of lower expenses, which could result in a greater overall cost to your business in the form of missed revenue opportunities.
Alright, let’s get practical now. Here’s how you can start to analyze where your business stands in terms of shipping spend compared to your peers. As a first step, check out some of our recent research, based on a survey of over 50,000 Shippo merchants and their average shipping spend by industry:
This should help put things into perspective. Based on your industry, does your business fall within these averages?
Reasons Why Your Shipping Spend is Above Average for Your Industry
First off, merely being above (or below) the average for your industry is not inherently a cause for alarm. There is going to be variation for a merchant based on many factors. The average cost of your items, your location, the quality and speed of the shipping services that you offer, and the weight of your items, will all factor into your shipping spend, relative to revenue. And, while these elements are likely to be similar within a certain industry, there will still be plenty of variability from one merchant to the next.
More specifically, you may find that your shipping spend falls above the average for your industry if:
- You are offering premium shipping services such as overnight shipping or other expedited services
- The products you sell are larger or heavier, and still fairly inexpensive
- You are servicing a significant amount of customers that are far away from your shipping location—obviously the further you are from your customers, the more you will end up paying for shipping
- You are only using a single shipping carrier for all of your orders. Even if this carrier is the best choice most of the time, it’s unlikely that a single carrier will be the most cost-efficient service for every order you ship.
- You are not optimizing your choice of service level on a per-shipment basis. For example, if you are paying a premium for USPS Priority Mail Express for a very short distance shipment, you could get the same speed and quality from normal Priority Mail.
Note: If your shipping spend exceeds the average range for your industry, it’s not necessarily a negative thing. Shipping can be a major factor in the purchasing decisions of your customers, and their overall satisfaction with your brand.
For many brands, spending a little extra could result in higher conversion rates and greater repeat purchasing. As an example, which case would you rather be? A merchant with a 10% revenue spend on shipping with $50K in order revenue, or a merchant with a 15% revenue spend on shipping with $80K in order revenue? It’s an easy choice.
Exploring Ways to Lower Your Overall Shipping Spend
Regardless of where you stand in terms of your current spend—whether you are over the average, under, or right on the line—everyone can benefit from making sure their shipping operations are as cost-effective as possible. Even if you are already in good shape, relative to the average, you shouldn’t pass up opportunities to further cut your costs, so long as they don’t come at the expense of your customers.
All merchants can benefit from carrier and service-level optimization, margin analysis, and finding the right balance of costs between your business and your customers (are they paying for their own shipping?).
Finding the best carrier and service level for all of your orders
There are several choices out there when it comes to carriers, each with their own complex service matrixes, pros, and cons. While most businesses will be able to identify a single carrier that most closely matches their needs, a one-size-fits-all solution is rarely the most optimal.
Let’s look at an example:
If you’re a US-based e-commerce business, the USPS is likely going to be your bread-and-butter carrier. The USPS is the most accessible carrier for growing businesses and their Priority Mail service is going to be the most cost-effective 2-day shipping option for the majority of orders.
But, that doesn’t mean that choosing USPS Priority Mail for every one of your orders will necessarily be the most optimal strategy. Why? Because in most cases, each order will be different.
Each customer will be in a different location and each order will have a different weight. For example, if you are shipping some heavier packages that are 10 lbs. and up, UPS Ground may come in as a more cost-effective option. And, the further you need to ship a heavy item, the more favorable UPS Ground becomes.
So, even if USPS is the “best” choice for price and speed for 85% of your orders, you’re still missing out on cost savings 15% of the time. Adding UPS to your mix, in this example, could result in saving a couple dollars per order on 15% of your orders. If you are currently spending 15% of your revenue on shipping, this alone could drop you down a couple of basis points.
Let’s do some more math: calculate your costs by knowing how they relate to your business and margins
What you can spend often depends on what you have available. For example, if your average margin (not including shipping) is 50%, you can most likely afford to spend 15% of order revenue on shipping and still pocket a 35% profit margin.
If your margin is, say 15%, you won’t have nearly as much room to play with for shipping. For you to walk away with much of any profit, you’ll need to opt for the cheapest (which often means not super-fast) shipping and/or pass some or all of the shipping costs onto your customers.
Should you consider incorporating shipping expenses into the cost of your products?
Probably not. While a straightforward yes or no would make all of our lives easier, it really wouldn’t be doing you any favors. The reality is that this is going to depend on your business. For most products, adding $10 for shipping to the item cost may make your business less competitive. Especially if you are in a competitive space, artificially inflating the cost of your items to account for shipping, could lead to lost business and lower conversion rates.
However, in the right situations, this could make sense. For example, if you are selling a unique and likely already expensive product, like a mattress or a custom desktop computer, you’ll likely already have more than enough margin to account for shipping. Even though shipping a mattress is a hefty expense, you’ll notice almost all online mattress sellers offer free shipping. Given that at scale, a mattress merchant can capture more than enough margin on a $1K mattress sale to account for even a $50 shipping cost.
Look at how you’re charging for shipping
Here are three common ways of charging (or not charging) for shipping:
Charging a fixed or flat rate: This is pretty straightforward—you charge the same shipping rate for every order. The price is fixed.
How you determine a fixed rate: average your shipping cost across all the types of orders you get. Doing so will help you decide what’s feasible for your business and compelling to customers. You may lose money on some more expensive shipping orders, but the mass appeal of a flat rate may make up for that in the long run with a higher rate of conversions.
Variable shipping rates: In this scenario, shipping charges are based on the real-time carrier rates at the time of shipment. There are various factors that can influence the rate you’ll be charged: package weight, dimensions, destination, and the service level you choose.
Free shipping: This option can be highly incentivizing for customers. But the costs involved in offering it can be a financial challenge.
There are different ways to absorb the costs of free shipping. Start by calculating the average shipping costs for the items you sell.
Once you’ve done the math, here are ways to offer free shipping:
- Require a minimum threshold to be spent before free shipping can apply
- Offer an incentive such as a special featured product that can be added to the order, qualifying it for complimentary shipping (hint: this could be an effective way to sell off old stock)
- Offer as part of a rewards or loyalty program: free shipping could be a special perk offered to your rewards members to incentivize them to return
- Offer free shipping for a limited time (for special occasions, the Holidays)
What if Your Business’s Shipping Spend Falls Below the Industry Average?
First off, congrats on successfully keeping your shipping expenses below average for your industry! That’s no easy feat, and takes a fair amount of planning and diligence.
As discussed, shipping can give your company a competitive edge, and utilizing it properly will go a long way in building customer loyalty and retention.
Optimizing for pure cost savings can lead to short-term efficiencies—and a happy accounting department. Though, if you are achieving cost-savings at the expense of customer experience, you very well may be losing out on far more than you are saving.
Ultimately, if you are on the low end of your industry’s benchmark for shipping spend, you should take a look at your current operations. Make sure that you are delivering (pun intended) the high-quality experiences that customers expect. If you find that your conversion rates are lower than you’d like, you’re getting customer support inquiries about shipping, and/or you are not seeing a high rate of return purchasing, you may want to reassess your shipping.
Remember, lower shipping spend, in isolation, shouldn’t be the goal. The goal is to deliver the right customer experience in the most cost-efficient way possible.
Okay, now getting back to our original question at the onset of this article, “How much should you spend on shipping?” It would be great if there were an easy, catch-all answer, but there just isn’t.
But as mentioned, if you work to strike a balance between your optimal conversion rate, while employing a shipping program that keeps you competitive in the market, that may just be the right mix for your business.
Get to a point where you’re happy with your results and your customers are satisfied. Once you’re there, figure out how to stay there while reducing costs as much as possible.
Check out Shippo for an all-in-one shipping solution that simplifies operations and lowers costs at the same time.