All Things Shipping | May 24, 2022

How Much You Should Charge for Shipping and Handling, Explained

Sarah Rickerd

We all know that the shipping and handling fees charged by e-commerce merchants affect consumer behavior. Shippo’s 2021 State of Shipping report, for example, found that 33% of the shoppers surveyed state that they’ll only purchase from stores that offer free shipping. A further 20% say they’d swap stores to buy from a seller that ships for free.

But although Amazon has created a ‘keeping up with the Joneses’ expectation when it comes to offering free shipping, adopting this as a blanket policy without crunching your own numbers is a recipe for disaster when it comes to your store’s profitability. Here’s why it’s important to calculate your own fulfillment costs, as well as how you can determine what to charge for shipping and handling, based on your results.

What is Shipping and Handling?

Together, the terms shipping and handling encompass all of the expenses associated with getting the items you sell into the hands of your customers. Postage fees are one of the most obvious examples of these fees, but shipping and handling also includes:

  • The cost of any packaging materials required to ship your items
  • Your time and labor preparing orders for shipment
  • The labor costs of any workers you employ who assist in package preparation
  • The per-package fees charged by any 3PLs or fulfillment centers you work with for storage or shipping

As a note, shipping and handling doesn’t encompass other fees, such as payment processing costs or seller fees (such as Amazon’s selling plan and referral fees). You’ll need to account for these separately in your calculations.

How to Calculate Shipping and Handling Cost For Your Customers

Every e-commerce business is different, which means that the way they calculate their cost of shipping and cost of handling fees will vary as well. Generally speaking, however, you can group these costs into three different categories:

How to Calculate Packaging Costs

Your packaging costs might include:

  • Boxes or poly mailers
  • Packaging tape
  • Box fill materials
  • Insulation and cooling packs
  • Custom mailers or inserts
  • Shipping labels and label pouches

Often, you can cut your packaging costs by using the free packaging offered by many carriers (such as those available from the USPS). Using poly mailers instead of boxes—if they work for your products—can also help to reduce both packaging and postage fees.

Other factors that might drive your packaging costs up include using pricier recycled or sustainable packaging materials, shipping items that need to remain cool or frozen in transit, or developing custom packaging materials for your items.

As a rule, you can estimate $1.00 per package in packaging costs if you’re shipping small items. But you can also get more granular with your calculations. Here’s an example of what this looks like for a small item that can be shipped in a 4 x 4 x 3 box:

  • You purchase 100 4 x 4 x 3 boxes at a cost of $0.34 each. With shipping fees and taxes, the total cost of your order is $55.61, or $0.56 per box.
  • After your item is placed in the box, you need roughly 0.1 cubic feet (cf) of packing peanuts per box to secure it for shipment. If you purchase two 7-cf bags of biodegradable peanuts for $58.83, your cost to fill a single box is $0.42.
  • You then seal each box with packaging tape, which you purchase at $3.99 for a 54.6-yard roll. Assuming you use 2 feet of packaging tape per box, your cost is around $0.05 per package.

In this case, your total packaging cost per box is $1.03. While you might have been ok using the $1.00 per box estimate here, you can also see how easily different packaging variables—such as the use of heavier duty boxes, thermal-printed shipping labels, or more expensive fill materials—can drive your costs beyond this figure. That’s why it’s always a good idea to perform your own calculations for every size package you ship.

How to Determine Cost of Fulfillment

Next, let’s look at the labor costs associated with preparing your packages for delivery. If you handle packaging on your own, this calculation can be relatively easy:

(The time required to package your items) x (your target hourly rate) = your fulfillment costs.

Here, if you spend 10 minutes boxing an item, and you decide your time is worth $15 per hour, your total fulfillment cost is $2.50.

If you have employees, you’ll need to adjust the calculation to include not just their hourly rate, but their total compensation (including any taxes, benefits, overtime wages, etc.).

(The time required to package your items) x (your employee’s total hourly compensation divided by 60) = your fulfillment costs.

For example, if it still takes 10 minutes to prepare an order, but your employee’s hourly rate with all factors considered is $20 per hour, your total fulfillment cost is now $3.33.

Finally, if you use any 3PLs or fulfillment centers, you may be able to skip these calculations altogether and substitute in whatever per-package costs you’re assessed for the storage and fulfillment of your items.

As an example from Amazon’s FBA program, the fulfillment cost associated with having the company fulfill delivery of a small standard box measuring less than 15″ x 12″ x 0.75″ and weighing less than 6 oz is $2.92 plus a $0.15 surcharge, or $3.07 total.

What to Charge for Shipping

Understanding your shipping prices is substantially easier than calculating your packaging and fulfillment costs. If you have your own negotiated rates with the carriers—or if you use something like Shippo’s rate calculator or live Rates at Checkout feature—you can simply pull these numbers and display them to your customers’ overall shipping and handling fee.

If you don’t, keep in mind that all of the following factors will play a role in determining your postage costs:

  • The size of your package
  • The weight of your package
  • The distance your package will travel
  • The carrier you use

With Shippo, your business can automatically get discounted shipping rates for services from the nation’s leading carriers such as UPS and USPS. These cost savings can then be passed on to your customer so that you can potentially charge them less. This can help increase their willingness to buy from you.

Examples of Determining How Much to Charge for Shipping and Handling

The reason it’s important to understand your exact shipping and handling costs is so that you can ensure you maintain the proper margins on each order. Let’s look at an example here:

  • Seller A ships the small, lightweight item described in the previous example, packages the item herself, and mails it from zip code 10001 to zip code 90210 using Shippo’s discounted USPS rate. In this case, her shipping and handling costs are $7.68: $1.03 for the packaging materials, $2.50 for her labor, and $4.15 for her postage.
  • Seller B uses the same size packaging and ships between the same zip codes, but sells a heavier, 2-lb item and uses employees to handle the fulfillment. Here, his total shipping and handling costs are $15.21, accounting for higher labor ($3.33) and postage ($10.85) costs.

Now, let’s imagine that Sellers A and B both sell their items for $35, purchase them at a wholesale rate of $20, and offer free shipping to all buyers. In this hypothetical example, Seller B’s shipping and handling costs have actually erased his profit—his cost to buy and ship his item is $0.21 more than what he sells it for.

Other Factors for How Much to Charge for Shipping

Of course, it’s worth noting that the example above doesn’t take into consideration the full complexity faced by most e-commerce sellers. Other factors that may affect your own calculations include:

  • Your average order size and profit margins
  • The number of items in your average order
  • The average discount applied to purchases through promotions, discount codes, etc.
  • What your competitors charge for shipping and handling
  • Additional peak season fees you may be assessed at certain points in the year
  • The customs fees associated with international shipments.

What it should do, however, is make it clear that determining how much to charge for shipping and handling can have a major impact on your overall profitability. Take the steps above to understand the unique variables associated with your shipping and fulfillment processes in order to avoid unknowingly eating away at your profits through unexpectedly high shipping and handling fees.

How to offer Free Shipping to Customers

The natural follow-up question to” how much should I charge for shipping and handling” is often “how can I offer free shipping?”

In order to offer free shipping to customers, you’ll have to closely analyze all the costs that go into shipping and handling, but also look at other factors such as average order value (AOV), your current inventory levels, and whether or not you can financially support such an initiative.

Some of the more unique ways to offer free shipping no matter the size of your e-commerce business include:

Add in Cost Of Shipping To Product Price: For some e-commerce stores, the final price of the product may be slightly higher than the industry average but offer free shipping as an incentive to buy them. Customers will be paying for shipping and handling without knowing it.

Purchase Value Threshold: This means customers qualify for free shipping if the value of their cart reaches a certain limit. An example could be “Free shipping on all orders $50 or more”.

Free S&H For Select Products: You can use free shipping and handling as a way to clear out old inventory. For example, your site could say “free shipping for all orders that add X item”. The item is generally one that is cheap to ship and could fit into most boxes that have other items in them.

Free S&H in Rewards Program: You can offer free shipping and handling to customers that join your rewards program. This incentivizes them to shop more which may help offset any costs of S&H that you may incur.

As you can, more often than not, free shipping isn’t going to be something you offer to everyone all the time. For all the other times in your business, you’ll want to take into consideration all the factors we discussed.

Sarah Rickerd is a Michigan-based freelance writer covering business, marketing, and technology topics. She is also the owner of Content Conquered, a B2B-focused content marketing consultancy.

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