Did you know that the main reason that people abandon their online shopping carts is because of unexpected shipping costs? (Statista, 2019)
What you charge your customers for shipping can be a make-or-break element in the success of your online store. Although shipping should not be a profit-centre for you, shipping costs should also be carefully calculated to ensure that you are not making a loss. Unfortunately, there is no formula or calculator to help you determine what you should charge your customers for shipping at checkout. But we can offer advice that might help you calculate it yourself.
In this article, uAfrica looks at the most common shipping strategies and what we think is your best bet.
1. Free shipping
Unless you are an Amazon of the world, offering free shipping is nearly impossible when considering your profit margins. There are some strategies you can put in place to still use “free shipping” to your advantage:
Free shipping on all products. By building the shipping cost into the price of the product, you can offer “free shipping” on all of your products. It simply means that the prices of your products will be slightly higher. However, the price competitiveness of your products in comparison to that of your competitors is still something that must be considered.
Free shipping over X amount. This is a very popular method of free shipping. It encourages the customer to purchase goods over a certain amount of money to qualify for free shipping. Not only does this push sales, but if your costing is right, then your profit margins should cover the shipping cost once you’ve reached X amount anyway.
How do you calculate if you can afford free shipping over a certain Rx? You must understand what your average cost of delivery is, and this is all about margins.
- Scenario Example (excluding VAT): If your average cost of delivery is R80.00 and you offer free shipping above R500.00 then R80 / R500 = 16%
This means that 16% of your profit is actually going towards paying your shipping fees. If your profit margin is 50%, then you will be left with a 34% profit margin (50% – 16%) to cover other operating expenses. Thus, you will have to make sure that an average margin of 34% is sufficient to cover your other business expenses and still leave you with enough to make a profit.
Revisit your shipping costs constantly to ensure that you are covering the cost of shipping. Often, the trick is to use an upsell app that informs customers at check-out that by adding a product, they can get free delivery. This increases the basket size in terms of Rand value.
Free shipping on certain items. Many online stores offer free shipping on items that are indicated as such, encouraging the purchase of those specific items. This strategy works best when you have a high profit margin on that product. This allows you to not only make a reasonable profit, but also cover the cost of shipping the product to your customer.
2. Charge a flat rate for shipping
One simple way of charging shipping is to calculate a flat rate across all of your products. Calculate the average cost of shipping for your products by measuring each product to get the standard shipping rate for a product that size. Add all of those costs together and divide the figure by the number of products you have to get a flat shipping rate. This way, no matter what is purchased, shipping always costs the same for your customer – regardless of what they purchase. It needs to be mentioned that sometimes you will make a loss on shipping and other times you will make a profit. However, if calculated correctly, the two should average each other out. Monitoring and amending your flat rate shipping fee is important when following this strategy.
3. Calculated shipping
The method to 'calculated shipping' is to measure and weigh each product to get an estimated cost of shipping for that product. When a customer adds that product to their shopping cart, that specifically calculated shipping cost is charged. However, this method does not take into consideration the location where you are shipping to and is not supported by all online sales channels. Also, for websites that sell multiple products, this method can become very complex and time consuming.
4. Shipping cost by zone
In this method, the shipping cost is only calculated once the customer’s shipping address has been specified – and this is only available when using certain platforms. Charge customers based on where they are situated compared to where you are shipping from: Local, Main Centre or Regional. This is based on postal codes and can be set up on uAfrica - Setting up Shipping Zones.
Since many courier companies increase the shipping cost based on weight/dimensions, it is important to also take these variables into account. Luckily, most online stores allow you to add the weight of your products, which means the total weight of a basket will automatically be calculated at check-out. The shipping cost will then be calculated based on the shipping postal code and the total weight of the basket. The benefit of this strategy is that you can align what you charge your customer with what you pay for shipping.
What does the table above mean? Let’s look at two examples:
- Customer A checks out a basket weighing 1kg with a shipping address that is classified as a local address. This means Customer A will pay R 40.00 for shipping.
- Customer B checks out a basket weighing 5kg with a shipping address that is classified as Main Centre. Therefore, Customer B will pay R 70.00 for shipping.
Most courier companies’ rate cards are classified based on area (Local, Main Centre and Regional) and weight/dimension. Thus, by following the above strategy where you calculate shipping fees based on these variables, you can align what you charge your customers to what the courier company will charge you. uAfrica Shipping Zones, available for Shopify and bidorbuy merchants, is a tool that can be used to easily implement this strategy.
So what method is the best?
When deciding on what you should charge your customers for shipping, you must remember to take returns and replacements into account. Some products have a higher return rate than others, like clothing and shoes, so you must remember to take this into consideration when calculating what you will charge your customers for shipping. In addition: monitor, monitor, monitor. After a few months of operating you will be able to see if you are covering costs or not. If necessary, change your rates. You may win some, you may lose some, but you must be sure that your business is running at a profit.
So what is best? Well, if your business model and profit margins can allow for free shipping, it is a great way to gain a competitive advantage. It is also the simplest pricing structure for customers to understand. Charging a 'Shipping Cost by Zone' is the least complicated cost strategy, provided that it is allowed by your ecommerce platform. A flat rate shipping method can be a hit or a miss - depending on what products you sell. The danger with a flat rate is that sometimes this rate is higher than the cost of the actual product, which could lead to an abandoned cart.
Looking at all of these shipping strategies, it becomes clear that there is no “best” or “worst” method; each has its own pros and cons. Rather, this becomes a matter of mathematics. Online merchants need to consider which of the strategies will best suit their business based on their products, margins and location of customers. Then it simply becomes a practice of observing, adapting, adjusting and learning.