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Retail Accounting: Are your shipping costs too high?

The advent of online shopping has completely turned standard retail practices on its head. Stores that have thrived for decades have been forced to start selling their goods online and compete on the global marketplace. One challenge that many retail owners struggle with is how to charge the right amount for shipping without scaring away the consumer. Are your shipping costs too high?

What really costs so much to ship goods

While many owners likely already know what makes shipping so expensive, I want to list the items here to distinguish them later and identify which ones we can cut back on to save money. In no particular order:

  • Vendor: Who you choose directly affects your rate. USPS costs less than FedEx or UPS but you sacrifice on customer service, speed, tracking and other options.
  • Ship to/from location: Where your customer is located relative to you is a major factor in shipping costs. Most consumers don’t keep this in mind when shopping online.
  • Speed: How soon the customer wants it is another major factor, as all vendors charge more for faster shipments.
  • Packaging: This is a cost retail owners incur and is mostly “silent” in nature–consumers don’t understand how much that cardboard box and those packing peanuts really cost.
  • Value of product (insurance): If you’re shipping anything of value then insurance is a must have.

So now that we listed them, which items should retail owners skimp on? There is nothing the shop owners can do about the location of themselves or their customers nor should they reduce any insurance purchased on the item. Without insurance the owners are forced to eat the cost of the product by shipping a new one to the buyer. Why do that when you can get insurance and pass on the charge?

The easiest method for retail owners to drive down shipping costs is to buy packaging in bulk. Storage could be an issue but for retailers that spend thousands each year to ship their goods must try to bring down the cost of packaging every way they can.

That leaves two options: Vendor and Speed. My advice here is to let your consumer decide who they want to send them the package and how fast they want to get it there. There is no reason to send an item via 3 day shipping at an extra cost if the buyer doesn’t need to have it right away. Many consumers can care less that UPS vs FedEx delivered their package as long as it saved them a couple bucks.

It takes extra work on your part to know the different rates for different speeds per vendor but if you find that one shipping company always is less over another then remove the more expensive option from you list. Sounds simple right? You would be surprised about the lack of research retailers do on shipping products across the country and if you’re not constantly trying to save your consumers money then guess what… someone else will!

How To Determine If You’re Charging Enough for Shipping

Most consumers don’t realize that the amount they pay for shipping isn’t dollar for dollar what actually goes into the cost of shipping the product. In fact, its at best a guess to what the retailer thinks the item will take to ship the item to the consumer’s local given the zip code. Sometimes it costs the retailer less than they charged and sometimes more. With enough volume this should even out but sometimes it doesn’t… and sometimes it doesn’t by a significant margin.

The first step you will want to take is to separate out your shipping revenue from your other sales. Your POS software will do this for you so that is likely already being done. Second, you’ll want to use the default Postage & Shipping expense account in QuickBooks to track the expenses you incur to ship your product. These numbers will not even out every month as the expenses you incur in one month will be used to ship the products in another.

Look at the moving average of expenses over the past 3, 6 and 12 months and compare that to the moving average of the shipping revenue received. Notice something off? If you’re constantly paying more for shipping than you’re bringing in every month then you know you are not charging your customers enough for shipping. Divide the net difference over that time period by the total packages you shipped–so if over a 12 month period you’re off by $100/month and you ship 100 items/month, then you should increase the cost of shipping to each of your customers by $1.

You will not want to raise prices significantly or too quickly as doing so could cause a negative reaction from your customers. Start with $1/shipment and see what happens over the next several months and hopefully the cost curve starts to bend down in your favor.

Your Customers Don’t Like To Pay For Shipping

Here is something you’ll already know: Your customers hate to pay for shipping. Don’t you? I know I do. Want to offer free shipping for your customers without having it break your bank? Force them to buy more! As a consumer, I would much rather spend $10 in products to get free shipping than spend $10 on shipping. Fortunately for you the cost to ship a product most likely does not increase at the same rate that consumers spend money.

To come up with a free shipping scenario, calculate the average purchase dollar amount your customers make and then go above that amount to offer free shipping once you account for your margin. For example: If an average customer of yours will purchase $50 worth of items with a 50% markup and it would normally cost $10 to ship those items, then offer free shipping on purchases of $75 or more. Your customers think they will be getting a deal by not paying for shipping, you’ll have broken even on the extra shipping costs and everyone will be happy!

Uniqueness of Product

Finally, don’t let the era of free shipping persuade you to take actions you don’t have to take. Retailers with a unique product don’t have to worry about losing customers due to increased shipping costs–your customers have no other option to get what they want. In that case charge what you must to recoup your shipping expenses and don’t let your customers dictate your reduced margin.

An example: I recently had to purchase a replacement piece to repair our dishwasher at home. The piece itself cost $2.50 and I couldn’t find it anywhere else but one place online. The cost to ship the product to me was $7.50; frankly they could have put the piece in a standard envelope with a stamp and I wouldn’t have minded. I was forced to pay the full $10 on a $2.50 part because I had no other option if I didn’t want to go out and buy a new dishwasher.

If you have a product your customers both need and want and you’re the only place they can get it… you win.

Final Thoughts

As a consumer, we all hate paying for things we don’t have to pay for–shipping is one of those items. Make your customer feel like you’re doing everything in your power to reduce their cost and they will reward you with more sales.

If you need help calculating your shipping costs or with any other retail tax or bookkeeping questions then contact us for a free consultation.