Do You Understand Where You’re Losing Money on Shipping & Handling?

     

This title of this blog might sound naïve considering S&H’s high cost to direct-to-customer businesses and the time companies spend on discussing it. Let me give you two examples to show you maybe there is additional homework companies need to do before changing policies.

Last week at a conference, a catalog and e-commerce business owner asked me, “Should I be willing to ship small dollar orders even though I lose money on the shipping costs?” A little background is important to understanding the man’s question. His business sells parts and accessories to luxury auto restoration enthusiasts. He could be shipping a fender worth thousands of dollars one minute and a bag of nuts and bolts worth $5.00 the next. I can understand the concern but it isn’t that simple. My response was, “Do you know how many times this happens? What would happen to customer purchasing and lifetime value? Is it the best customer service experience? Answering these and other marketing questions is crucial.

The second example is an emerging company with $10 million in sales and growing very quickly because of a unique merchandise assortment. In doing an S&H study for them we found:

  • Total shipping cost exceeded customer S&H revenue by 100% and amounted to a loss of 5% of net sales;
  • The “free shipping” threshold was set 15% below the $175 AOV. More expensive products were many times higher than the “free shipping” threshold. In this case, the free shipping threshold did not yield significant increases in average order value;
  • A high percentage of orders were dim/weight and ship alones. A shipping charge based on merchandise value doesn’t adequately price shipping costs. Additionally, it is difficult to know what heavy and oversized products actually cost to ship because of accessorials increase item shipping costs;
  • It was extremely difficult to reconcile the orders and packages shipped in the order management data to the shipping system data which complicates analysis;

 From the analysis, the client better understood where they were losing money and they could make a much more informed decision about what to do. Their strategic plan is to grow at a high double-digit rate annually over the next three years. They decided to not make any major changes to S&H policies that potentially would slow down their growth rate. The loss on S&H this company sees as an acquisition cost for new customers.

 These are two widely different examples. However, they illustrate the need to understand the detail and then determine the best policy from a financial, marketing and customer service perspective.

For business-to-consumer entities offsetting the revenue from customer orders with total shipping expenses, consumer businesses are almost always losing money. It may be as low as a couple percent to 5% or more as a percent of net sales.

 Business to business entities fare much better – many make a positive offset of 2% to 3%. But as marketplaces push into b-to-b this will change if they offer reduced or free shipping.

Here are marketing questions about free shipping that you need to answer for your business:

  • What do you understand about free shipping and how your customer responds from a marketing and database perspective?
  • Are you doing any A/B testing to determine the best marketing approach of are you simply offering free shipping?
  • Do your customers change purchase behavior with “free shipping”?
  • What happens when you don’t offer free shipping? Does the response rate fall? Have you conditioned the customer to wait for free shipping?
  • Are your order value thresholds set at the right level to get higher AOVs and make more margin?

An additional reality is how are you treating or absorbing shipping costs? As part of the Cost Of Goods Sold (COGS)? Partially as a marketing expense? Or totally as a Fulfillment expense?

In most direct businesses, outbound shipping costs exceed all the costs of fulfillment added together - management, direct and indirect labor, packing materials, total occupancy and allocated system costs.

None of these are easy issues to understand and solve. However, they are key to combating Amazon and growing your business profitably.