Simplifying S&H

Apr 01, 2006 10:30 PM  By

For direct merchants, there’s no escaping shipping and handling charges. You have to pay the shipper to deliver the goods to your customers, and generally speaking, you in turn charge your customers an appropriate amount to cover your costs. But determining what’s an appropriate amount and conveying that clearly to the customer is anything but simple.

Language skills

For starters, many merchants are grappling with the language, as “handling” is an arcane and vague term. Do handling costs include your direct carrier, packaging, and labor expenses? Do they also include distribution center overhead, returns processing expenses, and inventory carrying costs?

Back in the day, catalogers didn’t worry about the exact meaning of “handling.” They took the position that so long as they clearly disclosed how much the buyer paid for the product and for the S&H, the amount that they charged for shipping and handling was a matter of what the market should bear. But during the past few years consumers have filed several class-action lawsuits accusing merchants of illegally inflating their S&H charges. If a marketer is going to charge $6 for shipping and handling, the shipping and handling should indeed cost $6. In other words, says attorney George Isaacson, of Lewiston, ME-based Brann & Isaacson, if a consumer is charged shipping and handling costs, he should be paying a fee reasonably based on the merchant’s shipping and handling costs.

Last year, for instance, a class-action lawsuit (Smith, Allen, Mendenhall, Emons & Selby et al. v. The Thomson Corp.) accused Thomson’s West Publishing Co. of “concealing” the actual costs of transportation. Members were charged $6 for “transportation and handling,” but the court said that “fair and reasonable” costs for transportation did not exceed $1.10. The court found that West’s disclosure of transportation and handling charges caused consumers to believe that the charges were based on actual costs. The lawsuit included more than 61,000 consumers and awarded them more than $8.5 million in damages.

The lesson here, Issacson says, is that “the inclusion of the term such as “handling” will not insulate a direct marketer from potential liability for excessive and deceptive charges that cannot be cost-justified.

Thus the renewed emphasis on semantics. If a charge is described as a shipping charge, the costs you pass through to the customers should be limited to the common carrier charges and packing materials used. If the charge is shipping and handling, you should include your labor and outbound freight costs. If the charge is described as shipping and processing, it’s reasonable to include your order processing and credit-card expenses are included as well.

“Considering the customer sensitivity to shipping and handling charges and the potential for class-action suits, multichannel companies need to do cost studies of their shipping and handling costs to understand their direct, semidirect, and indirect costs and how they compare to the shipping and handling revenue that is generated,” says Curt Barry, president of Richmond, VA-based operations consultancy F. Curtis Barry & Co.

Along the same lines, Isaacson suggests that merchants begin with an examination of their internal cost structure and follow with a costs audit of the S&H charges, to determine what the actual expenses are and see if they justify the actual charges. Apart from doing it inhouse, catalogers have also hired outside firms to conduct audits. Costs may vary when it comes to conducting an internal audit of shipping and handling charges but some catalogers have paid up to $10,000 for the audit.

One method — all too common, according to sources — is the S&H charge that’s formulated based on what your competitors are charging. For all the talk about class-action activity, several companies still base their S&H on what others are doing. It may be a convenient tactic, says Isaacson, but not a defense that will hold up in court.

Another strategy used by most catalogers is charging for shipping and handling based on order size (for orders totaling $75, pay $6 for S&H) which could mean three boxes in the customer’s $75 order. But your shipper charges you on a per box basis based weight and distance. “That’s why there’s so much disparity,” Barry says.

So why not base your charges on what your carriers are charging you? Most companies can’t do that today because their warehouse management systems aren’t set up that way, says Barry, though this may change in a few years. Even though metrics such as weight and where the package is destined are identified on the shipping system, a lot of marketers can’t give accurate cube dimension measurements of a product. And to keep accurate records, you’d have to update this data every time you add a new product.

Be transparent

Most of us learned in kindergarten that honesty is the best policy. The same principle applies here, says Coy Clement, an East Greenwich, RI-based direct marketing consultant who has helped clients simplify their shipping practices. Clement advises merchants to be “completely transparent” to the consumer. And “shipping and handling” isn’t really a transparent phrase, he says.

“Processing,” on the other hand, much more clearly describes the act of moving an order along throughout the distribution center. Even so, Clement adds, “if the shipping and handling charges are meant to cover your labor, your overhead, and shipping, you have to say it.”

Most marketers, Isaacson says, are beginning to include a paragraph on their Website or somewhere in their catalog copy that describes what exactly the expenses are so that there are no surprises. With Internet shopping in particular, you should delineate the charges early in the order path, so that consumers do not go through several purchase screens only to abandon their shopping carts when they learn the shipping and handling cost at the end. For catalog shopping, consumers should be told the applicable shipping and handling charges when the total cost of the order is given. Some experts even advise training reps on how to field customer questions on how S&H charges are determined.

Methods and madness

Then there’s the method by which you charge. Suppose you sell small, lightweight merchandise such as jewelry. If you use a tiered pricing table (for orders totaling less than $100, customers pay $4.75 in S&H; for orders of $100-$200, $7.75; and so on) you could be seen as charging your customers unfairly because it costs you the same amount to pick, pack, and ship a $50 necklace as it does a $500 necklace.

In this case, Barry suggests opting for the flat fee instead. That’s how Tiffany & Co. charges. The New York-based cataloger/retailer of jewelry and tabletop items charges a flat fee of $12 for ground shipping and $17 fee for express shipping.

If your product line is more diverse in terms of size and bulk, then you can likely justify charging based on weight. Furniture mailers, for instance, frequently add a freight charge for large, heavy items.

Any sort of tiered pricing method, regardless of whether the tiers are broken out by dollars spent or product weight, can lead to tough-to-read S&H charts that buyers may consider offputting. Although charts are often the clearest, most concise way to present the information, “the consumer really hates to read charts,” Clement says, “They find it confusing.”

To help simplify charts and your overall pricing structure if you use tiers, Clement advises examining a random sample of 1,000 orders. Look at the order values, the shipment weights, and the revenue derived from shipping and processing. You may be able to eliminate tiers.

If, for instance, only 5% of all orders fell into a specific order value tier, you may want to combine that tier with another, eliminating a row or column from your grid.

Clement also urges marketers that if they are to change their shipping and handling practices, they need to be certain it’s a coordinated effort throughout the company. Be sure you have new order forms reflecting the new shipping practices printed as well as have the change in your Website’s “frequently asked questions” section.

It’s important to ensure that the effort is coordinated smoothly, Clement advises. For example, don’t give your CRSs the new shipping and handling information before your new order blanks are printed.

Michael Sherman, formerly the vice chairman at women’s apparel multititle cataloger Crosstown Traders, recalls that companies used to talk about shipping and handling being a profit center. But those days are long gone. “It’s unfortunate that because a cataloger keeps his financial records a certain way he’s going to come under scrutiny by a regulator. This is a hot-button issue.”

Spelling it out

Some marketers have cleared spelled out exactly what the shipping and handling charges entail. Attorney George Isaacson cites Website Famous Plumbing Supply as an example of how to explain not only the what but also the why of how the marketer arrived at the charges. It may seem impersonal to some, but its explanation leaves little room for interpretation.

Here’s how the company addresses the issue of charging $6.75 for shipping and handling, even if the customer’s merchandise costs $1. “This processing fee attempts to cover some of the costs that we — and all suppliers — incur for handling/processing your low dollar order. Even when shipping direct from the manufacturer or manufacturer’s warehouse, there is still extensive paperwork and follow-up involved to complete the order.”
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See you in court!

Much of merchants’ concerns surrounding shipping and handling charges stems from the fear of landing in court defending a class-action lawsuit.

Weehawken, NJ-based multititle cataloger Hanover Direct knows this first-hand. In March 2002, Hanover and six of its titles — Domestications Kitchen & Home, The Company Store, Silhouettes, Domestications Kitchen and Garden, Gump’s, and International Male — were named in a class-action lawsuit. Brought by California resident Jacq Wilson, the suit claimed among other things that gifts and tabletop merchant Gump’s did not have a right to charge tax on shipping and handling.

The suit sought relief including restitution of all monies wrongfully collected by defendants, an order enjoining defendants from imposing insurance on its order forms, compensatory damages, and attorneys’ fees. In November 2003, the Superior Court of the State of California and Country of San Francisco after a trial the previous April, ruled in favor of the plaintiff, requiring Hanover to refund insurance charges collected from consumers between Feb. 13, 1998, and Jan. 15, 2003, with interest. The court awarded plaintiff’s counsel approximately $445,000 of attorneys’ fees.

But Hanover Direct appealed the court’s decision, and this past September the California Court of Appeals reversed both the trial court’s findings on the merits and its award of attorneys’ fees and awarded Hanover its cost on the appeal.

Though Hanover successfully defended itself, it still had to suffer through the time and aggravation — not to mention legal fees — defending the charges.

Other marketers weren’t as fortunate as Hanover. A Florida furniture retailer, Turner Greenberg Associates (TGA), was brought into court for allegedly breaching Florida’s Deceptive and Unfair Practices Act. The plaintiff, Florida consumer Wayne Pathman, sought action because he interpreted the freight insurance to reflect actual shipping costs — not its costs plus a margin of profit.

TGA advised Pathman that the shipping charge for the table he bought from it would be $400-$500. When the table was ready to be delivered, TGA revised this figure, informing Pathman that the delivery charge was $985.80: $910.80 in “freight/insurance” charges and a $75.00 “residential charge.”

When Pathman asked for an explanation regarding the increase, he was told that the amount represented the cost to ship the table and that TGA was passing through the charge. The Florida Court of Appeals ruled in favor of the plaintiff and found that its freight insurance claim was misleading. The court ruled that damages be the difference between the marketer’s actual costs and the charge imposed.
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