Operations and Management: S&H Charges Under Scrutiny

More than one-third (35%) of respondents to the 2003 Catalog Age Benchmark Report on Operations (April 1, 2003, issue) said that they set their shipping and handling charges to more than cover their costs. In a free enterprise economy that relies on merchandise markups, marking up S&H costs may seem reasonable enough. But recent lawsuits against marketers have put the practice under scrutiny.

Last year, for instance, a class-action lawsuit accused continuity music club marketer Columbia House of charging its members an “excessive” amount of shipping and handling charges. Columbia House agreed to pay $5 million in legal fees. It also substituted the phrase “shipping and processing” for “shipping and handling,” because “processing” presumably encompasses more than merely Columbia House’s actual out-of-pocket costs directly related to packing and shipping the transaction.

“Words like ‘shipping and handling’ don’t adequately describe the total costs to the customer in some direct businesses,” says Curt Barry, president of Richmond, VA-based operations consultancy F. Curtis Barry & Co.

Because of consumers’ growing awareness of S&H costs — encouraged in part by the rise in free-shipping promotions during the past 18 months — “now is the time for catalogers to conduct audits of their shipping and handling practices, as well as of how they are disclosing the charges to customers,” says attorney George Isaacson, of Lewiston, ME-based law firm Brann & Isaacson. “The theory behind the charge should be cost recovery,” says Isaacson, who aided the Direct Marketing Association last June in establishing a code of conduct regarding shipping and handling practices.

According to the DMA guidelines, which were released in June at the Annual Catalog Conference, catalogers should not charge consumers as a whole more than they pay in total. There should be a reasonable relationship between what you charge your customer and what it costs to send out the package, Isaacson says.

“If you say that you’re going to charge X dollars for handling,” says Doug Wood, a partner at New York-based law firm Hall Dickler, “the net impression to a consumer is that there is some relationship between the charge and the actual out-of-pocket costs that you would incur in terms of S&H. For example, if the handling costs you $5, you can’t charge the consumer $50. That would leave the wrong net impression to the consumer.”

But given the variables in shipping costs, establishing consistently appropriate charges is anything but simple. Then there’s the matter of “handling” and what that entails: Is it just the direct carrier, packaging, and labor costs? Or does it also include distribution center overhead, returns processing expenses, and even inventory carrying costs? (See “Direct, Indirect, and In Between,” left.)

Putting theory into practice

To avoid dealing with customer interpretations of “handling,” Madison, VA-based “country living” products cataloger Plow & Hearth refers to its charges as “shipping,” rather than “shipping and handling.”

“Our goal is to match shipping expense to shipping income,” says senior vice president of marketing Pete Rice. “The variable labor costs are built into our mailing decisions, so we’re covered by the merchandise revenue, not revenue from shipping and handling.”

If you prefer S&H charges cover more of your back-end expenses, you need to know what those costs are. If you don’t have this information in your profit-and-loss statement, you can calculate by conducting a fulfillment-costs study to break down direct and indirect expenses. Determining the costs of all factors that make up your definition of shipping and handling will also enable you to provide the information to customers should they query you.

Not that you should necessarily wait for buyers to ask. Barry suggests that you clearly communicate on your Website, within your catalog copy, and on your order form the costs covered by your S&H charges. You can break out the expenses by direct costs (common carrier charges, packing materials) and indirect costs (including general and administrative expenses and inventory carrying costs). Keep in mind that the more indirect your charge, the less likely consumers are to understand why you are charging them for it.

Direct, Indirect, and In Between

When establishing shipping and handling charges, you should first define what costs you’re expecting to cover with the charges. In its S&H guidelines, issued in June, the Direct Marketing Association broke out three categories of fulfillment costs: direct, semidirect, and indirect. If you decide that you want your S&H charges to reflect your nondirect expenses, keep in mind that the more indirect your charge, the less likely consumers are to understand why you are charging them for it.

DIRECT COSTS

  • Common carrier costs
  • Land delivery costs
  • Express delivery Costs
  • Extra-heavy package costs
  • Other special handling
  • Packaging materials
  • Direct labor costs

SEMIDIRECT COSTS

  • Warehousing insurance for assured delivery, loss, and damage
  • Returns processing
  • Inbound call center costs
  • Depreciation of distribution center equipment
  • Distribution center rent
  • Costs for outsourcing fulfillment
  • Overhead costs, conservatively allocated

INDIRECT COSTS

  • General and administrative expenses
  • Inventory carrying costs
  • Item replacement sosts
  • Overhead costs, aggressively allocated

Lead, Don’t Follow

More than a few catalogers interviewed about shipping and handling charges said that they determine their S&H fees by monitoring what the competition charges. For example, Franz W. Weiglein, president of New York-based Bloomingdale’s Direct, says, “On a quarterly basis we compare our charges against a 20-company peer group for both apparel and home.”

But relying too heavily on what your competitors are charging can be dangerous. Another cataloger’s S&H charges — even if it is a direct competitor — may not accurately represent your costs to get that product to your customer. And if you do get hauled in to court to justify your S&H charges, the defense “Well, that’s what Catalog X is charging” likely won’t hold up.

Should you get summoned into court, be prepared for a long, drawn-out process that could last two years, if not longer, says Curt Barry, president of Richmond, VA-based operations consultancy F. Curtis Barry & Co. What’s more, once in court, you’ll be required to give up years’ worth of company financials and customer ordering histories. “So be proactive” about analyzing your costs and communicating them to customers, Barry advises.
MDF

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