Setting S&H fees

The practice of keeping a record varies widely, with about as many marketers that don't recoup costs through S&H as those that arguably recoup more. A fairly small group — 10% to 11%, says Schaefer — use the charges as a profit center. “This is the most dangerous practice from the point of view of the risk of a class-action suit,” he says.

Mark Lee, president of catalog consultancy The Mark Lee Group, believes that many would-be customers are turned off by shipping charges they think are out of synch with actual charges.

“Consumers think that shipping is higher than it should be because they know when they go down to the post office that they're going to be paying less” than what they're paying in the catalog, he says.

Guild.com's Baum is making sure his customers don't feel that way. “We're looking at all of our charges to make sure they are in line with our cost experience for various items, considering their weight, size, insurance cost, and location of the artist.”

He doesn't believe it's a hindrance for customers to see differing shipping charges between various products because for Guild.com it makes more intuitive sense than charging according to the total amount of the sale. “It's a lot of work to do, which is why most merchants go with the simple route of just charging by price,” Baum says.

Harkins cautions marketers against viewing S&H charges as elastic and a place to make up other costs. “This is dangerous — both legally and from the standpoint of the customer relationship,” he says.

Bann and Isaacson's Schaefer says that while there isn't a law that mandates that marketers can charge only so much for S&H, or that it can't be more than they're being charged by the mailer, it's understood that the fees are a pass-through charge and are representative of the actual cost of shipping. “It's a product of the idea being that you've made a representation that you're only charging for shipping,” he says, adding that handling or processing fees in addition to shipping can give marketers greater leeway in their fee structure. Even then, he says, merchants should disclose in greater detail what their handling or processing charge covers.

Setting S&H fees based on competitors can also get you in legal hot water, says Harkins. “The DMA advises its members to be careful to document their order processing costs versus their shipping and handling revenues, and offers guidance on what costs are appropriate to base shipping charges on, and what costs are riskier to include,” he says.

The DMA names common carrier, packaging, direct labor, and other special handing costs as appropriate to include in shipping charges. Among costs that are semi-indirectly associated are warehouse, rent, returns processing, and inbound call center costs for processing returns. Indirect — and risky, according to the DMA — costs include general and administrative expenses, inventory carrying and item replacement costs, and aggressive fixed overhead allocation.

Baum agrees that shipping charges are an area of sensitivity to some buyers, as parcel delivery charges have gone up due to fuel prices. “Merchants have to recoup their shipping costs one way or another, of course, but they have to be sensitive to not appear to be overcharging or to let the charge get so high that it's worth the consumer's while to get in the car and buy from a conventional retailer instead,” Baum says.

In theory, you can drive average orders up or down by making small changes to your shipping table, such as dissuading lower orders by increasing the lowest bracket in the table, says Lee. “If you want them to think of you for all purchases in the category, then having a high hurdle rate to buying may force them to buy from one of your competitors,” he says.

For example, if a prospect is shopping for guitar strings and is presented with an S&H charge of $10 on a $9 pair of strings, many consumers will break the buying cycle and go to a store to make the purchase.

You should also be aware of the order distribution based on your current S&H charges when planning changes. Making minor changes to your most popular pricing bracket can also raise revenue more than making larger changes to your overall pricing structure. A small pricing increase in that bracket can add up to a sizable revenue boost when multiplied by many purchases, says Lee.

On the flip side, take note of popular items that fall just below the top of an S&H bracket because customers may be reluctant to add a small companion piece or accessory to their order for fear of bumping the order into the next higher bucket, says Lee.

Merchants should look closely at the maximum charge and how much additional revenue it brings in vs. its dissuasive power to turn a customer off, Harkins adds.

“I did some work for a cataloger a few years ago that had recently revised its shipping and handling table, adding two extra breaks in the table that made the rate table bigger and more obvious on the order form, and showed a higher maximum than before,” he says. “Business softened after the new rates were implemented. The additional breaks brought in very little revenue, but had a negative impact on business.”

Competing with the low S&H fees of an online-only retailer can be difficult for traditional mailers who find that an Internet marketer is their biggest rival, says Lee.

The online merchant's business formula, which doesn't include the cost of producing or mailing printed books, can help them keep the edge on low S&H fees, but Lee says traditional mailers can compete just as well with Internet merchants on S&H by offering free shipping through online promotional codes.

You may be tempted to boost your S&H fees right now, given that the cost of producing and distributing your catalog has gone up. Don't, Harkins says, unless your S&H rate hike is based on actual processing cost increases, not simply because prices went up.

Lee recommends that mailers adjust S&H charges to maintain the existing balance of “revenue” and cost as a percent of sales by pulling a sizable recent or same-season sample of orders. You have to take into account the actual distribution of order values, and assume, via a generous leap of faith, he says, that a moderate increase in your table won't lower response rates.

From there, play with the table's charges and ranges, running a simulation for each scenario. “What you're doing is trying to find the combination that looks most palatable, while still meeting your revenue goals,” Lee says. “If you count other catalogers among your competitors, it's good to keep tabs on where they are, always mindful that what you're seeing may lag behind what they are planning by several months.”

Carson's Frederick says that despite an increase in packaging and mail costs, he has been able to hold S&H charges steady for customers because of an increase in mail volume and its proximity to a UPS center. By having more volume passing through UPS, Carson's is able to negotiate with the carrier for deeper incentives for air shipping, while packaging costs have at the same time increased, offsetting a possible hike in S&H charges passed along to customers.

“We're aware of how shipping cost affects our customers' behavior, and constantly try to find ways to make it more palatable for them,” Frederick says.

	LAYING IT OUT ON THE TABLE

Catalog and Web customers are sensitive enough about shipping and handling charges: The last thing you want to do is confuse or frustrate them with a complicated S&H table. These three tips can help you simplify your S&H chart.

1. Have as few breaks as possible

   Jim Harkins, principal at JJH Direct Marketing, explains that when S&H tables include fewer breaks they take up less space on the order form and ultimately draw less scrutiny. Moreover, try not to add brackets when reviewing the table.

2. Show the table near the “total” section of the order form in your catalog

   Customers can then easily reference S&H charges when placing the order. Likewise, on your Website make sure customers know what shipping charges will be prior to committing to placing the order, says Harkins.

3. Print the S&H table in a readable typeface with clear, to-the-penny brackets

   But be careful to treat your shipping charges table like any other price listed in your catalog or Website, says Mark Lee, president of catalog consultancy The Mark Lee Group. “It should be consistent with your brand.” For instance, numbers such as $8.88 would look out of place in an upscale catalog such as home decor and gifts mailer Frontgate, he says. More important, if your shipping costs end in $0.99, customers may think that the prices don't reflect actual charges. — HR