Setting S&H fees

Aug 01, 2007 9:30 PM  By

When it comes to shipping and handling fees, one thing is clear: Consumers expect to pay a fair price for the delivery of their purchases. But they don’t want to do any work.

They will no longer slave over a calculator and weight distance table to determine shipping fees and write a check for the amount. Instead, they expect simple shipping grids in catalogs, automatically calculated rates refreshed as merchandise is added to online shopping carts, and rock-bottom handling fees — or they’re going to a competitor.

So how do you set S&H fees?

Mailers used to base them on weight, and some still do. For example, Carson’s Wrapped Hershey’s Chocolates takes the heft of its candies into account. But most firms have shifted to value-based rates.

This makes it “easier for the customer to calculate the rates — and to know what they’re paying before they’ve committed to ordering,” explains Jim Harkins, principal at catalog consulting firm JJH Direct Marketing.

To determine the overall S&H S&S&Hrequireme revenue they want or need, most mailers now look at their direct and indirect order processing costs (call center, distribution center labor, and materials) and actual shipping expense. Then the creativity begins when they set the minimum and maximum charges, the number of breaks in the S&H table, and what those breaks will be, Harkins says.

If you sell direct, be direct

Guild.com, a marketer of home decor items, finds that being upfront about shipping charges is the only way to keep customers happy. Guild.com sells artwork made by 700 artists across the U.S. and Canada; its vendors drop-ship the finished pieces directly to customers.

“Our shipping charges are set and displayed at the item basis, so the buyers know when they order exactly how much the item will cost to ship; it isn’t a surprise at the end,” says Michael Baum, Guild.com’s president. “If a consumer orders three items in a single order, it’s very likely they’ll be made by three different artists and therefore come from three different locations. We can’t save shipping by packing them together, so it’s very important for us to try to get our individual shipping charges right.”

Carson’s Wrapped Hershey’s makes it a point to explain why it charges different amounts when shipping to California vs. Indiana, says Scott Frederick, president of sales and business operations. The company includes a chart with recommended shipping options based on the time of year, destination, and speed of delivery. It also explains on its order page why the company recommends those shipping choices.

The cataloger’s product line will melt in warm weather when in transit for more than 48 hours, even though it’s packaged in an insulated cooler with a frozen gel pack at its Fairfield, OH, distribution center. So Carson’s encourages customers in locations outside its two-day delivery zone to select expedited delivery. “Certainly the cost for air mail is significantly more than ground,” but it’s a matter of communication, Frederick says, adding that for a $100 order, two-day air delivery can be $25. “If they understand the reason, we find it’s not an issue.”

Matthew Schaefer, a partner at law firm Brann and Isaacson, says descriptions of S&H charges should be consistent in each location in which they’re listed, including the terms used such as “shipping and handling” vs. “our shipping charge.” Shorthand descriptions “tend to give fuel to the fire for those who want to portray a direct marketer’s delivery charge as being either unfair or deceptive,” Schaefer says, adding that the bigger risk is from private class-action lawsuits rather than public officials.

For example, in 2002 continuity music club marketer Columbia House was hit with a class-action lawsuit accusing it of charging its members an “excessive” amount of shipping and handling charges. Columbia House ultimately substituted the phrase “shipping and processing” for “shipping and handling,” because “processing” presumably encompasses more than its actual out-of-pocket costs directly related to packing and shipping the transaction. The settlement, which also included a $5 million attorneys’ fee award for the plaintiffs’ counsel, likely raised the profile of the issue with direct marketers, says Schaefer.

Similarly, in 2002 a lawsuit was filed against Web marketer Buy.com alleging that its flat-rate “shipping fees” of $1.95 for DVDs, CDs, and cassettes, and $3.95 for videos, games, and books were inflated and exceeded its actual costs. After a fair amount of press coverage, says Schaefer, the case was settled in 2003 when each customer received a 10% discount and free shipping on his or her next order of entertainment products, up to $100.

How transparent should you be about your S&H charges? Schaefer advises his direct marketer clients to ensure that their disclosures are in line with the costs they seek to recover through their delivery charges.

“Even though there has not been a high profile settlement or judgment for a year or so, recent court cases have tended to validate the plaintiffs’ theory of liability (that consumers view delivery charges as a pass through of actual costs, and anything more is excessive/deceptive), absent strong disclosures,” he says. “Consequently, conspicuous and accurate disclosures by a direct marketer to its customers regarding the nature of its delivery charges are ever more important.”

Know and document your costs

This may seem simple, but direct marketers need to know what their actual order processing costs are and document them. Harkins says not doing so could have serious implications in a class-action suit against the company.

Schaefer agrees. Many direct marketers don’t have a good handle on the relationship between the shipping charges they impose and the costs related to delivering products to the customer, such as carrier charges, picking and packing labor, and packaging materials. “It’s a good idea to have an understanding of your cost structure and how that relates to your charge and your description of your charge,” he says. And although direct merchants are not legally required to keep records of how much S&H costs them, it can benefit them in the event of a lawsuit. “If disclosures are full, it’s harder to represent and make the case that you have deceived or unfairly imposed a charge that they were going to pay,” says Schaefer.

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