Where are You Losing on Shipping and Handling?

The title of this blog may sound naïve, considering the high cost of shipping and handling (S&H) in direct-to-customer businesses and the time companies spend discussing it. But let me give you two examples that illustrate there might be additional homework you need to do before changing S&H policies.

Last week at a conference a catalog and ecommerce business owner asked me, “Should I be willing to ship small-dollar orders even though I lose money on the shipping costs?” For context, he 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 the next.

I can understand his concern but it isn’t that simple. I asked him how many times this happens, and the impact it would have on customer purchases and lifetime value. I also asked if it creates the best possible experience for enthusiasts who often spend thousands of dollars. Answering these and other marketing questions is crucial.

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

  • Total shipping costs 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 average order value (AOV). More expensive products were many times higher than the threshold. In this case it did not yield significant increases in AOV.
  • A high percentage of orders were single items and hit by dimensional weight pricing. A shipping charge based on merchandise value doesn’t adequately price shipping costs. It is also difficult to know what heavy and oversized products actually cost to ship because of the addition of unknown increases from accessorial charges.
  • 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 company better understood where it was losing money, and can now make a much more informed decision about what to do. Its strategic plan is to grow at a high double-digit rate annually over the next three years. Management decided not to make any major changes to S&H policies that could potentially slow down growth. It sees the loss on S&H as a cost of new customer acquisition.

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

Consumer businesses are almost always losing money on shipping. It may be as low as 2% to 5% or more as a percentage of net sales after offsetting S&H revenue with shipping expenses.

Business-to-business entities fare much better as they generally send more cost-effective bulk orders – many make a positive offset or profit of 2% to 3%. But as marketplaces push into B2B 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 customers would respond from a marketing analytics perspective?
  • Are you doing any A/B testing to determine the best marketing approach, or are you simply offering free shipping?
  • Do your customers change purchase behavior when offered free shipping?
  • Does the response rate fall when you don’t offer it? 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? Is it partially as a marketing expense, or totally as a fulfillment expense?

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

While none of these are easy issues to understand and solve, they are key to helping you combat Amazon and grow your business profitably.

Curt Barry is Founder & President of F. Curtis Barry & Company

One response to “Where are You Losing on Shipping and Handling?

  1. Hi Curt –

    Great article. You nicely illustrate two real-world examples and put forth useful questions that merchants should be asking themselves relative to free shipping.

    I did want to comment on this particular finding from the S&H study you referenced….

    “The “free shipping” threshold was set 15% below the $175 average order value (AOV). More expensive products were many times higher than the threshold. In this case it did not yield significant increases in AOV.”

    I’m curious how you were able to conclude that the free shipping threshold, which it sounds like was roughly $150, did not yield significant increases in the average order value?

    The reason I ask is that, if a free shipping threshold is effective, I would expect that the AOV would be higher than that threshold. If the AOV remains below that threshold, then it’s likely not working as intended and may be too high. And, if it is effective and is causing the AOV to go above that threshold, it seems like it could be detrimental to keep raising that threshold in the hopes of continually increasing the AOV. After all, as a buyer, if I’m spending $150, I would expect free shipping in most cases.

    Therefore, it seems like the only way to conclude that the free shipping threshold was not effective is by comparing the analytics to historical thresholds and AOVs. For example, if the free shipping threshold was previously set to $100 and the AOV corresponding with that threshold was also at $175, then you could draw the conclusion that increasing that threshold was not effective. However, if the historical threshold was $100 and, during that time, the AOV was $125, then the current threshold of $150 would seem to be effective.

    I understand your point that a free shipping threshold is intended to increase AOV, but I’m just curious as to how you drew the conclusion that the threshold isn’t what caused the $175 AOV, and also at what point do you leave that threshold alone knowing that consumers may have a low tolerance for paying for shipping with expensive orders.

    Steve Bulger

Leave a Reply

Your email address will not be published. Required fields are marked *