Online Retailers: How much should you charge for shipping?

 In Industry News

Ecommerce shopping has permanently changed consumer buying habits. With that shift, huge competitors (like Amazon) have introduced faster delivery and free shipping in an attempt to create better customer experiences and grow their own market share.

Those conveniences have made it easier for buyers to stay home, purchase, and save — which of course is the goal. At the same time, online retailers not offering those perks are experiencing climbing rates of cart abandonment and lost sales by providing longer delivery times and charging shipping fees.

Should online retailers charge for shipping?

Like it or not, what to charge for shipping has become a contentious internal discussion for today’s ecommerce businesses, particularly for logistics and finance decision-makers. Many online sellers view shipping costs as a business expense that must be passed along to the buyer. The consumer, however, often sees paying for shipping as a customer-unfriendly requirement. One that’s often significant enough to be a deal-breaker when it comes to finalizing a purchase.

In many ways this is a simple matter of perception. There are obviously ALWAYS shipping costs to deliver an order. Justifiably or not, consumers want to think it’s the seller’s responsibility to eat that expense. From the retailer’s perspective, how and what to charge for shipping is therefore a complex and important strategic decision. Most e-tailers have countless competitors selling many of the same products and not charging shipping fees — at least overtly.

Does that mean all sellers must follow suit and drop their shipping fees to save the sale? Or, should retailers ignore the current trend and the perceived benefits the competition are offering, and still charge for shipping to help protect their margins?

Not a black and white decision

Due to many factors, the answer to that question isn’t an easy yes or no. It depends on several things, such as the types of products you sell and your customers.

Unfortunately, this is not the easy answer most sellers want to hear. But, given its importance it deserves a very close look. It begins with thinking about your specific markets and the demographics and psychographics of your customer profiles, as well as the demand for your product and necessary profit margin. What and how your competitors charge for shipping matters, too. It doesn’t mean you need to follow suit, because every company is unique, but there is a lot to be learned from observing other sellers’ approach to shipping.

Where to start

Here are some ideas. The quickest way to uncover what large ecommerce sites offer is to study the top 50 ecommerce companies as well as your main competitors. Research their online catalogs, offerings, and shopping carts. Make note of what they charge and the delivery service they offer for that price. Examine whether or not a consumer can type in a promo code or offer codeword to receive a discount on their purchase or free shipping at checkout.

The next step is to note whether other e-tailers are offering monthly ecommerce subscriptions or continuity programs. If they do, is free or reduced shipping fees one of the benefits provided? If it is, note which product categories are covered and which are not included.

Another in-depth step to consider is to order a product from each leader’s ecommerce website. Keep track of each order, from purchase to delivery. What was the buying experience like? Were you offered other items to purchase before checkout? How many days did it take for the product to arrive? Any delays? Any backorders?

Time for a test

The goal with any test should be to measure the specific impact on sales and other indicators, such as cart abandonment. Here are three scenarios you can use in which the observed change in those areas can be meaningful.

  • Offer a flat rate for shipping based on the average shipping cost paid for all orders.
  • Develop a process to calculate the actual shipping cost for each order and charge this amount.
  • Offer a version of Amazon’s “Prime” and charge a flat annual amount to provide free two-day shipping for all the customer’s orders.

Looking at what other online retailers are doing will help you come up with other ideas as well.

It’s clear that finding the right answer for your business will take work and some trial and error. Which is why it’s important to always keep in mind your goal: to maximize your profit margin by charging as much as possible to cover your expenses — shipping included.

As you start offering different shipping options for customers, patterns will emerge in the data. Dedicate a period of time, as much as necessary, to A/B test different costs and options and measure the impact on your sales.

What did the data reveal after the testing phase? What has changed in your specific market over the past 12 months that may have impacted results? What did the data uncover that will give the business a competitive advantage moving forward? Testing and understanding these types of questions is the only way to quantify the impact of shipping fees on your bottom line.

Now go do it

Based on the data gathered in steps 1 and 2, you now have a blueprint of where your ecommerce site needs to be and how much you should charge for shipping. When you find the right answer, you’ll be a step ahead of the competition because you can be sure few of them have put the same amount of thought into their own strategy for pricing shipping. It’ll become a key differentiator that your customers will appreciate.

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