How are E-commerce Shipping Costs Calculated?
The rising cost of shipping is a problem for small and large businesses alike - especially as consumer expectations for fast shipping only continue to grow. But to create with a viable solution for high shipping costs, you need to understand what goes into the price on the shipping label.
The truth is that a lot of factors go into determining shipping costs - and some of them might surprise you.
So, how are shipping costs calculated, and how can brands use this information to their advantage to reduce shipping costs?
In this blog, we're going to cover what factors go into calculating shipping costs and share actionable strategies to help keep your shipping costs as reasonable as possible.
TL;DR
- Accurate shipping cost calculation helps identify areas for cost reduction and maximizes profit margins.
- Key factors in calculating shipping costs include dimensional weight, package weight, shipping zones, and shipping speed.
- It's also important to consider additional costs like peak season surcharges, accessorial charges, and duties/taxes can also impact shipping rates.
Why it's important to accurately calculate shipping costs
Identify what is pushing up your costs. Shipping rates may be expensive, but there are probably additional factors under your control that are resulting in unnecessary dollars being spent. For example, a lack effective cartonization will result in a higher DIM weight for a package, which means a higher cost to ship. By assessing these characteristics, you can identify where you can reduce shipping costs.
Maximizing profit margins. Regardless of whether you are paying for shipping or passing on the cost to your customer, shipping costs have a direct impact on your profitability. If your customer is paying for shipping, you need to know what your average shipping costs are in order to pass on a competitive fee that minimizes cart abandonment, or set up an accurate free shipping threshold.
Shipping costs fluctuate throughout the year. Shipping is never a 'set and forget' strategy, because shipping services are constantly being re-evaluated by carriers as operational costs rise. Between peak season surcharges and general rate increases, brands need to be consistently checking in to see if their current shipping strategy is aligned with average shipping costs.
What you need to determine shipping costs
A carrier's shipping calculator is a very handy tool to get an idea of what different shipping options or speeds are going to cost you. However, those estimates are only going to be as good as the data you give it. To get accurate estimates for shipping a package, you need to have the following information to hand:
Dimensional weight
DIM (dimensional) weight is a method used by carriers to calculate shipping prices based on cubic size, rather than the actual weight of the package. Most shipping companies including USPS, FedEx, and UPS now use dimensional weight for domestic and international shipments, unless the actual package weight is greater. This reflects how space is becoming a premium on delivery vehicles and packages are being billed accordingly.
Calculating shipping costs requires measuring package dimensions accurately. To calculate DIM weight, you need to determine the package's cubic size, divide it by the carrier's dimensional weight divisor, and round up to the nearest whole number.
Package weight
As we stated above, actual package weight comes into play to calculate shipping costs when actual weight of a parcel is higher than dimensional weight. The heavier a parcel is, the more it will cost to ship. Packages that are over a certain weight may have to be shipped using dedicated shipping services.
Number of shipping zones
Shipping zones are geographical regions that allow carriers to calculate the distance that packages need to travel from the origin to the shipping destination. This helps carriers to calculate shipping rates and delivery times effectively and more predictability. The more shipping zones that a parcel has to cross to get to its destination, the higher the average shipping costs will be.
Businesses can shorten shipping distances by operating multiple fulfillment centers. By allocating orders to the location that is closest to the end customer, packages will cross fewer shipping zones and cost less to ship.
Shipping speed
Speed always comes at a premium in shipping. Expedited shipping options will cost retailers considerably more, especially when combined with any of the above like a high DIM weight or multi-shipping zone deliveries. The faster you want a package to arrive (and for that rapid delivery date to be guaranteed) the higher that shipping rates will be.
For example, a brand's average shipping costs are going to be considerably higher if they are using an overnight service for their orders, as opposed to an economy or standard shipping method that takes 3-5 days to arrive.
Additional costs to be aware of
The areas outlined above form the foundation of how carriers calculate their base rates for both domestic and international shipping. However, these are not the only charges that brands should be aware of when trying to accurately calculate shipping costs.
In addition to the base shipping rate, shipping carriers will bring in additional fees at certain times of year or charge additional costs on packages that meet certain criteria. It's important to have an in-depth understanding of these fees so your business can estimate shipping costs and set the right budget for their needs:
Parcel handling related charges
Shipping and handling costs refer to the materials and time required to get parcels ready for shipment. This includes packaging materials, labor, storage, specialized equipment, and more. If you partner with a 3PL, these costs will take the form of line items that are charged as part of your overall fulfillment costs. If you are self-fulfilling customer orders these costs may be less visible, but nonetheless form a key aspect of your shipping costs.
Demand surcharges
Demand surcharges, also known as peak season, are additional fees that major shipping carriers impose on top of their regular shipping rates to account for higher operational expenses during peak demand periods like the holiday season. Typically, these surcharges are fixed amounts applied to each package. Demand surcharges should not be confused with a General Rate Increase, which recognizes a longer-term growth in operational costs within the shipping industry.
Residential delivery fees
Delivering parcels to residential addresses is much more costly and inefficient than commercial addresses, as every package requires a tailored delivery route and drop-off. Because of this, shipping carriers may levy a residential delivery surcharge on these packages during busy times of year like the holiday season, or in cases where a business has not selected a residential package service, for example FedEx Home Delivery.
Shipping insurance
For certain high-value items, it's worth considering adding on shipping insurance to protect against theft or damage in transit. This avoids the merchant having to foot the bill for replacement items or return shipping costs, which quickly eats into your profit margins. Some shipping rates come insure parcels up to a certain value, so it's important to understand when you might need additional insurance.
Accessorial charges
Accessorial charges are applied in scenarios where a parcel cannot be processed using a carrier's regular automated process. This includes oversized packages, extra equipment being required, or any form of manual handling during the sortation process. For example, if a polymailer got stuck in a sortation machine and needed to be removed by a worker, this would be considered as additional handling and would likely incur a charge. Unlike peak season surcharges which are billed upfront when the package is shipped, accessorial charges after the fact.
Duties and taxes
When shipping internationally, businesses need to decide how they are going to manage the duties and taxes that may be applied to shipments. There is a choice to be made between Delivery Duty Unpaid (DDU) and Delivered Duty Paid (DDP). DDU places the responsibility for taxes and customs fees on the buyer, with the seller handling only the shipment costs and documentation. In contrast, DDP means the seller covers all duties and taxes, as well as shipping the goods to the customer. DDU offers buyers more control but can result in surprise fees and delays, potentially leading to customer complaints.
Tips to reduce shipping costs
Check a shipping cost calculator
Shipping calculators allow you to quickly get a shipping cost comparison between different carriers. All major carriers including United States Postal Service, UPS, and FedEx have a shipping calculator available on their website. You can also invest in shipping software that can compare shipping rates in real-time using one interface. For example, Ryder E-commerce uses our in-house SmartRate selection tool to assess a customer's order history and determine the best shipping strategy for their needs.
Use flat rate shipping
Because flat fee shipping methods calculate rates on package size rather than the weight of the package, it offers a great way for businesses to standardize their shipping costs and save money on longer delivery distances. Flat rate shipping is also commonly exempt from peak season surcharges, as well as including packaging within the shipping rate. Major carriers including USPS, FedEx, and UPS all offer their own versions of flat-rate shipping. But while flat-rate offers predictable costs and is well-suited for free shipping promotions, it may not suit businesses who are doing a lot of short-haul deliveries or those seeking creative branding opportunities.
Use a free shipping threshold
Implementing a free shipping threshold for online orders allows e-commerce businesses to offer free shipping without sacrificing profitability to low-value orders. Calculating the optimal free shipping threshold requires analyzing your average order value and shipping fees to find the right balance between enticing customers and protecting your profit margins. However, setting the right threshold is crucial, as too low or too high thresholds can impact average order values and cart abandonment rates. It's also essential to account for bulky or heavy items in your calculation, and decide whether or not to exempt these from your threshold.
Shipping consolidation
Online shoppers frequently encounter split shipments in e-commerce, where a single order is divided into multiple deliveries. While this may seem advantageous in getting certain items to the customer faster, it results in much higher shipping fees, not to mention higher shipping related charges like packaging and order fulfillment. Split shipments occur for several reasons, including poor inventory management and cartonization strategies. Instead, allow customers to opt for order consolidation options to save money and be more sustainable.
Use multiple shipping speeds
It may come as a surprise, but not every customer is going to want rapid shipping - especially if this results in additional costs to their order. According to Shippo’s 2023 State of Shipping Report 75% of consumers who were given the choice between a free and fast shipping offer would choose free shipping. Brand can keep their shipping costs low by offering free shipping options on slower shipping speeds, while offering faster shipping rates at an additional cost. This enables your brand to offer consumers more flexibility via a full spectrum of shipping services, without breaking the bank.
You can learn more about e-commerce shipping trends in our 2023 E-commerce Consumer Study.
Consider a third-party logistics (3PL) provider
Determining shipping costs and implementing changes to your shipping strategy is an ongoing responsibility that takes precious time away from other areas of your business. Partnering with a 3PL for e-commerce fulfillment not only takes this responsibility off your plate, but qualifies you for discounted shipping rates due to partner's high shipping volume. This is one of the most effective ways to reduce overall shipping costs while also getting access to advanced parcel expertise.
