Did you know that the main reason that people abandon their online shopping carts is because of unexpected shipping costs?
(Statista, 2019)
What you charge your customers for shipping can be a make-or-break element in the success of your online store. Although shipping should not be a profit-centre for you, shipping costs should also be carefully calculated to ensure that you are not making a loss.
In this article, uAfrica looks at the most common shipping strategies and weigh in on what we think is your best bet:
1. Free Shipping
Unless you are an Amazon of the world, offering free shipping is nearly impossible when considering your profit margins. There are some strategies you can put in place to still use “Free Shipping” to your advantage:
Free Shipping on all products: By building the shipping cost into the price of the product, you can offer “Free Shipping” on all of your products. It simply means that the prices of your products will be slightly higher. However, the price competitiveness of your products in comparison to that of your competitors is still something that must be considered.
Free Shipping over Rx: This is a very popular method of free shipping. It encourages the customer to purchase goods over a certain amount of money to qualify for free shipping. Not only does this push sales, but if your costing is right, then your profit margins should cover the shipping cost once you’ve reached x amount anyway.
How do you calculate if you can afford free shipping over a certain Rx? You need to calculate two important figures; firstly what your average cost to ship an order is and also what the average profit margin across all products is.
Let’s look at an example:
If my average cost to ship an order is R80.00; the average profit margin is 50% and I want to offer free shipping above R 500.00.
The calculation: R80 / R500 = 16%
This means that 16% of your profit is actually going towards paying your shipping fees. If your profit margin is 50%, then you will be left with a 34% profit margin (50% – 16%) to cover other operating expenses. Thus, you will have to make sure that an average margin of 34% is sufficient to cover your other business expenses and still leave you with enough to make a profit.
Free Shipping on Certain Items: Many sites offer free shipping on items that are indicated as such, encouraging the purchase of those specific items. The reason why you would encourage customers to buy that specific item is when you have a high profit margin on that product, allows you to not only make a reasonable profit, but also covers the cost of shipping the product to your customer.
2. Charge a Flat Rate for Shipping
One simple way of charging shipping is to calculate a flat rate across all of your products. Calculate the average cost of shipping for your products by measuring each product to get the standard shipping rate for a product that size. Add all of those costs together and divide the figure by the number of products you have to get a flat shipping rate. This way, no matter what is purchased, shipping always costs the same for your customer – regardless of what they purchase. It needs to be mentioned that sometimes you will make a loss on shipping and other times you will make a profit. However, if calculated correctly, the two should average each other out. Monitoring and amending your flat rate shipping fee is important when following this strategy.
3. Calculated Shipping
The method to calculated shipping is to measure and weigh each product to get an estimated cost of shipping for that product. When a customer adds that product to their shopping cart, that specifically calculated shipping cost is charged. However, this method does not take into consideration the location where you are shipping too and is not supported by all online sales channels. Also, for websites that sell multiple products, this method can become very complex and time-consuming.
4. Shipping Cost by Zone
In this method, the shipping cost is only calculated once a postal code (or shipping address) is specified – this is only available when using certain platforms. You, as the merchant, must determine the average cost for shipping according to postal code – ie. shipping locally within your city will cost you Rx.
Since many courier companies increase the shipping cost based on weight/ dimensions, it is important to also take these variables into account. Luckily, most online stores allow you to add the weight of your products, which means the total weight of a basket will be automatically calculated at check-out. The shipping cost will then be calculated based on the shipping postal code and the total weight of the basket. The benefit of this strategy is that you can align what you charge your customer to what you pay for shipping.
Let’s break it down using this table:
What does the table above mean? Let’s look at two examples:
- Customer A checks out a basket weighing 1kg and a shipping address that is classified as a local address. This means Customer A will pay R 40 for shipping.
- Customer B checks out a basket weighing 5kg and a shipping address that is classified as Main Center. Therefore, Customer B will pay R 70.00 for shipping.
Most courier companies’ rate cards are classified based on area (local, main centre and regional) and weight/dimension. Thus, by following the above strategy where you calculate shipping fees based on these variables, you can align what you charge your customers to what the courier company will charge you. uAfrica Shipping Zones, available for Shopify and bidorbuy merchants, is a tool that can be used to easily implement this strategy.
So what method is the best? Well, our opinion is that if your business model and profit margins can allow for free shipping, that should be the merchant’s first choice. It is the simplest pricing structure for customers to understand and can provide online merchants with a competitive advantage. However, with that being said, if you decide to offer free shipping and your profit margins do not allow it, it can cost you your business. Online merchants then need to consider which of the other strategies will suit their business best based on their products, margins and location of customers. Another tip is to constantly review your shipping strategy in order to determine how it as affecting your customer purchase behaviour and your bottom line.
