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The Business Owner’s Guide to a Profitable Shipping Strategy

Why do so many savvy business owners spend a fortune on shipping? Because they don’t rate shop. 

If you’re a business owner, you’ve likely spent plenty of time negotiating with suppliers and optimizing your operations to reduce labor costs. But when was the last time you took a hard look at your shipping costs? Do you proactively set a shipping strategy and rate shop, or do you simply dismiss outrageous shipping costs as a painful part of doing business?

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What Is A Shipping Strategy and How Do I Build One?

Simply put, a strategy tells you how you get from point A to point B. In this case, you’ll need to define your shipping goals before you can detail a shipping strategy. 

Here’s an example of a shipping goal most business owners can relate to: 

Reduce annual shipping costs by 20% without negatively impacting customer satisfaction, order accuracy, or delivery times.

Once you have a goal, it’s time to think about the barriers or customer objections standing in the way of accomplishing it. For our cost savings goal, there are a few challenges:

  • The complexity and variability of shipping rates
  • High expectations from customers about cheap shipping rates with fast delivery times
  • Competition from companies like Amazon who can afford to lose money on shipping

If a shipping strategy is the path that gets you from point A (expensive shipping) to point B (cost-effective shipping and happy customers), these challenges are the roadblocks that stand in your way. Addressing them will make your shipping strategy clearer.

For instance, here are a few approaches you could take to tackle these challenges.

Challenges

Potential Solutions

The complexity and variability of shipping rates

  • Gain visibility over your current shipping costs
  • Understand how carriers price shipping 

High expectations from customers about cheap shipping rates with fast delivery times

  • Explore alternative shipping routes/regional carriers
  • Use technology to access real-time information about shipping routes

Competition from companies like Amazon who can afford to lose money on shipping

  • Differentiate your business by focusing on your core product offering
  • Develop creative shipping pricing strategies

 

Let’s dive into these challenges and solutions in more detail. 

How Can I Gain Visibility Over My Shipping Costs Before I Begin Rate Shopping?

A big mistake business owners make is isolating the shipping rate strategy, or thinking about it in a vacuum. 

Your shipping costs are part of the answer to a larger question: How much does it take to get my products to my customers and how much money do I want to make in profit?

The primary purpose of a business is to make money. So, when you’re deciding how much money to spend, it’s important to consider how shipping rates impact your profitability.

When you understand exactly how shipping rates affect your bottom line - and your business’s survival - you start rate shopping and vendor negotiations from a position of strength. You know when to continue the conversation and when to walk away.

As an initial exercise, grab a piece of paper or open a spreadsheet and list the following information. 

If you only ship a few products, it’s worth conducting this exercise separately for each product. 

If you ship several products, group them into categories based on cost or shipping requirements like temperature control and then conduct this exercise in batches.

  • Production Cost: How much does it cost to produce your product?
  • Packaging: How much does it cost to package this product, including boxes and packing materials? Does this product have specific packaging requirements (e.g., fragile product, temperature-controlled products)?
  • Historical Shipping Costs: Use your transportation management system (TMS) to determine how much you’ve spent shipping this product over the last 12 months. If you don’t have this information stored in a shipping database, talk to your accounting department or your account manager at your shipping provider, if you have one.
  • Profit Margin: How much would you like to make after you’ve covered the cost of getting the product to the customer?

After you’ve conducted this exercise, you’ll understand two things:

  1. The factors that are impacting your costs
  2. How much profit you need to make this whole enterprise worth it

These are important things to know when you’re negotiating anything—whether it’s negotiating with your carriers or negotiating with yourself about how much of your shipping costs you’re willing to pass on to your customers. 

How Do Carriers Calculate Shipping Costs and What Do I Need to Know to Effectively Rate Shop?

You should be familiar with these variables to understand how shipping costs work:

  • Size of your package
  • Weight of your package
  • Dimensional weight 
  • Package origin
  • Package destination

What is Dimensional Weight?

Dimensional weight is the assumed “weight” of your product based on the volume of the package you ship it in. 

Historically, carriers charged based on weight. When the online marketplace started booming, they quickly realized that lightweight packages in large boxes were taking up just as much room in their trucks as a similarly sized heavy package. So, they introduced dimensional weight pricing. 

Today, most carriers calculate the actual weight of your package and your package’s dimensional weight, then use whichever is greater to determine cost.

What Are The Lesser-Known Shipping Rate Factors?

Shipping Zones

Shipping companies divide the country or world into zones. Shipping to a destination in the same zone is cheaper than shipping to a different zone. Similarly, a shipping route that must travel through several zones is cheaper than a shipping route that only has to travel through one zone.

Signature Fees

If you’re shipping high-value packages and need to collect a customer signature to confirm receipt, this adds to the cost. 

Handling Fees

Carriers can charge extra fees for non-transportation related activities like documentation processing or being temporarily held at an intermediate location. 

Address Correction Fees

This is a type of handling fee. If there’s an issue with an address and your carrier has to correct it, you could incur additional charges.

Once you understand all of these factors you can compare rates from different carriers to find the best price for yourself. You can rate shop manually, using technology, or by liaising with your carrier account manager, if you have one. 

Are Shipping Rates Negotiable And How Do I Gain The Upper Hand?

If you want to go a step beyond rate shopping, you can also consider trying to negotiate your shipping rates. 

And yes, shipping rates are generally negotiable. Here are a few tips for a productive negotiation:

  • Don’t Negotiate With Yourself: Understand what you need (after understanding your costs and desired profit margin) and don’t compromise past your comfort level. 
  • Set a Time Limit on the Negotiations: Don’t stretch out the process unnecessarily. Set a time limit and be prepared to walk away from negotiations if the deadline passes.
  • Review Your Shipping Data: If you ship a high volume of goods, point this out during negotiations so your carrier will be more inclined to work with you. They’ll know your shipping history inside and out and use it to their advantage. Arrive prepared.
  • Request Volume Discounts: If you ship a certain volume of goods every month, your account manager should offer volume discounts.
  • Point Out Your Zone Skipping History: If you frequently ship from the East Coast to the West Coast, you’re skipping through several zones, which is expensive, but it’s a high volume that’s shipped frequently. That’s a relatively straightforward and lucrative shipping gig for your carrier, so it may be an opportunity for a discount.

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Should I Absorb The Cost of Shipping or Pass It On To My Customers?

Let’s say you’ve compared rates for multiple carriers and negotiated with your main carrier. You may still face the question of what to do with your remaining shipping costs. Do you:

  1. Pass the entire cost on to your customers?
  2. Pass on a portion of the cost to your customers through a fixed shipping fee?
  3. Absorb the entire cost of shipping?

best-shipping-strategy-image-1

Passing on the entire shipping cost to your customers introduces a few challenges. For starters, shipping costs are rarely fixed. In addition to irritating your customers with shipping costs, they’ll be annoyed about unexpected fees after-the-fact. Moreover, companies like Amazon offer competitive shipping costs, so, unless your product is very differentiated, customers have alternative options.

Opting for a fixed fee (one that stays the same regardless of final shipping costs) is another approach. But it has its own challenges, specifically the shortfall if the final costs are significantly higher than the fixed fee. And, it may not make a difference to customers who want free shipping, period. 

Finally, you can absorb the entire cost of shipping, but unless you have a multi-billion dollar business line in cloud computing to subsidize your e-commerce business (we’re looking at you, Amazon Web Services), you probably can’t afford to do this. 

There are a few solutions to this thorny problem. 

  • Include shipping in the product price: You’ll need to determine a fixed shipping cost, meaning there’s still the possibility of taking a hit sometimes, but there’ll be a better customer perception since you give the illusion of free shipping.
  • Free shipping for large orders: Consider offering free shipping for purchases over a predetermined amount. You’ll need to do some analysis to figure out what minimum purchase amount makes this offer worth the cost.
  • Offer real-time shipping information: If you have the technical capability, you can offer real-time shipping information to your customers. They absorb the cost, but they also feel empowered to choose the shipping solution they want. 

What Resources Can I Use To Access Real-Time Shipping Rates?

Manually comparing shipping rates that are constantly in flux is not anyone’s idea of a good time. 

Plus, even if it is your idea of a good time, it’s impossible to do this efficiently on a day-to-day basis. 

A transportation management system (TMS) integrated with major carrier systems (USPS, UPS, FedEx, Purolator) is essential for businesses who pay for a lot of outbound shipments. A sophisticated TMS can help you with:

  • Instant Rate Shopping: With access to real-time information, you can quickly determine the best carrier to work with for your day’s shipments.
  • Optimal Routing: A TMS can help you find cheaper rates through lower-cost routes while still delivering your goods on time. For instance, your TMS can find a route that takes advantage of regional carriers, thereby offering you cheaper rates with similar service levels. 
  • Easily Accessible Information for Data Analysis: Refining your shipping strategy and negotiating rates with your carriers is more effective with easy access to usage data from your TMS.

What Are My Other Options?

You may be reading all of this and sighing in exasperation. You have a million things on your plate and you simply don’t have time to collect data, analyze it, define a shipping strategy, and then execute on it. But, you’re convinced a shipping strategy and rate shopping are important. So, what are your other options?

Ultimately, the answer depends on your budget. 

You could:

  • Implement a TMS and delegate the shipping strategy to a trusted employee: The TMS will eliminate much of the manual work involved in data collection.Your employee can use the tool to develop a strategy, find opportunities for cost savings, and report back to you. 
  • Hire a consultant: You could hire an external consultant, but this may take up just as much time in terms of liaising with the consultant and making information available. 
  • Work with a third-party logistics company: A 3PL specializes in this area and likely has pre-negotiated rates with major carriers due to the large volume of business it provides. This may be a good option for companies that want to reap cost savings, but don’t have the time or internal subject matter expertise to do what’s required. 

Shipping Costs Money, So Take The Time to Rate Shop

Shipping is part of the cost of doing business, so pay close attention to it! Consider the best and worst case scenarios of ignoring your shipping costs. At best, you lose profits. At worst, your business starts operating at a loss. Neither of these scenarios is ideal. Take the time to rate shop or invest in technology that makes rate shopping easier. With better rates, you’ll do both your customers and your profit margins a favor. 

Ready to upgrade your cost-saving strategy with an integrated WMS? Schedule a demo today to see how Logiwa can bring the cheapest shipping options to your business. 

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Ruthie Bowles

Written by Ruthie Bowles

Ruthie is a content marketing consultant for Logiwa. Her specialties include small business development and inventory management.