Sunday, March 30, 2008

Understanding Shipping and Handling Cost for Online Sellers.

One of the things that I have wanted to blog about for a long time now is shipping cost for online sellers and to provide a list of line items to consider when calculating total cost of shipping.

eBay and some other online selling sites simplify shipping cost to the detriment of sellers. And to the profit of their businesses, because they charge their fees based on the price that you sell items at and not the charges that you recover for your shipping and handling operations.

Their calculators for the most part only cover postage. And this is what they expect you to charge for shipping and handling. You actually have to be careful because some online shipping calculators (eBay, PayPal) charge you to print postage. This extra fee goes to the provider of this service and at the same time add extra cost to your total shipping cost.

I. What really goes into shipping cost.

A. Actual cost of postage. This is the fee that you are charged by the shipping handler. ie USPS, UPS, FedEx or what ever shipper that you use to ship the items that you sell. Many would have you believe that this is the only cost that you should consider when thinking about shipping cost.

In this line item there could be items like postage cost, which is the cost of stamps (if you use them), printing cost (if you print your postage).

One of the things that no one at the post office or at eBay will tell you is that there is a big cost difference in sending a package first class mail and sending it priority mail.

eBay and the post office have it in their interest for you to ship all your items using priority mail. While many sellers would save more money from using first class mail. And this is just the postage line item where you can save money.

I know some of you are thinking but they give me free shipping materials. And it is true that if you use priority mail you don't need to buy shipping material. But trust me when I say that for some buying shipping materials at WalMart and paying first class postage will be cheaper for both you and your customers.

The difference in sending an item first class mail and priority mail is realy beyound the scope of this post and will have to wait until another post, but let me give a couple of thumb rules that we use.

(1) For low profit margin items first class mail is the way to go. Even if the item gets lost in the mail, you can just send another one. You will keep more of the money paid for the item as opposed to paying it to the post office.

(2) For high profit margin items, where there is a chance that the item could get lost in the mail priority mail (with tracking) is a better option.

Postage line items;
-- stamps (stamps are cheap because the post office prints them).
-- printing postage cost (take a close look at your printing cost, it includes paper, printer ink/toner, maintance on your printer).

B. Transportation cost. This is the money you spend getting items to the shipper. It is the cost of gas, and the maintenance cost of your vehicle. Or fees that you are charged to transport your items to the shipper.

It really frustrates me when I see eBay and others trying to dictate to sellers what they should charge for shipping when it is clear that every seller may have a different transportation cost for example, if I only sell ten items a day, I can just use my family car but if I sell hundreds of items a day, I may need to use a truck.

Transportation cost line items;
-- Gasoline cost
-- maintenance cost on vehicle

C. Cost of packaging materials. Here is another area that eBay penalizes sellers. They seem to want sellers to not be able to recover these cost. Please see the discussion above in postage cost for priority mail packaging material.

packaging materials line items;
-- cost of boxes, envelops, wrapping paper, paper for letters, etc
-- labels, pens, ink/toner
-- mailers, bubble wrap

D. Cost of labor of processing shipments. eBay has the attitude that people who sell on eBay do it for the love of eBay and not to make money for themselves or their employees.

At the height of our business we were shipping thousands of items a month from several different eBay stores to various countries all over the world. It was not possible to do this without help, but eBay does not seem to want us to make enough money to cover this cost.

It is a lot of work educating buyers about this particular cost. When we explained to buyers that (1) we were a business with employees, and (2) we wanted to pay them a living wage, and that was a part of our shipping and handling fee most of them did not have a problem with it.

We also compared our selves to major retailers and found that we often beat them on both price and shipping cost. eBay would never tell its buyers to go and compare shipping and handling cost with WalMart for example. But this is exactly the kind of comparison that buyers should be making.

Now eBay seems to be trying to punish sellers, via their new detailed seller ratings system, who charge extra to cover their labor cost. Which are clearly part of shipping and handling cost.

Labor cost line items;
- cost of processing returns
- cost of opening the mail
- cost of doing paperwork associated with shipping items. (ie tracking forms, customs forms)

II. Conclusions:

Every business is different. Even though eBay tries to make it look like every seller should charge only the postage cost for their shipping and handling cost this is a very inaccurate, and possibly harmful to your business, way of looking at your shipping and handling cost. Some times I think eBay only wants hobby sellers and not true businesses to sell on eBay.

Consider the seller who sells items that can be placed in envelopes and each item weighs several ounces, this situation is totally different from another seller selling items that weigh several pounds and must be placed in a box. Even the number of items changes the shipping and handling cost that must be charged per item, consider selling one one item versus someone who sells thousands of items.

Make sure you understand your total shipping and handling cost.
Do not over charge for shipping and handling but do not undercharge either.
Be carful when competing on shipping cost, because you do not know your competitors advantage or disadvantage when it comes to shipping.

And finally the point that I am trying to make is that shipping and handling cost is a complicated part of your business. It is a part where you can make some money but lose a lot if you do not pay attention to the details.


ShippingCoach said...

My research has shown that 6 out of 10 online sellers overpay for shipping. Most don't choose the most economical service. Others don't weigh their packages with an accurate digital scale. I am trying to help shippers save by providing advice and tips on my blog,

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