How to calculate shipping costs for your e-commerce business

Everyone loves free shipping—but if you’re an e-commerce retailer, you know that in reality, there’s no such thing. There is a cost associated with shipping, and it’s often higher than your customers may think. Shipping “sticker shock” is a major factor in shopping cart abandonment, so it’s important to calculate costs carefully and choose a shipping strategy that will cover your expenses, without scaring away customers.

In this blog, we’ll compare five common strategies for calculating shipping, share the best free shipping calculators for e-commerce, and provide a framework to help you decide which shipping model works best for your business.

1. Free Shipping

If you’re an online shopper yourself (and who isn’t?), you already know the allure of free shipping. Nothing could be more straightforward than paying for the price of the item you’re buying, and not a penny more. Of course, while this shipping strategy looks simple, it’s actually more complicated than it appears. Merchants who offer free shipping typically build the cost of shipping into the cost of the items they are selling. Customers are paying for shipping—they just don’t see the cost broken out separately.

Most retailers who use this strategy establish a minimum purchase amount to qualify for free shipping, such as “orders of $50 or more.” This approach has two benefits: (1) It allows you to spread the shipping cost over several items, and (2) It drives up the purchase price of your average order. Many a customer has piled more items into their cart, whether they wanted them or not, in order to reach the price threshold required for free shipping. After all, would you rather pay $9 for shipping on a $40 order, or buy $10 worth of extra products, and get shipping for free?

One of the biggest benefits of free shipping is that there are no surprises for customers when they reach the checkout, which may mean more completed purchases and less cart abandonment.

Of course, free shipping has its drawbacks, too. If you include free shipping on every product you sell, regardless of minimum price, you may struggle to compete with other online retailers who don’t include shipping in their totals. This is especially true of low-cost items, such as pens or notepads, for which the shipping cost may be equal to or greater than the cost of the item.

If you only offer free shipping for orders that meet a certain price threshold, you may find that you’re still eating some of the shipping costs, in order to keep your prices competitive. Further, because shipping costs vary depending on where your item is being shipped, you’ll need to give careful thought to what that minimum might be, to ensure you are not losing money on shipments to rural or otherwise hard-to-reach destinations.

Also, minimum orders mean “free shipping” will only be one component of your shipping strategy. You will also need to determine how to calculate shipping costs for customers with smaller cart totals. Read on for a few more ideas.

2. Real-Time Shipping Calculators

Just as Free Shipping is the simplest option for customers, Real-Time Shipping may be the easiest option for vendors. With Real-Time Shipping, you pass the cost of shipping on to customers directly, and take all the guesswork out of estimating shipping costs. You can get real-time shipping quotes from carriers like FedEx, UPS and USPS, with calculators that can be integrated right into your site. Most e-commerce platforms charge a fee to integrate real-time shipping, but it may be worth it to eliminate the headache of calculating shipping yourself based on cost, weight, and destination.

Here are links to some of the best shipping calculators for e-commerce:

• USPS - Shipping Calculator

• Canada Post - Shipping Calculator

• UK Royal Mail - Shipping Calculator

• Australia Post - Shipping Calculator

• UPS - Shipping Calculator

• FedEx - Shipping Calculator

While real-time shipping rates are transparent and easy to use for both merchants and customers, they aren’t a perfect solution. Even though your customer may love the product you’re selling and accept your price, there is a chance you could lose them at the checkout when they calculate shipping costs. Looking at that final price may cause a customer to pause, leave your website, and start shopping around for competitors with lower shipping costs or free shipping. Real-time shipping can still be a very good choice, however, especially if you would like to give your customer multiple shipping options, such as ground, 2-day and overnight shipping.

3. Weight-Based Shipping

One way to avoid losing customers when they see shipping totals, is to show shipping prices upfront. Weight-based shipping allows you to calculate shipping prices ahead of time, and include those rates on each product page. To set rates for weight-based shipping, you will need to choose a shipping carrier, such as FedEx or UPS, and determine the average cost to ship each item you stock based on the size and weight of the item, including packaging. You can visit the carrier’s website and use their online calculators to determine the shipping rates for each item you sell based on weight and dimensions. Enter a wide range of zip codes to get an idea of the range shipping costs across the areas to which you ship, and determine an average price to ship each product.

Now, your customers won’t be surprised when they see their cart totals at checkout. However, seeing shipping costs upfront may also mean fewer items make it to the cart in the first place.

4. Price-Based Shipping

Similar to weight-based shipping, price-based shipping lets your customers see shipping costs upfront. However, instead of calculating costs per item, based on weight, this method lets you calculate shipping costs based on order totals. To use this method, you’ll need to determine average shipping costs based on total order costs, for a wide range of price points. Start by determining the actual costs to ship your most popular low-priced items. Then, do the same for your best-selling higher-priced items. Taking into consideration the fact that some low-priced items may weigh more than others (or be bulkier), determine an average shipping price for each price point. Then, set up your website to automatically calculate and adjust shipping totals based on price, as customers add items to their cart.

Price-based shipping may increase acceptance of shipping costs for lower-priced items, because customers may be more willing to accept shipping costs as a small percentage of the total item cost. However, because the cost to ship low-priced items is, in reality, often equal to or greater than the price of the item, you may need to raise the base price of these items, in order to keep shipping costs low.

5. Flat-Rate Shipping

Flat-rate shipping takes factors of weight, price and actual shipping costs into consideration, and averages shipping costs across all orders, allowing customers to pay the same price for shipping, regardless of their order total. This method can be attractive to customers because of its simplicity—however, if the flat-rate price is deemed too high for the items being shipped, it may not be the best choice. By the same token, if it is too low to cover orders that cost more to ship, it may not be the best choice for retailers, either.

If your shipping costs are typically the same for each customer transaction, flat-rate shipping can be a good solution because it gives customers upfront shipping costs, while keeping these costs relatively low. One way to calculate a flat-rate shipping price is to determine the actual cost to ship an average order, and split that cost in half. Add half the shipping costs to the price of the item you are selling, and charge the customer the other half as a “flat rate shipping” fee. This approach enables you to lower shipping costs, while only partially increasing your product costs.

Shipping can grow your business. Funding can, too.

There is no one shipping solution that will work best for every company, but it’s good to know that you have options. We hope this blog was helpful in deciding which shipping option will work best for your e-commerce business. If you’re looking for more ways to grow your business, Fundomate can help you find the best funding option, too. It only takes a few minutes to apply for a business loan online, and compare top rates from the nation’s best lenders.