Jan 14, 2015

Understanding Your Shipping Costs

I have spent many years helping small and large companies (SMBs) with their shipping and logistics, and believe me, it can be a confusing subject. The #2 most often-heard shipping pain point is: ‘help me understand my shipping costs.’ For many SMBs, shipping costs represent the second or third largest line item in a P&L. For SMB’s in the e-commerce industry, shipping costs typically are 10% of revenue.

Total shipping costs are composed of transportation list rates, minus your discount (if you have one – more on that later), plus any surcharges, fees or add-ons. SMBs are typically offered a matrix of discounts, which vary by zone, weight, service type, etc.

Surcharges and fees typically account for 30%-40% of your total shipping costs. Examples of surcharges and fees include: residential delivery fees, pick-up fees, incorrect delivery address fees and, literally, a few hundred more. Add-on surcharges and fees, sometimes invoiced after the delivery has been made, make understanding shipping costs even more complex for the average SMB. Savvy SMBs should take this into account when calculating true costs of shipping, and making business decisions.

understanding shipping costs

Let’s dive into a few of these surcharges. Carriers charge anywhere from $3-$20 for pick-up fees, depending on urgency and service mode. Savvy SMBs plan accordingly and consolidate shipments. Instead of having FedEx or UPS pick up 1 or 2 packages each day of the week, group them together into 3 or 4 packages every 2 or 3 days. You may even get the carrier to waive your pick up fees, depending on your increased volume per pick up. Another example is address corrections. These surcharges range from around $11 to $65 per shipment. There are several free sites, including the USPS, which allow you to verify an address before printing a label with an incorrect delivery address. For higher shipment volumes, there are APIs or websites that allow you to verify a number of destination addresses before shipping.

It’s also worth knowing about shipping zones. This is a term used by FedEx & UPS to calculate lead times, mostly as a function of miles traveled from an origin address to a destination. For example, a shipment from Newark, NJ to New Orleans, LA, a distance of 1,300 miles, is priced at zone 6. A similar shipment from the same origin to Long Valley, NJ (45 miles away) is considered zone 2.

As you can imagine, the average SMB does not speak “shipping zones”, and when presented with an invoice based on this terminology, you can imagine how difficult it could be to understand.

Understanding your shipping costs, and equally importantly, how your carriers price rates and prioritize metrics will help you manage your own internal metrics and better serve your customers.

Your carrier’s account manager should be able to explain this in plain English, and our suggestion is to have monthly or quarterly business reviews with them to share your plans, and understand theirs. In addition, there are several shipping auditors and consultants that may be able to provide you additional support on this.

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About the author

Jose Li

Jose Li is CEO of 71 Pounds (www.71lbs.com) a set-and-forget system that automatically audits your shipments for late-delivery refunds and incorrect charges. He formerly ran FedEx’s Retail & eCommerce practice and can be reached at [email protected].


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