In Pricing and Ecommerce – Some Thoughts, Adelino points to some of the most common pricing models for shipping, including the traditional catalog “by order total range” and the Amazon “threshold” model and provides some spot-on analysis.
While one could argue that in the “range” model, the cost of shipping as a percent of order falls, I don’t think consumers really look at it that way.Â I think they wonder why they are “punished” with higher shipping costs for placing larger sized orders.Â Perhaps they don’t.Â But they sure like flat rate pricing for shipping when they see it.
We played extensively with S + H at Home Shopping Network in the early days, and what we found to be most successful was a flat shipping charge.Â I continue to use this approach with clients on the web today, where possible.Â It drives average order size like nobody’s business as people pile more stuff into the cart because “it doesn’t cost any more”.Â If you understand the financial model of the mail order business, you understand that boosting average order size drives profits like (almost) nothing else you can do.Â Also, being able to promote “Shipping is $6 per order, no matter how many items you order” in your advertising and all over the site eliminates any questions people have about shipping, which reduces cart abandonment.
This approach, of course, takes an intimate knowledge of the business, a study of UPS (if that is your carrier) rate structures, and understanding the general geography of your customer base.Â You have to know what your real average shipping costs are and peg your flat rate accordingly.Â For heavy products, you should build some shipping cost into price in order to lower the flat rate, which will not work in a commodity product environment.Â And good merchandising that encourages customers to upsell themselves helps a lot to drive the average order size.Â We even have some people who put flat rate at under cost and charge the difference to marketing, which is an accounting view of this approach.Â It certainly could be argued that the flat rate is a retention marketing technique, if not an acquisition technique as well.
Amazon is perhaps a unique case in that both the margins and average prices are low relative to product weight; they’d probably get killed on flat rate and a threshold approach serves them best.
If you had a shipping bill of $120K last year and you shipped 20,000 orders, your average cost to ship an order is $6.Â Why not charge a $6 flat rate per order and see what happened to your average order size?Â Sure, your shipping costs will go up with average order size but unless your margins are thin you will drop a lot more money to the bottom line.
Clearly, the success of this approach depends on the breadth of your lines and their sizes / weights.Â But if you generally ship in a 12 x 12 x 12 box or less and you’re not shipping rocks, it should work out for you.Â Take a look at what each extra pound above 1 lb and 2 lbs really cost you versus a 20% increase in average order size.Â You’ll see.
As Adelino says, the trick is in pouring over the financial details of the business.