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. I think they wonder why they are “punished” with higher shipping costs for placing larger sized orders. Perhaps they don’t. 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. I continue to use this approach with clients on the web today, where possible. It drives average order size like nobody’s business as people pile more stuff into the cart because “it doesn’t cost any more”. 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. 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. You have to know what your real average shipping costs are and peg your flat rate accordingly. 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. And good merchandising that encourages customers to upsell themselves helps a lot to drive the average order size. 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. 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. Why not charge a $6 flat rate per order and see what happened to your average order size? 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. 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. 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. You’ll see.
As Adelino says, the trick is in pouring over the financial details of the business.
Thanks for the great insight and for expanding on the topic. You make a great point: shipping charges should be viewed in light of the business model, the product and its weight.
I just noticed that Sierra Trading Post is announcing free shipping on orders over $75… would this be a trend?
Not sure if it a trend or not but it sure is a good idea if you understand the fundamentals of your business. Setting this threshold above average order size (but not too far above) is a good way to drive incremental profit.  The higher you go above average order size, the less effective it becomes until it ceases to do anything.
Now, you can segment the offer, certain groups may have a higher average order size so can tolerate a higher threshold. For example, this promotion is one of the few you can use on Recent-Frequent buyers and actually make money. Typically, straight discounts are just subsidy costs for this group (if they normally spend $100 a month and you give them a 10% discount they spend $90 that month). But these “threshold” type promotions, when matched correctly to behavior, can make money.
In other words, it is suboptimal to make the same offer to everybody, but you knew that…:0
As always, practice safe marketing promotion and use control groups for any tests so you get at true lift (if any) and real profit.
I’ve been trying to start a small business from the stuff I ship on eBay and mail orders and after reading you article I was looking for somewhere to compare the shipping rates and see if I could find a price for my frequent buyers that could stay constant without hurting my profits. I stumbled across http://www.shippingsidekick.com and it compares the prices of USPS, FedEx, UPS, and DHL and with that I was able to find a reasonable price for S + H that would make the buyer happier and allow me not to lose too much money. I would recommend all small business owners check out shippingsidekick.
Hi, thanks for this post. This is exactly what I’ve been looking for! I have some follow up questions, if you don’t mind:
1) Are you recommending companies that sell commodity products not offer flat rate shipping?
2) In your flat rate shipping calculations, do you calculate only Ground orders (excluding 3 Day, 2nd Day & Next Day)?
3) Do you have any advice for companies that want to implement flat rate for international customers as well? Does the same math apply to international orders as well?
1. It’s much more difficult to do since margins are generally slim, but it’s possible to do if you have a good handle on shipping revenues / costs.
2. Yes, primary ship method only. Customers pay cost for upgrades.
3. The same math applies, but the variance is much wider when you start talking about different continents. Whether this works or not would depend on a more detailed analysis including average margin per order and so forth, but the idea is the same – you want to drive average margin per order higher by not tying shipping to average order value.
For example, if 90% of your items are light weight – say electronic components – then it’s much easier to estimate / control / manage a flat rate shipping program for international.
In the end, it’s all just math…if you have the data, and that’s where most folks run into trouble with an idea like this – they don’t have good data on actual shipping costs, average margin per order, etc.