Managing Shipping Costs for an Online Business

In a previous article Selecting the right shipping partner, we discussed the parameters on which you should evaluate your shipping partner. Today, we will focus on one of the most important criteria: cost. As we mentioned, pricing is dependent on various factors. We will discuss the factors that you can control (and hence control your shipping cost). There is fuel surcharge which is a significant portion of the cost but since you can’t control it, I am not focusing on it here.

Package Weight

Prices are quoted in units of 500 grams. Obviously, prices go up as weight goes up. Note that there are 2 types of shipping companies: one which specialize in documents and lightweight items (most courier companies fall in this category), and other which specialize in package shipping (Gati is the best known one). As weight goes up, there will be a tipping point after which the package shipping company will be better suited than the courier companies. It is important to start from the right type of shipment provider. Price for a 500 gm package could vary from Rs. 25-100 depending on which shipper you pick.

Transportation Distance

Distance prices are in zones and not in actual distance travelled. Since some shipment is done by road while others by air, prices could go up drastically when you ship far from your warehouse.

Shipping Time

Depending on which service you choose, your shipment will be delivered from between 24 hours to 7-8 days. Price will vary steeply depending on how fast you want the package to reach.

Cash on Delivery

If CoD is needed, shippers will charge extra. Current charges for CoD is Rs. 50-100 or 2-3% of the amount being collected (whichever is more). Note that when the customer selects CoD, you are saving on the transaction fee your payment processor would have charged (usually 3-4%). So as long as your CoD cost is within this number, you should be OK.

Given these costs, let’s see how you can manage these costs.

Cost Analysis

Here is typical pricing you should expect after standard negotiations:

Rule of thumb for for shipping cost is that it should be about 10% of the price you charge the customer. Given above numbers, and the fact that customers are used to free shipping, assuming 20-40-40 mix (20% local, 40% within region, 40% outside region), 500g package will cost Rs. 52 and 1 kg will cost 94. This means that your 500g package (make sure this weight include packaging weight) can’t contain items less than Rs. 500 and 1 kg package can’t contain items less than Rs. 950.

Note the last column: MRP Density (Desired MRP for every kilogram of item). I believe this is a key metric that should be kept in mind by all retailers. If MRP density is less than 1000, you will mess up your margins somewhere. This also suggests what kind of products will have desirable shipping characteristics: those with low weight and reasonable price (books, accessories), and those with reasonable weight but high prices (mobile, laptops, most electronic gadgets).

If you don’t carry some of these types of items, you will have to be creative and get MRP density in your favor. Here are some things that can be done:

1. Don’t carry low price, high weight items
2. Bundle items together
3. Only ship free to nearby places, or lightweight items, charge shipping fee for rest of the places. If you ship more to nearby places, the blended cost will also go down, improving your MRP density.

Key Takeaway

Shipping cost can very easily spiral into single biggest cost for your online business and it is critical to manage them. Invest in data collection and analysis system (it could be an excel expert that you hire to manage data or buy a sophisticated data analytics system) and keep an eye on how these key metrics are moving. Be creative so that you are not losing per transaction, otherwise it is hard to ever get to profitability.