How to Estimate Shipping Costs for eCommerce Fulfillment
Running an eCommerce business forces you to become an expert at a lot of things, but estimating shipping costs isn’t the best way to spend your time. Sure, shipping packages directly to your customers at the right address, undamaged and on time, is critical to your business. But figuring out which shipping method to use for every package you send is tedious and time consuming. Worse, it will eat into your profits and impact customer experience if you’re not paying attention.
Whether you’re handling your own eCommerce fulfillment or considering a third party logistics company (3PL) to handle it for you, you need to have a clear understanding of the shipping options available, how to calculate eCommerce shipping costs, and ways to reduce these shipping costs. This article will compare three top shipping companies, the US Postal Service (USPS), FedEx, and UPS, and show you how to calculate shipping rates for each.
Factors That Determine Shipping Costs
All major carriers including USPS, FedEx and UPS use the same factors to determine shipping costs: package dimensions, weight, the distance it’s traveling, and how fast it needs to get there. Optional or unexpected services as well as carrier surcharges might add to the cost.
Each carrier measures your package’s dimensions and multiplies width x length x height, then divides that number by a standard divisor unique to that company. This gives them a number, rounded up to the nearest inch, that they call Dimensional Weight (DIM weight). DIM weight represents the package’s volumetric weight. It was adapted by carriers to charge customers for the valuable space their packages fill on airplanes, trucks and shipping containers. Carriers compare the DIM weight to the package’s actual weight in pounds. The larger of the two numbers is the package’s billable weight.
Carriers also weigh your package on a scale to the nearest pound, including contents and all packaging. Carriers will compare this actual weight to the DIM weight and charge you for the higher of the two.
The distance a package is shipped within the contiguous US is measured in zones. Picture these zones as waves moving out from the point of origin (your warehouse) to the final destination (your customer’s house). The more zones your package passes through, the higher your shipping cost. Each carrier has its own zone maps, but they all work the same way. The closest and least expensive domestic destinations are within Zone 1; the farthest away are in Zone 8. International shipping rates are calculated differently.
Obviously, the faster the shipping and the higher the zone, the higher the cost. But it’s entirely possible to offer inexpensive 1 or 2-day shipping within Zones 1 or 2. Clearly, this is only possible when your warehouse or fulfillment center is within a zone or two of your largest customer base.
Each carrier has its own pricing model for various shipping methods, and its own network of planes, trucks, and transit hubs. They base their shipping rates on the size of their network, speed, accuracy and convenience. To learn more about the differences between USPS, FedEx, UPS, DHL and regional carriers, check out our Comparing eCommerce Shipping Carriers blog.
Value of Contents
The value of contents in a package also acts as a factor that determines shipping costs. Shipping carriers provide their own policies regarding limited liability. This type of shipping “insurance” ranges based on the package contents and value. If the contents of your packages regularly exceed that value, you may choose to add optional insurance or take advantage of MonkProtect, ShipMonk’s post-purchase delivery protection.
Stockouts or Shipping Delays
Occasionally you may need to split an order into two shipments if a product is out of stock, or pay for expedited shipping to get it to the customer on time. An emergency fund for these hiccups should be factored into your shipping costs.
Carrier Rates and Calculators
Let’s compare shipping options and pricing for the three top carriers commonly used in eCommerce shipments, and explore what it might cost to ship the same package using each carrier’s fastest and least expensive methods.
USPS picks up and drops off mail every day at every location in the US. That means you’re not paying extra for them to stop by your office in NYC or deliver to your customer’s door in Chicago. For this reason, USPS is usually the cheapest way for small businesses to mail packages to different locations. It offers qualified businesses discounted commercial rates and loyalty program rewards. The new USPS Connect program can expand your reach with next-day regional delivery and simplified returns.
USPS offers many different shipping methods, from the fastest, most expensive method (USPS Priority Express 1-Day™) to the slowest method, (USPS Retail Ground®) for shipping large heavy boxes to Zones 5-8. Don’t assume that Retail Ground is always the best option, though. The USPS website suggests that postage costs between the two are very similar “but Priority Mail travels there faster and includes free forwarding and return.”
USPS can deliver across the country in 2 days, and also offers flat rate options, which are ideal for heavier products as long as they fit inside one of the USPS Flat Rate shipping boxes.
To accurately estimate current shipping costs for your average eCommerce order, use the USPS Business Postage Price Calculator.
FedEx offers expedited shipping options to anywhere in the world. Their slowest, least expensive delivery option, FedEx Home Delivery®, is priced specifically for eCommerce businesses and delivers to residential addresses anywhere in the US in 1-5 days. FedEx also offers a rewards program and discounts on select shipments through their Small Business Resource Center.
For guaranteed delivery by a specific time and day, FedEx offers Priority or Standard Overnight delivery, FedEx 2Day® and FedEx Express Saver® (3rd business day). Packaging is free if you use FedEx Express services, however there is a charge for pickup and a surcharge for residential deliveries. When we checked on July 5, 2022, express services also included a fuel surcharge of 19%.
For more accurate shipping rates for your eCommerce business, create an account and use the FedEx Rate Finder to estimate shipping costs.
UPS offers business discounts and expedited shipping options, including Next-Day Air, UPS 3-Day Select and UPS Ground. Small business owners can access Small Business Services at more than 300 UPS Stores nationwide, and ship and label packages from over 1,150 UPS Access Points. Your customers can also redirect packages for pickup at a UPS Access Point in their own neighborhood if desired.
For up-to-date pricing with a business discount, create a business account and use the UPS Shipping Calculator.
Let’s compare what it costs to ship an imaginary package that weighs 3.5 lbs and measures 11”L x 8”W x 5.5”H from New York City to Chicago (Zone 5).
* Prices accurate as of 7/5/2022.
** Prices include fuel surcharge.
*** Business discounts not shown. Retail rates shown include $4.00 pickup charge, $5.30 residential delivery charge and a 19% fuel surcharge.
Should Your eCommerce Business Offer Free Shipping?
Many eCommerce business owners worry that in order to compete with Amazon, they need to offer free shipping. But for companies that sell low margin, low-priced goods, free shipping just doesn’t make sense. Often, the shipping costs more than the product inside. If you sell higher priced items with high margins, you have a lot more wiggle room in your pricing to recover shipping costs
Keep in mind that free shipping and free fast shipping are two different things. Shopify’s State of eCommerce 2021 study shows that 59% of consumers say that free shipping is key to a positive online shipping experience, while only 40% indicate that fast delivery is key. This indicates that most customers are willing to wait a few days to get free shipping.
If your eCommerce business can offer 2 or 3-day shipping using ground services, you can offer your customers free shipping without paying premium rates. A 3PL with multiple locations can help you distribute your inventory across the country and make this possible.
If your margins are so low that you can’t offer free shipping, make sure your customers have at least one affordable option and one faster option.
What Should My eCommerce Business Charge for Shipping?
Ecommerce businesses have several options when it comes to covering their shipping costs.
Option #1: Real-time Rates
Be completely transparent and charge your customers the actual cost of shipping their order. Nobody likes surprises, so make sure they have some idea of what the charges will be when selecting their delivery method, if not before. It’s also important to offer more than one choice, so they can decide for themselves if faster shipping is worth the extra cost.
Option #2: Free Shipping
Build shipping costs into your pricing strategy and offer free shipping on every order. This might mean raising your prices, or setting a minimum order quantity. Free shipping can be an effective marketing tactic to win customers, but you’ll need to make up for it by bringing in new customers or increasing your AOV (average order value). Either method will require a significant marketing push.
Option #3: Free Shipping with Conditions
Offer free shipping if customers meet certain conditions such as spending a specific dollar amount per order, subscribing to emails or SMS, or shopping during a limited time. To determine what that minimum spend should be, take your AOV and add a few dollars. You’ll raise your AOV and cover your shipping costs at the same time.
Option #4: Flat Rate Shipping
Charge a flat rate calculated to cover shipping costs on your average order. Some orders will cost more to ship and others less, but your costs should average out. Flat rate shipping works best for shipping products that are heavy for their size.
How to Reduce Shipping Costs
Before you set your shipping rates, make sure you’ve done everything you possibly can to reduce your shipping costs. Here are some ways to do that.
Reduce Package Size
Are you using the smallest package or box available to safely ship each order? If you’re shipping every order in the same size box regardless of the contents, you are probably wasting a lot more money on shipping than you are saving on packaging.
Reduce Package Weight
Have you looked into different packaging materials including corrugated boxes or poly bags instead of standard cardboard? What about dunnage (padding material used to protect products inside the package)? If you can reduce your package’s total weight, even by a few ounces, it could save you money with every order.
Get Volume Discounts
Most shipping companies offer a discount for small businesses. But unless you ship thousands of packages per day using the same shipping company, it will be difficult to qualify for larger discounts without the help of a fulfillment company. A 3PL can combine your shipments with those of other clients to obtain volume discounts you can pass on to your customers. And with a 3PL like ShipMonk, your packages will be routed the least expensive way automatically, using multiple carriers and shipping methods—no calculations necessary!
It’s important for eCommerce businesses to calculate shipping costs regularly to protect their margins and maintain profitability. Shipping cost calculators from the major shipping companies can help you estimate costs, but you’ll need to know the size, weight, and value of your average order, as well as the zones you’re shipping to most often. Once you know what your average order costs to ship, you can calculate how much to charge your customers.
If you’ve had it with calculating your own shipping costs, outsourcing your fulfillment operations to a 3PL can take this burden off your shoulders. They can calculate your shipping costs per package down to the penny, tell you your average package dimensions and weight, what zones you ship to most often, and everything else you need to know to determine how much to charge your customers. Lastly, they can help you reduce shipping costs by leveraging volume discounts and use multiple warehouse locations to take advantage of regional carriers and ground shipping rates.
Leave the mind-numbing calculations to the experts. Get a quote from ShipMonk today and see how much you can save on shipping costs.