Quick intro: I’m Michael Sonnenschein currently COO of Fulfillrite.com. Fulfillrite.com is a New Jersey-based order fulfillment center catering to small and mid-sizede-commercee and crowdfunding order fulfillment. However, for most of my career, I’ve been in operations and marketing for e-commerce and brick and mortar suppliers, both of whose business models depend critically on logistics, supply chain, and shipping success.
Pat and I got to talking after a forum post we had both contributed to. My comments were geared toward helping a new business owner avoid some of the shipping and supply-chain related mistakes that we so often see in our company.
When Pat offered me the opportunity to share some of these ideas with his audience, I thought it would a great opportunity to provide some education and serve as a resource for you.
Here’s a fun thing to do: Ask entrepreneurs who are in the process of starting a product based e-commerce business to, “Quick, name the top three things that will affect your company’s bottom line.”
You’ll get lots of answers including, Marketing, Sourcing, Profit Margins, Scalability (this usually from people who have heard the word but don’t quite understand it), KPIs, (that one too), Outsourcing, Cash Flow, Financing, and of course, Customer Service.
Product Fulfillment and Shipping don’t usually make the cut.
You, however, are more clever, and you know that shipping and fulfillment absolutely affect the bottom line. Plus, you read the title of this article. But do you know just how these things make a difference, and what you can do to control your shipping costs, streamline your logistics, and have shipping and fulfillment work in your favor?
Leaving importing, customs, and duties for another article, let’s focus on three surprising areas in which understanding shipping costs can change your profit margin and quite possibly be the difference between profitability, and, whatever the opposite of profitability is.
We all want great packaging for our products. We’d love something durable, attractive, unique. We know how it feels to open a perfectly branded, high-quality box, bag, or case, and we’d love our customers to have that feeling as well.
We also know that the fancier, thicker, and stronger the packaging, the higher its cost is going to be. Weighing the extra cost for better packaging against the customer experience, we come to a decision to spend a bit more for the package in exchange for wowing the customer.
What we don’t always consider, though, is how better packing will impact shipping costs. Hint: shipping costs will go way up.
Why? There are a few reasons for this.
Because better packaging usually weighs more and adds to the overall size of the product.
This will domino into higher inbound freight costs, higher storage costs, and, most significantly, higher shipping and fulfillment costs.
We are aware that carriers charge by weight. You might be thinking, what’s another few ounces? How much can that really change my shipping rates?
More than you think. But first, it is important to understand that carriers do not only charge for the weight of your parcels. They have this other calculation called, “dimensional weight.” This means that they calculate the size of your packages, and figure that number heavily (sorry for that one) into the weight they are charging for.
Remember being a kid and receiving deliveries of large boxes filled with lightweight packing peanuts? (Mom does.) Do you remember how the product that was actually ordered was buried deep, deep in the box somewhere? See, back then, the vendor would use a standard size box for all their products.
Sometimes they even repurposed a carton that was lying around, regardless of its mammoth size, because they were being charged by weight, and the weight was negligible. Well, carriers whose truck space, plane space, and facility space all cost money, not to mention the expense of adding extra trucks, drivers, gas, etc. to their routes, were losing out.
They decided to implement dimensional weight as a way to bill for the real estate taken up, in addition to the weight of the item. Dimensional weight charges vary by carrier, but all shipping carriers utilize some variation of this charge. Smart, right?
That apron you’re selling could have been wrapped in plastic, with an attractive branded sleeve added, and placed in a padded mailer or polybag for shipping. Weight: 14 ounces. Cost: $2.34. The cardboard box you chose to pack it in is lovely, but your shipping is now $7.83 because the carrier measured the oversize packaging and considers its dimensional weight to be more than 2 pounds.
Another factor to take into consideration when deciding on packaging is bulky or irregular shaped packaging. UPS has a useful page with instructions for calculating your irregular package here, which is worthwhile to check out.
E-Commerce sellers are sometimes shocked at the added cost which comes along with oddly shaped shipping parcels and packaging.
In order to ship the item correctly, the product must be able to fit into a shipping-ready box or secure mailer. The larger and bulkier the product, including its packaging, the sturdier, roomier, and and heavier the shipping supply must be.
Now, not only will you need to account for the cost to ship the item itself, you will need to add the weight and size of the outer shipping packaging, (and the cost to buy that box) to your final shipping cost.
Carrier tiers and classes
Get educated about the classes and tiers that are used by shipping carriers.
While you may not think the weight or size difference between two items are significant, it really can be. Because carriers group charges into tiers of weight and size, an ounce or two, or an extra inch, can bump your product out of the most economical range, and your costs can balloon from there.
So while a hard plastic container with a cover might seem like a great idea, if it bumps your item to the next shipping bracket, you might want to rethink how much financial sense it really makes.
But it’s not all bad news! A good understanding of tiered pricing can be a powerful thing. Consider this example: The cost of shipping one designer pair of designer socks from the East Coast to Southern California in a USPS First Class Flat padded envelope: $1.83. The cost of shipping five pairs of socks? Wait for it... $1.83. Since the Flat Rate tier didn’t increase to the next level because of the addition of a few more ounces, you essentially shipped those extra items for free.
When creating sales, BOGO deals, and bundle incentives, think about your margin breakdowns. You might clear only 20% on the first item after shipping, but on the second, third, fourth, and fifth, you could be looking at margins of 40 percent! The lesson in this case is, look to take advantage of shipping breaks, especially when offering upsells, as a way to bring your COGS down and your profits up
Postage rate changes
As an entrepreneur, you’ve undoubtedly thought about the costs of goods sold and figured that the price of shipping must be included.
You might have done your due diligence and calculated proper postage for your product selection (you can pat yourself on the back - that’s no easy feat!). However when dealing with slight margins, as many ecommerce sellers are, it is really important to know when and how often your costs will increase.
Postal rates, and those of other carriers, typically increase at least once a year, most often on January first. To make matters worse, the price increases are not usually announced until sometime in December. That’s right, sometime during the busiest e-commerce season of the year, the carriers slide in the good news of rate increases, and you need to re-evaluate your costs. If you pay for your customers’ returns, be aware that beginning in January, the Official Month of Returning Items, your shipping costs are going to increase.
How much is the increase? Hard to say, but in the past few years, increases have consistently been between 4%-7%. Building in a 6% postage increase to your holiday sale price is one good way of protecting yourself from the inevitable postage rate hikes.
The more products you carry, the more products you sell, right? Well, maybe. But at what cost? Think about the idea that each product needs to be sorted upon arrival at your facility or at your fulfillment partner’s warehouse.
It then requires slotting, storing, and accounting for in your inventory so fulfillment and shipping can be possible. The more skus you have, the more difficult error-free fulfillment is. Fulfillment centers often charge by the sku, and require you to pay for separate slots for each sku. Shipping multiple products make it more difficult to plan for shipping costs as well. Each product type, with its own shape and size will demand its own shipping material and price.
There is a fairly universal 80/20 rule when it comes to product sales. 80% of your sales will come from 20 percent of your products. When you look at some of the most successful brands today, like Apple, and Samsung, you’ll notice that they don’t increase their product line by more than a few products a year.
When they do, they often retire older lines. Stick to the products you really know and love, and you will become a leaner, more profitable company.
Wrapping it up
All in all, shipping and fulfillment might not be the first thing you think about when planning for profitability, but doing so in advance and keeping up to date with trends, price changes, rate tiers, and associated costs will help guide you to better product selection, decreases in packaging costs, and competitive advantage that just might make the difference for your business’ success.
It’s always great to do a guest post and I thank Pat for giving me the chance to engage with his awesome readers! Fulfillment is an involved sub-section of the e-commerce world, with companies like Fulfillrite.com dedicated to making it work for entrepreneurs and business owners every day.
I would really love any feedback on this post, and I really welcome any of your questions about shipping, fulfillment, etc., and how it affects your business. I can be reached at [email protected], or by calling our office: 732-961-7766. You can also check out our website, for some great FAQ’s, blog posts, guides, or just to leave your info. Cheers!
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