There are many aspects to consider when setting up your business, and one of the most vital is pricing. In order to not only keep your head above water but also to actually generate profits that enable you to grab new growth and development opportunities as they arise, finding the balance between strategic and competitive pricing is essential.
However, pricing a product isn’t always as easy as it may seem. Here, Will Schneider from Fulfilment Companies breaks down the costs of shipping packages to customers.
Pricing your products
Pricing a product isn’t as straightforward as simply looking at supplier costs and marking up to create the necessary profit margin for desired revenue. There are multiple other aspects to take into account, and the cost to ship the product to your customer is one of the biggest. This is something that many online retailers overlook. After all, why should product shipping have an impact on e-commerce retail pricing?
Free shipping for your customer
Understanding how postal charges impact your pricing strategy becomes easier when taking a look at what today’s customers are really looking for from the retailers they choose to purchase from. According to the 2019 UPS Pulse of the Online Shopper Global Survey, an increasing number of shoppers are looking for free delivery. In fact, around one third actively choose the slowest delivery options to avoid paying postage fees. To gain a competitive edge, it’s important for businesses to offer low cost or free delivery but in the e-commerce world, and across the retail sector, ‘free’ doesn’t really mean ‘free’.
Free delivery has fast become one of the most effective marketing strategies for businesses, but the truth is that successful businesses don’t offer truly free shipping. Instead, a much more appropriate term would be ‘included shipping’, where the price of the delivery is factored into the retail cost. Therefore, knowing how much it costs to send parcels to your customers is an integral part of product pricing but how much does it really cost to send packages?
Setting the shipping prices
Many businesses think that the weight of the package is the most important factor in determining delivery costs and up until 2015, it was. Before this time, weight was the be-all-and-end-all of parcel pricing, but some carriers found a connection between the price they were charging their users, and the value of their primary asset: space. And so dimensional weight was introduced, which means that most parcels and packages are now priced based on their size and density, rather than by their actual weight.
Understanding dimensional weight
Dimensional weight, also known as volumetric weight, considers the overall size of a parcel to determine how much space that package will take up in an airplane, in a van, or in any other form of a delivery transit vehicle. And from a carrier perspective, it makes sense. Imagine, for example, that you need to post a huge bag full of soft toy stuffing to your customer. It’s not going to weigh much, but it is going to take up significant space in a delivery vehicle, which means companies won’t be able to carry as much, won’t be able to complete as many deliveries, and ultimately won’t be able to make as much profit.
Dimensional weight is used by many logistics firms today. It’s used by Parcelforce, as well as by a number of international carriers like FedEx, UPS, and DHL, so it’s especially important to keep dimensional weight in mind if you deliver globally, or if you’re thinking about expanding to overseas fulfilment solutions.
While each carrier has its own formula, the typical calculation used to determine dimensional weight is:
Length x width x height ÷ 5000 per parcel
So a 30x30x30 cm box would have a volumetric or dimensional weight of 5.5kg. That’s the ‘accepted’ weight, regardless of what the parcel actually weighs. However, many carriers like UPS don’t acknowledge fractions, only by whole kg. This means that this example parcel would need to be rounded up to a 6kg total billable weight. Where does actual weight enter the equation? If the actual weight of the parcel is greater than the dimensional weight, the actual weight will be used as the billable weight.
How to reduce your shipping costs
While dimensional weight makes sense from a carrier perspective, it was not met with smiling faces from businesses when it was first introduced. At the time, it was reported that three-quarters of businesses disagreed with the introduction of the new calculations, citing it as ‘unfair’ to retailers. Writing for Logistics Viewpoints, Bobby Miller from research company ORTEC estimated that the cost to ship an average parcel increased by between 20% and 30% when dimensional pricing formulas were launched.
Here are some tips to lower the costs of shipping packages to your customers:
- Only use the necessary packaging for each product
- Consider using mailing bags for non-breakable items rather than boxes
- Check to see if it’s more cost-effective to send multiple items separately
- Use lightweight fill such as packing peanuts rather than denser papers
- If you have a small product selection, try customised packaging designed for your product
Meeting customer expectation
Product packaging may not be high on your list of priorities as you’re looking to set up your business, but it is likely to be a much bigger factor for your customers than you realise. A whopping 99% of shoppers say that e-commerce packaging is important, with the top three shopper requirements being packaging that adequately protects the product, packaging that is a suitable size for the product, and packaging which is easy to return if needed. By keeping these aspects in mind, and calculating dimensional weight, it’s easier to improve the customer experience, break down costs, and price your product effectively.