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Shipping 101

From choosing vendors to shipping and handling charges, we've covered the essentials of setting up a shipping system that delivers.
May 6, 2010
URL: http://www.entrepreneur.com/article/64726

Shipping is the roughage in an entrepreneur's diet. Nobody's interested in talking about it, but everybody's got to deal with it. In fact, shipping is one of the most challenging aspects of business for many entrepreneurs. Because the fact is, no one shipping vendor or shipping policy fits all. Much depends on the industry you're in, the kinds of products you sell, the weight of the items you're shipping, and your customers' needs.

It's well worth the time to do research before jumping into a shipping plan, says Sergiy Lishchuk, owner of Skokie, Illinois-based Ukrainochka. And he should know. Before opening his online business selling Ukrainian arts and crafts, he investigated what successful online retailers were doing with their shipping policies. "I looked at Amazon, overstock.com and lots of eBay stores and compared them to see what worked best," he explains.

All the major shipping vendors like the U.S. Postal Service (USPS), FedEx, UPS and DSL explain services and rates on their Web sites. You can also check out sites that will do comparison shopping for you, sites like www.iship.com and www.InterShipper.com, which gather size, weight and location information to calculate the cheapest way to send packages.

These sites are a good place to start, but don't stop there. Shipping vendors also have representatives who will meet with business owners to review their needs and explain options. "Arrange meetings with the reps and find out just what options are available. There may be things you didn't know about that will work well for your business," suggests Ramon Ray, founder of SmallBizTechnology.com, a business and technology consulting firm in New York City.

"A lot of small businesses think they aren't large enough to negotiate rates with the shipping services, but they can. Open an account, get a rep and talk about options," advises Rhonda Abrams, a small-business columnist and president of her own small business, The Planning Shop in Palo Alto, California, a provider of business planning books and CD-ROMs. "You can negotiate discounts that you won't find out about if you just call their 800 numbers."

And don't limit your questions to expense. Also ask about specific services. Does your vendor offer morning pick-ups? How much paperwork is involved? Are there easy tracking measures? Your choice of vendor should depend heavily upon the needs of your business.

Small Dog Electronics, a computer retailer, is located far from a post office in rural Waitsfield, Vermont. "To use the U.S. Postal Service, I have to pull someone off a job to drive about 10 miles to the post office and wait in line," says co-founder Don Mayer. "I lose time and money, so we discourage customers from choosing that option."

Instead, the company relies primarily on UPS, which offers a twice-a-day pick-up service, a major timesaving measure for the company. "UPS offered exactly the kind of pick-up services we needed," notes Mayer.

The Planning Shop, which processes hundreds of book orders each week, was looking for a vendor that would simplify the shipping process. The company signed up with FedEx once it integrated its shipping software with Quick Books 2003. "It's freed us up enormously since we only have to enter order data once for our records and theirs," says Abrams. "This has saved lots of valuable staff time."

"In general, you'll want to cover your bases," says Steve Strauss, author and founder of www.smallbiz.com , a small-business consulting site, who suggests businesses offer at least one express service and one standard service.

That's what Lishchuk does by offering UPS, FedEx and USPS shipping options. "Heavier items usually go by USPS because it's cheaper to send, but UPS and FedEx offer convenience, so it all depends on what we're sending and to whom," he notes. "So far not a single customer has requested express mail. Perhaps I just have customers who plan ahead. But we've got it, if they ever want it."

Shipping Charges
Once you know what it'll cost you to ship items to customers, then you have to develop a sensible shipping policy to pass onto your customers. If you charge too much, you risk losing business. In fact, 63 percent of consumers surveyed by Jupiter Media Matrix Inc. cited excessive shipping costs as the reason they cancelled a purchase.

Retailers looking to make big profits on shipping stand to lose business. "Shipping shouldn't be a profit center, or customers will resent it," warns Strauss.

True. But on the other hand, if you don't charge enough, you may well lose money. Jupiter found that of the companies it surveyed, 45 percent make money on shipping fees, 45 percent lose money, and 10 percent break even. Breaking even may be the best way for retailers to keep a good relationship with customers.

Small Dog Electronics, which has a brick-and-mortar store as well as online business, has developed its shipping policy over the past eight years. "We do not make money off the customer on shipping. We charge them exactly what it costs us to ship," Mayer says.

Padding shipping charges to make a little extra profit might sound like a good idea at first, but in the long run, it can hurt you. "Customers find that a major turn-off," warns Ray.

Doing the right thing by customers and keeping costs contained goes a long way to building a strong and loyal customer base. "In this competitive environment where there's very little customer loyalty, things like shipping matters," small-business consultant Strauss says. "Look at it this way: If you don't have a store location, you're saving on rent and employees. Eat the shipping. It's a small cost to you, and customers will respond."

"Customers love free shipping," agrees Abrams, "so when you can afford to offer it, do. For instance, if you have high profit margin and lightweight items like jewelry, offer free shipping. It won't cost you much and it'll been seen as a great value to your customers."

E-tailors like Amazon.com and Circuitcity.com have proven that free shipping, particular on items that are costly to send like books and electronic equipment, can be an effective incentive for customers.

"Shipping costs, especially on heavier items, surprise some customers. They may not understand why it's $50 to ship a 20-pound computer monitor when it was only a couple of bucks to ship a PDA," explains Ray. "The transaction can fall apart at the end over the cost of shipping."

In these cases, Ray suggests offering free or low-cost shipping. If that's a financial impossibility, post shipping charges alongside the price of the item to avoid last minute sticker shock. And if you're going to charge for shipping, charge by weight, not cost of merchandise, he recommends.

That's advice many retailers ignore. In fact, the Jupiter Web Track Survey of online retailers found that 54 percent base shipping charges on the cost of items, while only 30 percent base them on weight.

That's a mistake, says Ray: "E-tailers who do this, especially those who sell products that can be bought at local stores, risk losing customers who next time will get in their cars, drive down the block and purchase items there to save on shipping."

Shipping as Promotion

Periodically Small Dog will offer free shipping on certain items. "We like to keep things interesting on our Web site, so every so often, we'll pick a few special items and offer free shipping," co-owner Mayer notes.

Free shipping can also be used to reward good customers. "I'm a big believer in customer segmentation. If you have a loyal customer, give them free returns and give them free or low-cost shipping," recommends Ray.

The Planning Shop offers discounted shipping on large orders. "If customers buy more than one book, the shipping costs per book drop," Abrams explains. "We cut our profit margins for combination purchases, because we want to encourage multiples."

If you aren't sure what impact free or low-cost shipping will have on your business, try it out, suggests Ray. "Pick a period of time, say one week, and test market it. See what happens when you offer options like free or low-cost shipping," he says. "That's an inexpensive and fast way to find out if your customers will respond to this kind of offer."

Returns & Exchanges
Should customers be charged to return merchandise? What about to exchange it? These are questions businesses grapple with regularly. While it's perfectly legal to ask customers to foot the bill, is it smart?

That depends, say the experts. In the case of exchanges, where customers want to swap items for like items, perhaps in different colors or sizes, good customer relations dictates the business eat the shipping costs, at least when sending out the exchanged item, the experts agree. "It's a small price to pay to keep customers happy and shopping with you," Strauss notes.

Lishchuk agrees. If a customer wants to do an exchange, Ukrainochka will pick up the cost of shipping the exchanged item. However, the company will not pay for return shipping, nor refund the original shipping charges if a customer is unhappy with merchandise. "I'm very thorough in the information I post on the site so that people should know what they're getting," he notes.

Paying for shipping when customers change their mind about an order can get costly. "You can lose a lot of money, and if the margins are small, it can be detrimental to your business" Ray says. "Did the woman's son kick the couch and destroy it? Did the man decide he no longer likes the color red? Those aren't things you should lose money on."

Defective items are a different story. "Never hesitate to pick up all the shipping charges when a product you've shipped is broken," Abrams stresses. "What you lose in shipping costs you more than make up for in customer loyalty."

Abrams speaks from experience: She recently bought some outdoor furniture from a major catalogue retailer. After she'd had it for a short time, the furniture fell apart, so she called the company. "Even though I no longer had my receipt, they had my order on the computer," she says. "They immediately sent me all new furniture without charge or hassle to me. That's great customer service. They didn't make any money from me on this order, but they have a loyal customer for life."

Handling Charges
To charge or not to charge, that's the question when it comes to handling. Generally, handling charges include both the cost of packing materials and the cost of labor to pack items.

The Planning Shop charges handling fees. "Factor in the expense of packing materials and staff time because the costs are significant," Abrams says. "That doesn't mean you should view handling as a way to make a profit. If you do that, you have the wrong attitude."

Not everyone agrees that businesses should pass along these costs to consumers. "Packing things is just part of the normal course of doing business, like providing a bag and a cashier at a bricks and mortar shop," Strauss says. "You don't want to put off customers by charging extra for that."

Lishchuk doesn't build in the costs of handling or materials, although he acknowledges they can get pricey. "Retail packing materials are very expensive, so I deal directly with manufacturers," he explains. "I drive over there, stuff my car full of it, and save money that way. I wind up spending about thirty cents per package on materials, and a couple of hours a month, but I feel my customers are worth that."

Overall, it's wise to remember that shipping is the last transaction you make with customers. A bad final impression means you won't likely see customers return. A good experience is the equivalent of a warm smile and handshake, the beginning of a good relationship.


Andrea C. Poe is a freelance writer who specializes in business issues and is jointly based in New York City and Easton, Maryland.