The first step to getting an accurate estimate of shipping costs is understanding how your transportation invoice is calculated.
Understanding the true cost of shipping products to customers is a big puzzle. There are so many factors that it can be difficult for an ecommerce business to choose the best shipping method that fits their needs, their customer’s delivery time expectations, and is also a low-cost solution.
Transporation costs have risen more than usual in the past two years, making it more important than ever for online businesses to understand how to forecast and estimate their shipping costs.
How to Choose the Best Shipping Option for an Ecommerce Brand
Before we get into the details of a freight invoice that are often overlooked, it’s important to state the more commonly known factors that go into choosing a shipping service.
Here are the top four things to consider when choosing a shipping carrier and service:
- The type of product you sell. Different items have very different shipping needs. High-value products might require extra handling or signature required service. Consumer packaged goods might need expedited shipping due to expiration dates. Electronics might need special labeling for ion batteries or other specialty components.
- The type of packaging you use. The size and shape of each box directly impacts the cost of shipping. What goes inside the box is just as important; you need to consider product safety, branding, the consumer unboxing experience, actual weight and DIM weight.
- The places your products go. Where your shipments need to go is a major factor in how much you’ll pay per shipment.
- The place where your products are fulfilled. Where your shipments come from is an equally important factor in how much you’ll pay per shipment. Fulfilling products closest to your customers is the best strategy to lower the overall cost of shipping.
Some carriers use a hybrid model where a private carrier outsources the last-mile delivery to USPS. Hybrid shipping services can be a cost-effective and reliable method for lightweight ecommerce products.
Commonly Overlooked Ecommerce Shipping Costs
Choosing a carrier and service based on the big four aspects of shipping, stated above, is a great start. While many ecommerce companies only focus on these, to get a truly accurate estimate of shipping costs, you’ll need to consider many other things.
Here are the commonly misunderstood and overlooked factors that should be considered when choosing a shipping service. Many of these may not seem like big costs, but when added up over time and larger package volume, they can increase overall shipping costs by a large margin.
1. Dimensional Weight (DIM weight)
Most ecommerce companies don’t know how carriers bill for the weight of their packages. It’s not very straightforward. It starts with understanding the difference between dimensional weight, actual weight, billable weight. Here’s a breakdown:
Actual weight: When a package is put on a scale, this is the actual weight of the package. When citing the actual weight for shipments, carriers will round up the next whole pound or kilogram.
Dimensional weight: Dimensional weight (DIM) is determined by multiplying the length, by the width, by the height of a package (using measurements in inches). The result is the cubic size. Next, divide the cubic size by 166 or the DIM factor. Note, all carriers have a default DIM factor of 166, unless otherwise negotiated.
Billable weight: The cost a carrier applies to ship a package. Once both the actual weight and DIM weight are calculated, the billable weight is whichever of the two is higher.
When looking at your shipping invoice, look at the billable weight for your packages. This is not necessarily a fixed cost, and there are ways to adjust it.
First determine if your carrier is billing you by DIM weight. If you have already signed a contract with a carrier, you’re probably locked into the default DIM factor. But if you switch carriers, that’s when you will be able to negotiate a lower DIM factor.
Second take a hard look at your packaging. Whether your carrier is billing you by actual weight or DIM weight, the way your products are packaged is directly affecting your billable weight. By moving to different sized box, or lighter packing materials you can save on what you pay per package. Another way to lower billable weight is to reconsider your kitting strategy to optimize for lower shipping costs.
Surcharges can be very sneaky. They contribute to a big part of your overall shipping costs, but you won’t see a line item for them specifically.
The main thing to say about surcharges is that they are unavoidable, and non-negotiable. But just like most aspects of your shipping costs, understanding where you are getting charged, and how much, is the best way to navigate shipping surcharges.
Surcharges are added to services, on top of the base rates you already pay for. Some surcharges are added as flat fee and others are calculated as a percentage. Some surcharges are temporary, while others are constants, even if the amounts change week-to-week.
Here are the most common types of surcharges that might be included in your overall shipping fees:
- Peak Surcharge/Delivery Surcharge: To compensate for the extra labor, time, effort, fuel, and infrastructure needed to keep up with high-volume, carriers apply fees for a specific time period until volume decreases. Historically reserved for the holiday rush between Black Friday and Christmas, peak season charges can be applied any time of year. Recently peak surcharges have been implemented often due to the rise of online shopping. Peak surcharges are applied to specific services (usually most if not all services a carrier offers) as a flat fee.
- Fuel Surcharge: As an additional charge on top of the base fuel rate, each carrier also includes a fuel surcharge. This is calculated as a percentage of the base fuel rate (in some instances it is a flat fee, like with DHL for example) and is applied to most services. Each carrier has a different formula, and it’s important to first understand how to calculate fuel charges.
- Delivery Area Surcharge (DAS): To offset the costs a carrier incurs to deliver packages outside of the standard areas. These are usually reserved for remote areas, which are determined by the carrier’s list of specific DAS ZIP codes. Related to DAS is EDAS (extended delivery area surcharge) which is a charge for the delivery or pickup to even more remote ZIP codes than DAS.
Other extraneous shipping fees include signature required, government charges, adjustment charges, address correction, Saturday surcharge, oversize package surcharge.
Some of these surcharges have started overtaking the original order value of some products. If you notice surcharges are a high percentage of your shipping invoice, it might be time to re-evaluate the shipping services you choose, or switch carriers. Here’s an example:
An ecommerce store sells a product for $10. Many consumer packaged goods are light-weight, and have relatively low shipping costs. But with surcharges added, (peak, fuel, DAS, and more), all of a sudden they might be paying $20 or more, per package on shipping. It stops making sense to ship a low-cost item for such a steep cost.
Surcharges also change frequently. The best way to stay on top of this is to consult an expert, or work with a 3PL to help you rate shop multiple times a year.
3. Delivery Speed
As a general rule, the slower the delivery speed of a package, the lower the cost of shipping. (This doesn’t consider any surcharges, exceptions, or special add-on fees.)
It’s easy to get caught up in the Amazon-effect and want to offer your customers the fastest shipping speeds possible. Doing this will increase your shipping costs quickly.
When choosing your shipping service and delivery speed, first think about the type of products you ship. If you have a high-value camera, you don’t necessarily need to get it to your customers the next day. Medical supplies or consumable goods are more likely to need faster shipping speeds because of expiration dates.
Second, consider the customer experience. Are they the type who need instant gratification? Or the type who are fine waiting a few days? Age and region might also be determining factors. Take a look at the demographics of your customers to help determine what delivery speed they will best respond to.
If you ship primarily LTL freight, consolidated shipping is another strategy to choose from. It means multiple LTL items are combined into a single container shipment. Instead of moving the shipment from warehouse to warehouse, during the process of consolidation, LTL shipments are moved to a single location, combined, and remain on the same truck until they reach their destination.
4. Fuel Charges and Surcharges
Fuel is a huge part of moving packages from place to place. No matter the service you choose (air, sea, expedited, or ground) fuel is one of the biggest contributors to your overall shipping costs.
There are many aspects of fuel charges that many ecommerce brands don’t know. Here are a few:
Fuel rates change each week, depending on the market price of fuel.
There is a base fuel rate. But then there are fuel surcharges that are layered on top of the base rate, and then also layered on top of specific services.
The fuel base rate isn’t the same at all carriers. It varies greatly because each carrier uses a different formula to calculate it from the market price of fuel. For example, UPS references two weeks of diesel costs to come up with an average, whereas FedEx takes a week of data to create their fuel surcharge.
While fuel rates and surcharges can’t usually be negotiated, it is important for shippers to understand how they are applied to services.
5. Claims Ratios
All carriers lose or damage products occasionally. While it’s not ideal, it does happen.
You will likely be alerted to damaged or lost goods by a customer complaint. You’ll then need to file a claim with your carrier for the damaged or missing shipment. When claims happen often it means you’re losing money—because of lost product revenue, and lost customer loyalty, plus the time you lose to customer relations and administration efforts with the carrier.
Some occurrences where claims are likely to occur more frequently include:
- Higher value products (especially if they don’t have secure packaging)
- Fragile products (glass bottles, candles)
- Products that have an expiration date (medicine, food, beverages)
- Places where weather can affect products (temperature, humidity, or precipitation)
Look at your carrier’s claims ratio. It should be very low. If it is above 1%, that’s a red flag and you should look elsewhere for shipping service. If you frequently ship LTL, claims come into play more often than other types of freight shipping.
Using Flat Rate Shipping for Ecommerce
It’s important to note that many ecommerce sellers use flat rate shipping to remove the need to weigh packages, calculate DIM weight. Flat rate requirements: any package under 70 pounds, using the USPS flat rate boxes, can ship anywhere in the US for a single rate. The estimated delivery window is between 1-3 days.
It is also a great way to navigate away from DAS and EDAS charges and surcharge. The flat rate applies to packages of all weights, plus all ZIP codes they are traveling to and from.
Flat rate shipping is good for very heavy, small products. It is also more commonly used by shippers who are just starting to ship products, self-fulfilling, and with low monthly order volume.
How a 3PL Can Help
Outsourcing fulfillment and logistics to a third-party provider can help take the guesswork out of a lot of items on this list. Understanding the details that go into your shipping invoice is a full-time job. It’s best to outsource to an expert who knows how to optimize for lower cost, better overall service, and ultimately greater satisfaction.
An experienced 3PL will have long-standing relationships with carriers and be able to negotiate competitive rates (like DIM factor). Some 3PLs have internal tariff systems in place to give customers a consistent shipping rate. They absorb the fluctuation from the carriers and apply a flat rate for all customers. While it might mean you aren’t paying the lowest possible rate, having consistency will make forecasting and revenue planning much easier. If you’re a small business or startup, consistency is hard to come by.
If you are a shipper looking to better understand if you’re with the right carrier and you have the right shiping service, reach out to us to get a quote. At DCL Logistics we have a transportation team with decades of experience, ready to help you and your team get the best for your brand, and your customers.