Shipping is one of the factors of doing business that significantly affects profitability. If you’re an entrepreneur starting a business and are contemplating on taking it online, shipping will be a major part of your business operations.
In an increasingly virtual business landscape influenced by the pandemic, consumers have now shifted to buying online. If you don’t get your shipping costs right soon, your products will not sell at a profit, and your business will lose money. Pretty soon, it will be time for you to check out financing options just to keep your business going.
That’s why it’s important to understand shipping and formulate a strategy on how to do it profitably. Before you choose a shipping strategy, you have to know about the basic shipping principles first.
Shipping Models and How They Work
In eCommerce, there are three major shipping models that play a part in the degree of control you have over your shipping costs.
Dropshipping
With this type of fulfillment, you don’t store your own inventory. Readers who love reading should know about online book stores. You’re essentially an online reseller of a product that’s stored in a remote warehouse, while the ‘dropshipper’ deals with the carrier and relays the product, shipping, and delivery costs to you.
Third-Party Logistics
You have an inventory stored in a warehouse, and a third-party logistics team manages your inventory and shipping. Cost control is limited to the product.
Self-Fulfillment
You make the product, manage the inventory, and deal with the courier to deliver the product to your customers—you also have complete control of costs.
Basic Shipping Principles
In preparing to choose your shipping strategy, you have to know the basic principles in doing business where shipping is heavily involved. Below are some things to keep in mind.
Differentiate your offerings
Before you think about strategizing shipping profitability, first you have to determine how you want to differentiate your products or services in the market according to the following factors:
- Lower cost
- Superior quality
- Faster response
There’s a tradeoff between these factors. For example, choosing to differentiate your product as the cheapest one in the market may decrease its quality and how fast it can be shipped. You have to think of these as it affects your decision when determining your shipping methods and choosing your shipping rates.
Incorporate shipping cost when determining price
To accurately reflect the price per unit of your product, you have to incorporate shipping costs. Below are the components that you would need to know to cost your products accurately:
- Cost of producing your product
- Packaging
- Shipping cost
- Custom fees (for international shipping)
- Card fees
You also have to take into consideration how your chosen courier calculates its shipping costs. Whatever their costs are will be yours too. Here are some of the things that US couriers take into consideration when determining shipping costs:
- Size of the package
- Weight of the package
- Address of origin
- Destination
- Additional shipping features (tracking or insurance)
Take into account customer experience
Customers are sensitive to shipping costs. If you are thinking to get e-commerce shipping services, must consider essential factors. The cost of this extra charge can spell whether they’ll buy your product or leave your store, and is a part of their overall shopping experience. You must take this into account when planning your shipping strategy.
Other parts of the shipping process that the customer experience are the following:
- Branding
- Packaging
- Degree of personalization
- Promptness of delivery
You need to set the importance of each factor to strike a balance between customer experience and your shipping cost. These factors are your choice of shipping, the courier shipping rates, and ultimately, the price and quality of your product.
Strategies for Shipping Profitability
Now that you have chosen a shipping model, analyzed shipping costs, and accounted for customer experience, it’s time for you to choose the right shipping strategy that’s profitable for you. Also, read the car shipping guide for the everyday family. Below is a quick guide on the basic strategies.
The Free Shipping Strategy
This strategy entails offering free shipping to customers at the cost of your product margin.
When to use it:
- If you have a huge product margin
- You’re creating brand awareness
- You’re promoting a certain product or product line
Pros:
- Decreases likelihood of shopping cart abandonment
- Increases your sales conversion
- Yields great customer experience
Cons:
- Eats your profit margin
Exact Cost Strategy
This is the opposite of free shipping where the customer pays for the exact cost of shipping.
When to use it:
- When the business has gained loyal customers
- You have a competitive product price per unit
- The products have a low profit margin
- When product size and weight specifications vary hugely
Pros:
- You get to keep the margin fully
- Maximizes profit per sale
Cons:
- Increases likelihood of shopping cart abandonment
- Difficult to set up because of the shipping price variability
Flat Rate Strategy
You’ll offer a flat rate so both you and your customer can cover the cost of shipping.
When to use it:
- If the product offering has uniformed specifications
- There’s a reasonable profit margin on the products
- You have a low-cost courier as an option
Pros:
- Facilitates the sale and movement of your products
- Encourages high volume orders
Cons:
- A flat rate may be overpriced
- A tendency to cover more of the shipping cost due to increased volume
There’s no one-size-fits-all strategy
Choosing the right strategy is not exclusive to just one of the three. It may change depending on how you do business. What’s important is that you know which strategies to use from launching your products up to the point where it becomes a going concern.
Now evaluate your business, the products it will offer, and the degree of control you want to have on your shipping costs before you launch your products online. If you have already launched your products, try to review your business and decide if your current shipping strategy is still profitable, then choose from the three strategies that will work best for your needs.
Good luck on your entrepreneurial journey!
