The Complexities of Shipping & Handling Fees

Flip to the order form of any catalog or go to the checkout of a cataloger’s Web site, and you’ll find one truth: There’s no standard for shipping and handling (S&H) fees.

What a catalog charges to ship product depends on many factors, such as type of product (soft goods or hard goods) or the shipping method chosen by the customer. Others are less-than-obvious and depend on how the cataloger chooses to account for S&H in its operations.

These variables make S&H a widely debated topic. According to F. Curtis Barry & Co., an operations consulting firm, about half of catalogers charge customers more for S&H than the actual costs of the outbound freight. How does your catalog view this important element of back-end operation? Is S&H a line-item on the expense or revenue side of your balance sheet?

Catalog Success spoke to three catalog operations experts who have differing opinions on the complexities of S&H. Here they make recommendations for the best ways to manage your S&H costs.

What to Charge

In determining what to charge, look at the total expenses for all your S&H activities. Start at your cost per order, suggests operations consultant George J. Mollo of GJM Associates. “What does it cost to pick, pack and ship?” he asks.

Also consider how many packages will mail for every order. Says Mollo, “This depends on your backorders. There’s a direct relationship between the two.”

A major factor in discerning what to charge for S&H is the kind of product you’re shipping. Hard goods obviously cost more to pack and ship. Soft goods such as apparel (which Mollo says often can ship in manila bags, and stay less than the 2 lb. weight) will be cheaper to ship.

Curt Barry, president, F. Curtis Barry & Co., adds another element to be factored into your S&H costs: freight damages. “Look at the cost of the outbound freight, also taking into account the damages and freight losses.”

Next, include a portion of your pick and pack labor costs and the cost of shipping materials, says Barry. “Factor in some percentage of outbound packages that result from orders received,” he says. “Take your number of orders and the percent that will ship with a second package, say 120 packages for every 100 orders. Look at what percentage of backorders will have to ship in additional packages.”

Barry suggests doing a shipping study that looks at all of the factors together to discern if you’re charging the right amount. “This also will help to determine places within your S&H where you can potentially reap some cost savings,” he says.

In setting your fees, look at your competitors’ order blanks. “What percentage of their average orders are they charging for S&H? You want to be in line with your competitors,” Barry asserts. Also look at how many customer complaints you log regarding your S&H policies.

Overcharging for S&H can get you into hot water. “There was a class action suit against two mail order companies in the last year related to S&H charges. The suit alleged that consumers were being unfairly overcharged for the insurance part of S&H,” Barry says, noting that insurance fees were common a few years ago but not anymore. “Today, you have to be certain [such charges] are absolutely necessary.”

Also use caution when offering free shipping. In some cases, it can boost orders, but it also can be a losing proposition. Mollo explains: “Look at your average order size. If it’s $70, maybe you’d offer free S&H on orders over $80 to get the average order up.” But, if your average order is $50, and you offer free shipping on orders of more than $40, then you’re giving the store away, says Mollo.

How to Charge

Most catalogs today use a tiered S&H fee schedule. Charges are divided into levels, with the fee charged for an average order size somewhere in the middle tier.

Other less-common methods of charging include using a flat fee (but that only works for a limited number of catalogers), or charging actual cost for shipping, based on the weight of the items and the location to which they’re being sent (but this is difficult for most catalogers to manage). “It may cost you more to ship from a distance, for example, New York to California, but it’s problematic to charge more from a consumer’s point of view,” Mollo states.

Michael Grant, of the catalog marketing and database consulting firm Michael I. Grant & Associates, explains why tiered pricing works: “What you try to do with a tiered table is create levels with your average order size in the middle. The percent obviously is less for larger orders, so there’s a benefit to ordering more. It should decline as a percentage the farther up the tier you go.” He offers examples:

$6 on orders up to $30 (20%)
$7 on orders up to $50 (14%)
$10 on orders up to $75 (13%)
$12 on orders up to $100 (12%)
$15 on orders $100+ (To Profit or Just Break Even

Of course catalogers want their S&H fees to cover shipping costs. However, while some catalogers make money beyond their actual expenses, others may lose cash because they’re shipping heavier items and can’t place the full cost on customers’ shoulders. How do you strike a balance between what’s fair to the customer and what’s a fair compensation for your efforts to get the order out?

“Catalogers generally do make money on S&H. It’s an area that contributes to their fixed operating costs,” Grant asserts. Just how much they make, however, depends on if it’s hard or soft goods they ship, Grant says. “Because soft goods cost less to ship, there’s more room to make a little money. With hard goods you can still make a little over your expenses, but not nearly as much.”

S&H expenses for soft goods tend to range from 4 to 6 percent. With hard goods, the expense can be from 6 to 10 percent. As a result, it’s somewhat easier for marketers of soft goods to cover their expenses and then earn some extra contribution.

Barry takes a different view of the profit issue: “Cover a portion of the costs beyond the actual outbound freight. The fee is a marketing income, and the freight is an operations expense, so it shows up as a net income. But this is to cover all of the associated costs beyond the shipping.”

Mollo says S&H fees must cover both the actual shipping and handling costs of an order. “Catalogers should be able to make money on S&H. It’s handling, too, and that’s a service.” But, he continues, be reasonable in what you charge to cover the handling portion. “You might charge $5.95 for S&H, but it only costs you $3.50 for the actual shipping.” That places the handling at about 40 percent of the total cost, he says.

Keys to Cost Control

Numerous changes can be made to reap incremental savings in S&H. But two areas emerged as key: managing backorders and vendor negotiations.

With inventory forecasting, the goal always is to ship a complete order. “One of the challenges is to be in stock on most product SKUs,” says Grant. “Mailers will be hard-pressed to charge their customers for inventory-related issues.”

If backorders are high, says Mollo, “You’re shipping multiple packages per order, so it costs you more to ship.” More outgoing orders means more picking and packing expenses, plus you lose the cost benefits of shipping one package versus multiples. “If it’s 1.1 or 1.2 [packages] per order, then that’s great. If it’s more, it costs you more to ship the order because you’re dealing with multiple packages,” he notes. To alleviate this situation, sometimes catalogers will hold orders for a day or two if items will be in soon—that’s if they’re not expedited orders, Mollo says.

Barry believes catalogers could do a better job at shipping-rate negotiation. “It’s like when you buy a car. You’ve got the sticker price and the dealer cost. If you know what the dealer paid, you can negotiate your price down to where he’s still making money, but you’re getting the best possible deal.”

A freight consultant can help you get a lower rate from the major carriers, often getting 5- to 12-percent cost reductions, Barry continues. Also, a freight consolidator may help you reap economies of scale.

Also explore shipping alternatives. Says Mollo, “You may be able to truck goods to a consolidation point to mail from the BMC or go right to the local DDU.”

Grant concludes: “Most mailers charge a fair amount. They’re working with their vendors with hard goods to keep costs reasonable.” But, he adds, “Expenses keep going up, and it’s hard to pass that [increase] along to the consumer. This puts pressure on the cataloger to keep searching for ways to cut costs.”