How To Set Shipping Rates For Your Online Store

When starting an online store, determining how to charge your customers for shipping can be a difficult decision. There doesn’t seem to be much consistency between the many ecommerce stores out there. Should you offer free shipping? Should your shipping rates be based on weight or total price of the order? And how will you ensure you’re keeping a healthy profit margin?

These are all questions you may be asking yourself. In this article, we’ll cover the common ways online retailers handle shipping rates and what seems to work best based on testing. However, it’s important to note that there is no one size fits all solution. However you decide to set your shipping rates will depend on your industry, what you’re offering, estimated sales volume, weight and size of your items, and much more.

Before we look at the common ways online businesses set shipping prices, let’s look at how to determine your actual costs.

Determine Your Shipping Costs

You should calculate what your shipping costs will be before determining the shipping prices you’ll charge your customers. Here’s how to calculate your shipping costs:

Handling

First, you’ll want to figure out the average time it takes you to package an item you sell. This will be easier to figure out if you only offer a small handful of items. Take the average number of minutes it takes you to package a single item and divide that by 60, then multiply that number by an hourly rate you would pay an employee to perform that job. If you do not have any employees, use the minimum hourly income you would accept.

Packaging

Next, you’ll want to determine the average cost for packaging materials such as boxes, tape, cushioning, etc. It is recommended that you determine the actual cost, however, if you’re only shipping small packages you can use $1.00 to make it easy.

Postage

For this step, you’ll want to measure the average package dimensions and weight and plug those numbers into an online shipping calculator and test out different destinations that you would normally ship to. If most of your customers will be based in the United States, use different destinations within the United States to determine an average cost.

Finally, add up all three of those numbers to get your final cost before taxes and fees. You’ll then have your average shipping cost per order and can move on to setting your shipping rates.

Common Shipping Solutions

There are four common ways to handle shipping rates for your ecommerce store. They are:

Free shipping: You pay for shipping and do not charge your customers.
Flat rate shipping: A single set rate for all orders, regardless of quantity, size, or weight.
Price based shipping: The shipping rate is based on the total shopping cart price. This is usually done with a tiered system- for example for every $100 in items the shipping price goes up by eight dollars.
Weight based shipping: The shipping price is based on the weight of the items ordered.

Flat Rate Vs. Calculated

Flat rate shipping is charging a set rate- whether that be free shipping or charging the same shipping rate for all orders. Calculated shipping, on the other hand, takes other variables into accounts such as weight, destination, or the total price of the order.

There are advantages and disadvantages to each type. There has been much testing on this topic, and what many have found is that offering calculated shipping can actually increase cart abandonment.

When your customers are shopping in your online store they will always make two decisions- do they want the product you’re selling and are they willing to pay the price you’re charging. Those are the two essential decisions you can’t avoid. For every additional decision you ask your customers to make, you will lose a percentage of those customers. For example, when your customer gets to the checkout page and sees a calculated shipping rate, they will then ask themselves “am I willing to pay this much for shipping?” and “will other stores charge me this much for shipping?”

Many of the big online retailers do not charge what it actually costs to ship their items; therefore most customers don’t realize how much shipping really costs. Too many online retailers offer free and discount shipping rates and many consumers have come to expect it. This doesn’t mean those retailers are losing money though, they are simply recouping the cost elsewhere.

They may be increasing their margins on the sale price of each item. Or they have found that by charging free shipping has increased sales and they are making the profit up in the additional sales volume.

The Closest Thing To A One-Size-Fits-All Solution?

Again it’s important to mention that there really is no such thing as a one-size-fits-all solution when it comes to setting shipping rates for your online store. If you are in a small niche it is recommended to look at what your largest competitors are doing and test out different shipping rates to see what works best for you.

But for the majority of online retailers, a $5 shipping rate seems to be the sweet spot. Anything less will not award you enough additional sales to make it worth it. And anything more will cause the customer to search elsewhere for cheaper shipping rates.

Conclusion

The most successful online retailers have tested out different pricing structures for their shipping rates and have found what works best for them. If you want an easy place to start, offering a flat rate of $5 shipping per order may work well for you as it has for so many other online stores. But don’t set it and forget it- use your built-in split testing features that your ecommerce platform most likely comes with to test out different pricing structures and find what works best to both increase sales and profit margins.