How to Calculate Shipping Cost?

E-commerce Challenges, Questions, and Solutions (With Detailed Best Practices)

Selling product on an online store is hard in and of itself – but it is also essential that you make sure your customers end up receiving it actually receive it in a quick and cost-effective manner.

There are many questions you need to answer about shipping. How much does it cost? What carrier should you choose? What can cause your package to be held up if you ship internationally?

In this article, we will answer all those questions and give you some useful tips about not only calculating your shipping cost but incorporating it into your marketing strategy and business planning.

Shipping rates and abandoned carts

Shipping costs and cart abandonment rates are closely tied, and not just not because the costs are too high - but because merchants forget to tell shoppers about them...

Every online store has to come up with solutions to lower cart abandonment rates – on average, every 7 out of 10 shoppers who ass to their cart eventually leave the site without completing a purchase. (The exact average rate varies from one study to another, but in general, cart abandonment is somewhere between 75% and 80%.)

Numerous surveys and studies have been conducted to uncover the reasons behind cart abandonment. And all of them come up with the same conclusion: that unexpected costs are the most common reason for abandoning a cart.

This means that the customer fills their cart and then proceeds to the checkout, only to find out that the total cost is higher – usually because shipping costs or VAT were not included in the cost on the product or cart page.

According to the Baymard Institute, as much as 60% of US online shoppers have abandoned their cart at least once because the extra costs (shipping, tax or fees) were too high.

And as important as this factor is, it has a very simple solution: just be transparent all the time and fully disclose all costs from as early on in the buying process as possible.

If the customer can see on the product page how much the shipping would cost and you also include that information in the total indicated in the cart and checkout page, they won’t have to face unpleasant surprises. Consequently, they will be less likely to abandon their cart.

Much of the time, the best solution is to offer free shipping – and we will cover this and other options a bit later in the article.

To do that, and to work with shipping costs that won’t cut into your profit, you have to first calculate the costs yourself.

So let’s start with probably the most basic question.

Which Carriers Should You Choose?

There is no definitive answer to this question - it all depends on the needs of your business and, customers.

In this section we will break down the major shipping services by concentrating on the most important questions: what, where and when are you shipping.

Domestic Shipping

U.S. Postal Service (USPS)

The US Post Office is one of the most popular domestic shipping solutions. You can choose to ship packages by going to the Post Office, where they will measure it and tell you how much shipping will cost, or you can request a free pickup from where you fulfill your orders.

If you opt for picking, you can register on the USPS website where thwy will walk you through the process of how to weigh and measure your packages as well as print shipping labels from your own computer. If you opt for free pickup, you have to mail at least one item via Priority Mail Express, Priority Mail or Flat Rate.

There are a number of shipping options you can choose from at the USPS, the main ones are:

  • Priority Mail Express: delivery to most U.S: locations.
  • Priority Mail: Estimated delivery within 3 business days.
  • Flat Rate: Overnight or 1-3 business days delivery.
  • First-Class Mail: delivery within 2-3 days.
  • Standard Post: available for retail only, see below. Expected delivery in 2-8 days.
  • Parcel Select: delivery in 7-10 days.
  • Military Mail

Shipping rates vary:  USPS has four standard rates:

  • Retail: what you pay when you go to the post office to mail your packages.
  • Commercial Base: a discounted offer for those who use an online postage provider.
  • Commercial Plus: this is for larger merchants who ship more than 50,.000 packages yearly, but also requires a customer commitment agreement with the Post Office.
  • Negotiated Service Agreement: for companies shipping, even more, there is an option to enter into a contract with USPS where the prices are negotiated based on the shipping volume.

FedEx

As with USPS, you have the same option to ship deliveries from a FedEx office (make sure your shipment is boxed and ready to ship) or from your fulfillment location. In this case, you have to do the measurements yourself, create an account on the FedEx homepage and schedule a pickup – or drop it off at FedEx yourself after creating and applying the correct labels.

Based on your shipping volume you can negotiate a rate with FedEx: the higher your volume the lower your shipping rates will be. You can also register for an account via ShipWorks, which comes with an automatic 16% discount.

You can choose from a large number of options:

  • Same-day delivery: depending on availability, door to door delivery is within hours cross-country or cross-city.
  • FedEx First Overnight: packages are delivered first thing in the morning on the next business day.
  • FedEx Priority Overnight: packages are delivered the next business day morning.
  • FedEx Standard Overnight packages are delivered the next business day afternoon.
  • FedEx 2Day AM: delivered in the morning in 2 business days.
  • FedEx 2Day: delivered in 2 business days
  • FedEx Express Saver delivered in 3 business days.
  • FedEx Ground: delivered within 1-5 days in the contiguous U.S., 3-7 days to and from Alaska and Hawaii, to residential and commerce addresses.
  • FedEx Home Delivery: delivered within 1-5 days in contiguous U.S., 3-7 days to and from Alaska and Hawaii, only to residential addresses.
  • FedEx SmartPost: delivered in 2-7 business days
  • FedEx One Rate: package delivery within 1-3 days in the contiguous U.S.

As you can see there are two similar but separate services you can choose among other options: FedEx Ground delivers to both residential and commerce addresses, and FedEx Home Delivery delivers only to residential addresses from Tuesday to Saturday.

The greatest strength of FedEx is speed: most of their services offer delivery within a few days but you can even choose options like overnight delivery or same day shipping, door to door.

United Parcel Service (UPS)

UPS is a good option for both domestic or international shipping if you have larger packages and the delivery is timely.

With UPS you also have the option of shipping from an office or from your home. As with the other providers, if you want to ship from home, you have to create an account on the UPS website and measure the package yourself which then can be shipped via a scheduled pickup or you can drop it off at a UPS facility.

Based on shipping volume you can negotiate a rate with UPS about shipping rates – the more shipments you send, the less you are going to pay.

These are the options you have at UPS:

  • UPS Next Day Air Early AM Delivers the next business day in the morning
  • UPS Next Day Air Next business day delivery by 10:30 am., 12:00 noon, or end of the day, depending on destination
  • UPS Next Day Air Saver Next business day delivery by 3:00 or 4:30 p.m. where UPS Next Day Air delivery is committed by 10:30 a.m. or 12:00 noon, respectively
  • UPS 2nd Day Air A.M. Delivery on the second business day by 10:30 a.m. or 12:00 noon to most commercial destinations
  • UPS 2nd Day Air Delivery by the end of the second business day. Some locations in Alaska and Hawaii require an additional transit time
  • UPS 3 Day Select Delivery by the end of the third business day
  • UPS Ground Delivery typically in 1-5 business days
  • UPS Mail Innovations UPS Mail Innovations inducts your mail piece into the U.S. Postal Service within 48 hours

International Shipping

I-parcel

UPS i-parcel is a service dedicated to helping internet retailers who want to ship packages internationally. The cloud technology that they use offers local currency shopping, multi-currency payments, fraud protection, online tracking, and returns.

Their primary offering is the so-called Preferred Service, which makes it possible for retailers to ship their merchandise in 5-7 business days with an online trackable air shipping service.

Postal Qualified Wholesalers (PQW)

PQWs are companies that are working in partnership with the USPS to mail packages outside of the United States. Working with them can simplify shipping abroad.

All PQWs are screened by the USPS to make sure that they meet the requirements for volume, providing data, delivery times and so on. There are a number of different service levels you have access to this way, including:

  • International Priority Airmail: Packages are delivered in 3-7 days, so it is a good fit for time-sensitive deliveries. Companies that sell their products on Amazon or eBay frequently use this method because it keeps costs down while ensuring quick delivery.
  • International Surface Airlift: Deliveries are completed in 7-14 days, so it is a good fit for companies selling products where it is less important to ship them as soon as you can.

DHL

You also have the option of using DHL since they also offer international shipping. To know how much it will cost to ship your packages with DHL you’ll have to ask for a quote directly.

Their international shipping service also includes their iCart Software which makes processing online shipping expenses easier since it integrated with your online store.

This way customers can see the cost of delivery (including related taxes, duties and shipping cost) in their own currency while shopping.

How to calculate shipping costs for your online store

There are a few basic factors that determine the cost of shipping, these include:

  • Size of the package
  • The weight of the package
  • Country of origin
  • Destination

There are a number of other options you can choose that can also increase the shipping price, like online tracking or insurance. The volume of shipments also factors in. The more you ship with a single shipping service the less it will cost.

As you can see it is not easy to get exact numbers – you can get a good idea by using the calculators available online with the carriers we listed above.

How much should you charge for shipping?

Ideally, you would want to charge shoppers the exact cost of shipping but is often difficult if not impossible. While there are some carriers like FedEx, DHL, and IPS that have APIs which could display the estimated shipping cost on your site shoppers to see, they can’t always include all of the surcharges that may apply.

This means that your customers will only get to know the exact cost of shipping at the last stage of the checkout after all information is available like the parameters of the items ordered and the destination.

This poor user experience and surprise shipping costs can increase your cart abandonment

So instead of charging the exact same amount for each order, it makes more sense to offer fixed costs. This takes careful planning to make sure you are still making enough profit on each sale.

Many online stores don’t even charge for shipping – not directly anyway. They offer free shipping for their products – but still have to pay for the shipping, so these costs are integrated into the overall business.

This might be a very effective strategy since customers are more likely to convert if you offer free shipping,- and also eliminates the problem of showing shipping cost as earlier on in the buyers journey as possible.

Consider your products

The first thing you should think about is the kinds of products you sell and ship. If you sell low cost or low margin goods, you may find yourself in a situation where footing the bill for free shipping may eat too far into your margins.

In this case, you have two choices. First, offer free shipping and include the price of shipping in the price of the product.

But this will make your product more expensive: when people are searching for your product, they may think you are more expensive early on in the buyer’s journey and shop somewhere else

The second choice is offering flat rate: shipping where the shipping rate is the same for everything.

In the case of higher value products however free shipping is often expected from you as a merchant. And if your product is of high value but not that expensive to ship you can likely afford to lose some of the profit margins to provide a better customer experience.

Consider your customers

You should also take into account the target market: people who you are selling products to their behaviors and demographics.

Geographic location, for example, is a primary factor. If you are targeting a specific area or country you can create a flat rate, but if your customers come from all over the world, this is likely not a doable option: you have to set added fees depending on the destination.

The way you deal with shipping costs can also influence the customer experience. For example, if you offer free shipping to returning visitors as a reward for loyalty, you can likely increase the lifetime value of a customer.

What is your competition doing?

We have already mentioned that you should keep an eye on what your competition is doing.

If you have high competition on your market and everyone else is offering free shipping when you should also figure out how to do that, otherwise, you will be the less customer-friendly, more expensive option.

But if you sell a unique product with no or little competition, this becomes a less important factor in terms of price, as customers can only get it from you – however, it can still factor in customer experience as we have discussed above.

Your options

Let’s have a detailed look at all the possibilities you can choose from (or combine).

Storewide free shipping

This can be an effective strategy, but if you have a great variety of products in your store it could be hard to pull off. If you don’t incorporate the shipping in the product prices or make up for it elsewhere, you have to plan your strategy very carefully to make the profit needed to sustain your business.

If your competitors offer free shipping, you should definitely try and do the same – at least test it to have a basic idea about how it affects your sales and margins.

In the long term it may become a viable strategy to offer free shipping because you reduce friction from the buying journey – so it may cost you something at first, but bringing back customers who have already purchased something from you is much cheaper than acquiring new ones and can also increase their lifetime value.

Free shipping on certain products

The product itself factors into how much the cost of shipping is. If you have a wide range of products in your store, consider segmenting your shipping options.

This helps with marketing because you can communicate free shipping for at least some product categories.

If you chose to do this, make it sure that your shipping guidelines are very clear, so the customers will understand why they are charged for the shipping of one item and not the other. It’s a good idea to have a dedicated category for free shipping.

Free shipping on certain deals

You can also use free shipping to increase average order value – for example, you can drop the shipping costs if they order a certain number of products or the total is above a certain value. Try testing different minimum values to find the solution that increases conversions-, order value, and margin the best.

Free shipping for certain customers

You can offer free shipping as a reward for customer loyalty – so customers with a certain number of orders or who have spent a certain amount of money in your store are offered free shipping.

You can even create a program like Amazon Prime where there is a smaller annual fee for free and quick shipping. Even if joining the program is offered for free, you get new ways to reach out to those who join, so you can save on marketing cost.

Flat rate shipping

A flat rate is a good option because it is easily understood by customers. You can easily communicate flat rate shipping early in the buying journey and lower your cart abandonment rates.

With a large and diverse line of products, this may not work well. A wide range of product values, weights and sizes makes it all but impossible to put a flat rate shipping cost on everything, and if you have target markets in multiple countries that also complicates it.

If you want a flat rate you have to calculate your average costs and make sure that you aren’t cutting too far into your margins and revenue.

Cost calculated per order

If the flat rate or free shipping won’t work for you, then you should use a system where the store calculates the shipping cost based on the attributes of the product and available information (mainly geographical location) and indicates it on the products page and the in the cart.

For this you can use APIs of the carriers you use, most of them have it available so you can integrate it in your store. However, as we have mentioned there could be certain additional costs that are not factored in this way.

What is shipping insurance?

Most carriers include insurance protection as a part of their service, but you’ll want to be aware of what that exactly covers.

It is important to know that you and your customers can rely on whoever is shipping your product.

Cargo Insurance

This is what most carriers offer: it provides a door to door protection for your shipments and you don’t have to prove that the loss was caused by the negligence of the carrier. The insurance will pay either way.

It also covers losses outside of the carriers control. The insurance will provide a full refund and oftentimes pays for expedited shipping for the replacement goods. The payout is usually quick and is regulated by the Department of Insurance.

Declared Value

This type is included by most major carriers (up to $50-100 value). However, with this type, the carrier’s negligence has to be proven by the shipper. They lack many advantages of cargo insurance, for example, you won’t get refunded as quickly.

Why (and when) is insurance important?

If you have insurance, you can (and should) communicate that to your customer to strengthen credibility. It is also a good idea to get insurance on your packages if you sell and ship high-priced products.

If the package is stolen, damaged or simply lost, you should file your claim right away to start the process as soon as possible. Every insurance provider has different times for how long the process takes, so be sure not to miss the window for when your claim is eligible.

Customs declaration and forms

If you sell internationally shipping can become complicated due to the required documentation.

These documents inform customs officers about the details of the shipment – what is in the package, how much it costs if its merchandise or a gift and so on.

Before you start marketing to foreign markets, always check what forms are necessary for each country as they can differ.

If you don’t have these or don’t correctly fill them out, the package could get held up, which leads to unsatisfied customers.

Additional customs fees will have to be taken care of by your customer upon the arrival of the package, so you should also acquire this information beforehand and tell them before they make the purchase. Also, include this in confirmation emails and your shipping policy page.

Fulfillment warehouse

Using a fulfillment warehouse can streamline your process and automate many of your tasks. You can store your items at the fulfillment warehouse and integrate their system to yours and have your orders automatically forwarded to theirs. At the warehouse they pack and ship it for you, making your life much easier.

Fulfillment warehouses can usually provide much lower shipping rates since they get discounts for their high volume of shipments.

You may also get to chose from a wider range of options as these facilities usually are usually integrated with all the major carriers.

Shipping may also be quicker because you store your inventory at the warehouse – and that warehouse could be located closer to your target market than you are.

You do have to pay for their service. You may get lower shipping rates, but you will also have to pay for the storing and packing your products.

Shipping Management Software

One of the most popular solutions is ShipperHQ. It can be integrated with most eCommerce platforms: Magento 1 and 2, WooCommerce, BigCommerce, Shopify and Zoey.

It offers full control over shipping options and the shipping rates that you display in the cart to the customer. It has one of the most sophisticated rates calculation engines and includes the option to discount or surcharge life, set rules, create shipping groups, and set other conditions.

Software that helps you in shipping can be a great way to not only cut some of your costs but also reduce human error. The greater your volume is the more likely it is that you are going to need some kind of automation – and in part because it is also more likely that you will make mistakes and tracking all your shipments will become a full-time job sooner than you think…

Conclusion

To be successful in e-commerce, well thought out shipping strategy needs to be implemented. The way you communicate it, the actual cost, and the speed of delivery all have a great effect on customer experience, conversion rates, average order value and lifetime value of a customer.

Shipping also directly effects margins. You need a sound, well thought out the business strategy before you even start a store. Dedicating a great deal of thought to exactly how shipping is going to work for you so your customers and your business can both stay happy is an absolute necessity.

Make sure you consult with experts and experienced merchants to develop a plan on how to implement a successful shipping cost strategy.  If shipping rates cause too many cart abandonment or cut too far into your margins, your online store may not succeed.

Start thinking about everything we mentioned in this article and start sketching up a shipping blueprint. You’ll be on your way to building a successful online store!

Juergen Schreck
Certified Magento Developer and Magento 2 Solution Specialist

Juergen is a 10-year veteran Magento Developer holding multiple certifications. Combining more than 25 years of hands-on experience in software development and business management, his insights provide merchants with creative solutions to gnarly problems and peace-of-mind where the rubber meets the road – turning hard earned traffic into actual sales. Juergen is proud father of two, a foodie and a lover of jazz music.