Who Pays to Get It There?

By Melissa Campanelli
Entrepreneur magazine - February 2002 

One of the most delicate issues facing online merchants today is how much to charge customers for shipping and handling. Charge too much, and an online customer may decide that buying that bag of kitty litter at the local pet emporium is a much better bargain-why pay to ship gravel? Charge too little, and an online merchant may soon find itself the subject of its own business obituary at X-Company.com.

Online marketing analysts offer several suggestions on how to handle shipping and handling fees. Because the majority of consumers review these costs prior to making a purchase, it's advisable to consider these charges as a break-even proposition instead of a way to make more money. That tactic serves to minimize both the customers' distrust and a merchant's risk.

"Consumers are wiser to the true costs of shipping than retailers think," says Ken Cassar, a senior analyst at Jupiter Media Metrix in New York City. He recommends e-tailers base shipping and handling charges on the weight of packages, not on how much a customer spends. But studies indicate that not all business owners agree with that advice. According to a Jupiter WebTrack Survey of the top 50 Media Metrix online retailers, 54 percent of retailers based shipping costs on order cost, while only 30 percent based fees on weight. Experts admit the right policy for your business depends on the nature of the products you sell.

A Weighty Issue

As some e-tailers are finding out, charging by weight isn't always the best way to go. "There are many exceptions to the rule," says Cassar. "In fact, in some instances, deviating from a weight-based method poses no real risk." Take the example of companies that charge shipping and handling fees based on order cost. In this scenario, business owners ask their customers to pay shipping and handling fees only if the order amount costs less than the company's break-even point. When orders exceed that amount, customers receive free shipping. However, this approach only works in some circumstances.

"It is possible for a merchant to break even on shipping and handling based on the price of the product if they sell a single product or a very homogeneous mix of products with a fairly consistent number of items in every order," Cassar says. "[But] if the product mix varies, or if the order size varies, the possibility arises that many customers will get soaked on shipping and handling charges."

Online music store CDNow begs to differ-it charges customers $2.99 in shipping and handling fees for the first CD and 99 cents for every additional CD. "This is a dangerous per-item-based pricing model," says Cassar. "A purchase of 200 copies of Journey's Greatest Hits would cost a customer $200 in shipping and handling fees, while CDNow would only incur about $28 in shipping costs."

Taking a break-even approach-instead of using shipping fees to net extra profits for the company-has worked well for Ashford.com, a Web site based in Houston that sells corporate and personal gifts and rewards. The company was co-founded in 1988 by J. Robert Shaw, 35, and James Whitcomb, 35. William J. Hensler, COO of the company, which has $50 million in sales annually, says orders costing less than $1,000 are charged for shipping; orders costing more than $1,000 are not.

"[Our] shipping charges are what we pay FedEx, UPS and the U.S Postal Service, so we are not making money on shipping," Hensler says. "As a result, we do not view shipping as a profit center, but as a critical service for encouraging customers to shop with us more often."

"Our customers spend a lot of time browsing products and visiting the site numerous times before purchasing, but once they do decide to purchase, they want it immediately," adds Whitcomb. "We want to get our products in the customers' hands as quickly as possible for a price that does not defeat the convenience of buying online."

Hensler insists basing shipping and handling costs on weight is not the correct approach for his company. "We do not have a product line with large and heavy items, such as computers, where you'd have to come up with a strategy that takes into account the relatively high cost of shipping and handling heavy items," he says. Hensler does, however, admit that sometimes the company actually loses money because of its shipping policy. Beyond paying the charges for customers who buy more than $1,000, Ashford also pays for insurance on each item. "But we don't mind," says Hensler, "because we feel it's very important to offer our customers the best value and low shipping costs."

A merchant like Ashford, according to Cassar, is indeed an exception to the rule. He says that even though the company experiences small losses on shipping and handling, it can be comfortably covered by the margin on a large order, because the company sells fairly light products at high order sizes. However, he notes that if they were to change their business model and start selling heavy or lower-priced products, they could run into trouble with the current shipping and handling policy.

As making money on the Internet becomes increasingly important, e-tailers understandably want to seek out new sources of revenue-and charging higher shipping and handling fees may sometimes sound tempting. But inflating these charges can be dangerous. According to a study from Datamonitor, 69.4 percent of online transactions in 2001 were abandoned. It seems concern over high shipping and handling costs was cited as one of the most popular reasons for online buyers to abandon their shopping carts. After all, as Cassar points out, "The long-term interest of the retailer is best served if customers trust it."