Shipping costs have increased over the past year thus impacting small business expenses and bottom line. Reviewing shipping strategies annually is a good practice and should include all aspects of shipping: packaging materials, time spent on packaging, postage or freight costs, and money lost on damaged, missing or returned shipments.
By Cleveland SCORE
Shipping is a crucial part of the product a business offers as customers demand fast, reliable service on orders. Balancing this with the businesses strategy for optimizing profits can be difficult to manage. It is estimated that shipping costs have increased on average 6% and it is expected to increase another 9.5% for 2023. This data may not yet fully reflect additional rate table changes that may be made to reflect surcharges for peak season and diesel fuel costs. Industries hardest hit by this increase are those that ship packages 50 or more pounds or 48 inches in length on one side. Typically, this would include auto parts, furniture, home goods and sporting goods. Additional impacts will be felt by e-commerce businesses or those that offer free shipping as they are typically running at low margins.
Thus, it is important to perform a review of your shipping strategies, so they align with margin expectations and customer needs. When considering shipping costs, a review of not only carriers and types of shipping offered is necessary but also an internal review of packaging materials used and time spent on packaging should be included. Additionally a review of money lost on damaged, missing or returned shipments should be completed.
Having the appropriate shipping strategy for your products has benefits for your company as well as the customer.
- Better customer experience – The appropriate shipping strategy allows you to have better transparency with your customer regarding expected delivery, anticipated delays, etc. The ability to track shipments is important to customers as it provides the transparency they desire. It is noted that poor shipping speed relative to competitors can cause up to an 80% loss of prospective customers.
- Improved cash flow – Shipping should be determined not solely on expenses but also on the reliability and accuracy of shipments. It has been noted that roughly 40% of business revenue comes from repeat purchases. You and your customer are part of a supply chain and credibility of expectations by the customer translates into potential for additional business.
- Competitive advantage – Small businesses with efficient and effective shipping have an advantage in markets where there are multiple suppliers. This makes speed of shipping as well as transparency in tracking of shipping a major plus for your business with customers. Small businesses can differentiate themselves from large suppliers by improving the convenience of their service.
Following are the major components for review and determination of optimal shipping strategy for your business.
Review internal shipping practices
Regarding the actual rates for freight or postage, there are considerations in calculating the costs. The following should be included:
- Weight – This is an important factor for products being shipped via air transportation. Because there is a weight limit on planes, the heavier the package the more cost is incurred. A viable alternative could be long haul trucks if delivery speed is not a factor.
- Dimensions – This is a major factor when utilizing land transportation as carriers want to pack as many boxes into a truck as possible. By using carrier supplied boxes and standard sizes, carriers can offer more uniform rates versus businesses using differing size boxes. The latter will cause changing shipping rates and be more difficult to budget for.
- Destinations – This factor is self-explanatory as the further you go with the shipment the greater the expense. To help contain this factor it is possible to carve out a geographic area where it makes sense to ship through local carriers thus reducing costs for more localized shipments.
- Speed – As is intuitive, the faster the customer needs the shipment the more it will cost. Businesses in need of products are less sensitive to this when delays could mean lost production time on their end. Small businesses with non-business clients, however, need to be able to offer more options as these clients are sensitive to shipping costs. Therefore, differing shipping strategies may be necessary.
- Volume – Volume discounts are offered by large carriers for businesses that can use large number of item shipments.
- Shipping supplies – Carriers that can offer free shipping materials should be considered as this will reduce one component of shipping costs.
- Human resources – In addition to the box or container, there is a cost for label creation, packaging, sealing and possibly delivery to the carrier. While these are considered as part of shipping cost, when determining the product price, they are added into the production cost amount along with a variable profit margin to determine total product cost.
The second part of the strategy includes selecting the appropriate carriers which also includes a determination of the proper shipping mode. Following are some considerations:
Mode of transport
- Potential for damaged goods – This is directly influenced by acceleration force and movement. For ground transport acceleration force is experienced during handling at depots and transfers at railyards therefore consider the number of transfers that may occur and the sensitivity of the item when considering ground transportation.
- Transit time – On average a study has determined that over the road has a time of two to four days, rail seven days and maritime 10-14 days. This should be considered against customer needs and/or expectations for delivery.
- Cost – Cost is determined by the type of vehicle utilized (rail, truck, air), each having unique costs factors such as fuel. Consider the average costs for each mode as well as considering the transit time as this must meet your and your customers’ expectations.
Selecting a carrier
- Cost, quality and time – Cost is self-explanatory however the quality and time are additional factors. In evaluating these you need to consider your business needs, the customers’ expectations and any additional factors that may be important to the business.
- Services offered – This includes more than merely the transport of the item but also the ability to track easily, variable rate schedules, discount for large shipments, etc.
- Reliability – Your business depends on the timeliness of shipment arrivals. Be sure to consider the level of service rate (LOS) when selecting carriers.
- Capacity – In the current environment the demand for services exceeds available resources. Consider finding a carrier that operates within geographic locations where many of your customers are located.
- Safety – Verify the safety record for the carrier as this may have impacts on shipment reliability and timeliness.
- Sustainability – Choosing a carrier that has market longevity is optimal. This factor influences the ability of the carrier to be in a better position to meet your needs.
Multiple rate structures available
- Live shipping rates – This method charges the customer the exact charge that the shipper will be adding. Live rates allow the customer choices of shipping such as next day, express or standard delivery. Additionally, rate changes from the shipper are automatically figured into the customer billing.
- Table rates – This is the most customizable option as it is based on size, weight, class, destination and number of items.
- Flat rates – This is the easiest to set up and is used when products are of similar size, weight and dimension. It is simple, straight forward, and takes the guest work out of shipping costs for both you and the client.
- Free shipping – This is always an option but should not be used when products sizes vary and profit margins are already low.
Keep in mind there are many occasions where a combined strategy of shipping options makes sense. Businesses should evaluate the shipping options offered and identify what is optimal for their business based on profitability and customer satisfaction. Strategy should be based on:
- What items are being shipped – variability of size, weight, dimension?
- Who are your customers – what is their need and expectation for receiving your product?
- What is your budget – can you assume any loss related to shipping costs? Are profit margins already low?
- What is the safest mode of transport for your items?
- What carriers have the best record for safety and level of service?
In the event your business may have a unique need for outside assistance with operational issues, growth initiatives or other business matters, SCORE mentors can offer you expertise and support. Mentors with a wide range of technical and user experience are available on request.
The Cleveland Chapter of SCORE was founded in 1965 to foster and support the small business community in Northeast Ohio through mentoring and education. There are currently 80 volunteers with experience in the fields of business ownership, managers, accountants, attorneys, and other business fields that are ready to share their knowledge through mentoring. For more information about our services for small business visit the website at www.cleveland.SCORE.org or call (216) 503-8160.
In addition to mentoring services, there are also webinars and on-demand classes listed on the website. To attend a webinar, visit the site and register. Following are upcoming events in February:
Seminar Title Date & Time
Google Sheets & Forms 02/09/2023 – 12:00 PM
Small Business Tax Questions – Ask the CPA 2023 02/09/2023 – 1:00 PM
Get Your Local Business on Google Search & Maps 02/14/2023 – 1:00 PM
Google Slides 02/16/2023 – 12:00 PM
How to Start an On-Line Business on a Budget 02/16/2023 – 1:00 PM
Technology for Small Nonprofit Businesses 02/16/2023- 7:00 PM
Small Business Cash Flow – Understanding Money Management 02/21/2023 – 1:00 PM
Establishing a Professional Domain, Website & Email for your Business 02/21/2023 – 7:00 PM
Google – Gmail, Calendar & Tasks 02/23/2023 – 12:00 PM
How to Recession-Proof Your Business 02/23/2023 – 1:00 PM
Google Sites 03/02/2023 – 12:00 PM
So You Want to Start a Business 03/02/2023 – 7:00 PM