How To Set Shipping Rates For Your Online Store

There are several options concerning how to charge for shipping with your online store. We’ll take a look at the common solutions and discuss the pros and cons of each.

Common Shipping Solutions

The five most common ways to handle shipping rates for your online store are:

  • Free shipping: You just don’t charge for shipping at all.
  • Flat rate shipping: A single rate for all orders
  • Price based shipping: The shipping price is based on the total price of the items being purchased. The price may go either up or down as the total price of the order increases, but the price tiers are defined by the price of the order.
  • Weight based shipping: The shipping price is based on the weights of the products ordered.
  • Real-time shipping rate calculators: The shipping rate is calculated in real-time with a particular shipping carrier such as FedEx, UPS, or USPS.

Sometimes you might want to combine a few of these options on your store. For example maybe you offer free shipping on orders over $100 but charge a weight based price for orders less than that.

Up Front vs Calculated Rates

In the end, all the different options for setting the price for shipping falls into one of two categories. It is either an up front price or a calculated price.

An up front price is one where the customer knows up front what the rate is going to be before checkout. Shipping options such as free shipping, or flat rate shipping are up front methods. During the shopping process your customers know what it will cost to ship their orders. When they get to your checkout page the hurdle of the shipping price has already been cleared.

Calculated rates account for all other options for setting shipping prices such as weight based, price based, and real-time shipping quotes. With calculated rates we need to know exactly what products are being ordered and where to ship them before we can determine the cost of shipping.

Out of all the ways to calculate shipping rates, real-time quotes from your carrier (FedEx, UPS, USPS, Canada Post, etc.) are the sexiest. With many e-commerce solutions, real-time shipping rates are a premium feature for which you may have to pay extra. With live rate quotes you can simply pass through the exact cost to ship the order to your customer. Our research has clearly shown, however, that calculated shipping rates – including live rate quotes – decrease sales. This is true even when the end price is the same as a flat rate or free shipping order. It’s not the final price that loses the sale, it’s the way you get to the final price.

What’s Wrong With Calculated (Real-time) Shipping Rates?

Whether you use live rate quotes or some other method of calculating the final shipping cost for an order, there are two main problems with using calculated shipping rates on your store.

  1. Cart abandonment
  2. Sticker shock

Shipping Induced Cart Abandonment

When a customer shops your store he essentially needs to make two decisions. First, does he want the products your are selling and second, is he willing to pay the price you are asking. The more decisions you ask the customer to make, the less likely he will be to complete the purchase and abandon the order. While he is shopping your store, comparing and researching products, he is building an expectation of what his order will cost. Supposing the customer decides to add a product to the cart and checkout, he has now made both of the decisions – “Yes, I want the product. Yes, I agree to this price.” But now, when the customer reaches the checkout page, we are going to challenge him with another series of decisions.

  • Is this a reasonable price?
  • Am I willing to pay this much for shipping?
  • Are any other stores charging less for shipping?

Now we have introduced a huge barrier to the sale as we send the customer off to do shipping price research. Or, at the very least, we’ve forced him to clear another series of hurdles before closing the sale.

Sticker Shock

The other big problem with calculated rates, especially live rate quotes, is sticker shock. Most people don’t realize how much it really costs you to ship something and the truth is the actual shipping cost to you is much more than the average person expects. For example, even something small and light weight like a set of headphones costs an average of about $9 to ship within the United States via FedEx Ground shipping. So if you pass through the entire shipping price for the order to your customers, they will think you charge too much for shipping. The sticker shock is likely to cause your customers to shop around, not for better product prices, now they are shopping for shipping.

When Are Calculated (Live) Rates OK?

There are certain scenarios when calculated rates, especially live rate quotes may be appropriate. If you sell the exact same product as your competitors, for example you sell Sony headphones, and you want to compete on product price taking the entire shipping price out of your advertised product price may give you an edge. Of course you still have all the drawbacks of cart abandonment and sticker shock as discussed above.

Another example would be if you sell very expensive yet light weight, small, and easy to ship products. If the price of the shipping is just a small percentage of the total order, then passing through the entire shipping cost to the customer may be alright. If, however, you sell an inexpensive product, especially anything under $15, then you slap another $9 on the order for shipping that’s going to be a strong deterrent to closing the sale.

The best reason to use live shipping rates is if you offer multiple shipping methods such as ground, 2 day, and overnight shipping. In the context of this discussion the assumption has been that only ground shipping is available. If you introduce faster, more expensive shipping methods like overnight shipping, people are generally used to that being an expensive option.

How To Set Up Flat Rate Shipping

Choosing an up front shipping policy for your store will increase your conversions and get more sales. But, how do you do it, especially if your shipping cost varies dramatically for the products you are selling?

Determine Average Shipping Costs For Each Product

Figure out what the average cost to ship each of your products is going to be. Pick a carrier like FedEx, and figure out the box size and the weight for each of your products. This may sound like a lot of work, but you are going to have to do it any way when you actually ship your products. Once you know the weight and size of the box, go to the FedEx website and enter in destination zip codes around the country. Be sure to choose both urban (densely populated) cities as well as rural locations. You will find that rural locations are more expensive to reach even though they may be geographically closer. You will see a trend develop and will then know what your average cost to ship that product is going to be.

3 Ways To Pay (But Really Just 2)

There are three ways to deal with your internal shipping costs.

  • Take the shipping cost out of your profit margin
  • Increase the price of the product to include some (or all) of the shipping cost
  • Pass some (or all) of the shipping cost on to your customer as a shipping line item in the order.

The last two options are really the same thing and only differ in customer perception because the final order total will be the same whether you put the shipping cost into the price of the product or pass it on as a separate line item on the order. So essentially either you eat the shipping cost out of your profit margin or you pass on the shipping cost to the customer.

Why You Should Consider $5.00 Shipping

Here is the conclusion aimed at the average store that ships average sized, normal products. No e-commerce recommendation is truly a “one size fits all” solution, but this covers the majority of stores.

Having described the difference between up front and calculated shipping options and explaining how to gauge shipping costs using the free rate quotes available online from the various carriers the best choice for most stores is set a flat rate shipping cost for your entire store. The “sweet spot” appears to be $5.00. Anything less does not win you many extra sales and tipping over the $5.00 mark begins to move into the sticker shock zone.

Once you know the cost to ship your product, take $5.00 off that price and increase the price of your product by the difference. Here is an example, suppose you have a nice set of noise reduction headphones that you were planning to sell for $85.00 and you discovered the average shipping cost was $9.00. Assign $5.00 of that to the flat rate shipping and bump the price of your headphones up $4.00 to $89.00.

Now you have assigned the entire cost of shipping to the customer – like you would have if you had used a live shipping calculation but without introducing all the obstacles during the checkout process.