How to Calculate Shipping Costs for Small Businesses [2022]
This is a walkthrough on how to calculate shipping costs for small businesses, the main drivers of shipping costs, and why they matter.
Business owners agree that predictability is crucial when it comes to shipping costs. Surprises are a big no-no.
Learning how to calculate shipping costs is essential for both small businesses and their customers.
Knowing the shipping costs in advance helps businesses price their products strategically. It also means your customers can stay within budget and better understand what to expect from the transaction.
To do manual shipping cost calculations, you must learn and understand the key factors affecting shipping rates.
Understanding the shipping process for small businesses
Shipping is the transport of physical goods between two points. It’s a crucial component of the supply chain that directly impacts a business’s profitability and customer experience.
Small businesses rely on various shipping methods depending on delivery distance, speed, and the package’s dimensions and weight.
Domestic ground shipping, for example, is widely considered the most cost-effective for businesses, but it can be slow over long distances.
On the other hand, air freight shipping is a faster shipping method to transport packages across a country. They’re also generally more reliable since airports operate on a tight schedule.
The drawback is air freight services come with higher price tags than ground shipping. Packages transported by air must also follow the specific size and weight limitations.
Lastly, there’s sea freight shipping. Maritime shipping is affordable, can cover long distances, and supports high-volume transportation of heavy products.
The drawback? Sea freight services can be extremely slow and often delayed, particularly in the post-COVID world.
Air freight, sea freight, or ground shipping – which is best for small businesses?
Small businesses want to keep shipping costs as low as possible. That’s why ground shipping is highly preferred by small businesses.
Ground shipping has no size limitations and includes better, more accurate tracking systems.
However, size limitations, tracking, and costs aren’t the only important factors in shipping. You must also ensure fast and reliable deliveries to boost customer satisfaction, close transactions faster, and win more business.
That’s where air freight shipping comes in.
Air freight is a much quicker shipping option for customers. You can bring goods across the country within hours when you use domestic air freight services.
As for sea freight shipping, it’s useful if you want low-cost, international deliveries with generous timelines. It’s also more cost-effective if you’re sourcing inventory from foreign manufacturers en masse.
Calculating shipping costs for small businesses
Here are the five main drivers of shipping costs for small eCommerce businesses.
1. Distance
The further you need to ship, the more you have to pay. Carriers use shipping zones to measure and categorize the distance a package has to travel to reach its destination. The longer the distance, the higher the zone number and the more you will have to pay for the shipping service.
For example, U.S. carriers assign the following distances to their shipping zones.
- Zone 1: 0-50 miles
- Zone 2: 51-150 miles
- Zone 3: 151-300 miles
- Zone 4: 301-600 miles
- Zone 5: 601-1,000 miles
- Zone 6: 1,001-1,400 miles
- Zone 7: 1,401-1,800 miles
- Zone 8: Over 1,801 miles
2. Weight and dimensions
For carriers, weight and cargo space are limited resources. Shipping big and heavy packages consume more of these resources and hence, requires higher fees.
Carriers consider the dimensional weight (DIM) when calculating the price of shipping a package. It is the measurement of a package’s weight relative to its size.
DIM is calculated by multiplying its dimensions (length, width, and height) and dividing it by a carrier-specific divisor.
DIM = (Length x Width x Height) ÷ Dimensional Divisor
The dimensional divisor is standardised across carriers to a certain extent.
For example, ground shipping services like UPS Ground and FedEx Ground/Home Delivery use a dimensional divisor of 139. On the other hand, USPS Priority Mail uses a divisor value of 166.
Additional rules apply when determining the DIM divisor. Your best bet is to research or contact your carrier of choice to get the divisor for the shipping service you require.
If, however, the actual weight of the package exceeds the DIM, most—if not all—shipping service providers will quote you based on that value.
Note: The surcharges that oversized packages incur depend on your carrier of choice. For example, USPS adds a $100 surcharge to Priority Mail Express, Priority Mail, Parcel Return Service, USPS Retail Ground, First-Class Package Service, and Parcel Select packages over the mailable size limit.
3. Insurance
If you’re shipping high-value and high-volume products, you may need to purchase shipping insurance to cover the cost in case of damage, theft, or loss during transit.
Most carriers offer free coverage of up to $100, depending on the package’s value. But if your shipment is worth significantly more, purchasing insurance can be a good risk management move.
Apart from the items being shipped, it’s worthwhile looking into the statistics for the destination to get a clear picture of the risk. Remember, some areas—in and out of the U.S.—statistically have higher cases of theft and damage.
The good news is shipping insurance is cheap and convenient to purchase.
Major carriers like FedEx, UPS, and DHL only charge around $1-3 for every $100 package value beyond their free coverage offer. You can also easily purchase shipping insurance as an add-on when transacting with these carriers.
4. Speed
Carriers offer several small business shipping solutions with varying rates based on transit time.
For example, FedEx Ground usually completes deliveries within 1-5 days. On the other hand, FedEx Express Freight can bring packages to customers in only 1-3 days.
Give customers the option to get a faster delivery time for an extra fee. Just be sure to pick a carrier with proven capabilities of speedy deliveries.
52% of customers will not blame carriers if their packages get delayed. They will leave you bad reviews only because you worked with the wrong shipping partner.
5. Packaging
To provide a satisfactory customer experience, you must ensure that your goods reach customers on time and in one piece.
Proper packaging will help you achieve the latter. But it also increases the cost of shipping your products.
Certain factors affect the price of packaging, like:
- Packaging box type
- Protective packaging (bubble wrap, crumpled paper, etc.)
- Branding elements (stickers, logos, etc.)
A simple way to save money on packaging is to reuse old boxes. Simply cover up the labels from the previous shipment and inspect the box for any damage that will compromise the package’s safety.
Why is calculating shipping costs important?
Left unoptimized, shipping could eat up your profits and leave you with a failing business.
Calculating shipping costs enables you to provide accurate estimates to customers.
According to statistics, 48% of customers abandon their online shopping carts due to unexpected costs, including fees and shipping. That’s roughly half of your potential revenue gone.
Furthermore, shipping cost calculations allow you to adjust your product’s pricing for healthier margins.
For example, let’s say your ideal profit margin is 60%, and you incur the following costs for every sale:
- Shipping cost – $10 (including the packing process)
- Product packaging – $3
- Credit card processing – $1
- Product costs – $25
Your company spends $39 for every sale with the items listed above. That means your product must sell for at least $97.50 to get a profit margin of 60%.
Calculate the ideal sales price using the following formula:
Sales Costs ÷ (1 – Ideal Profit Margin)
$39 ÷ (1 – 0.6)
$39 ÷ 0.4
Ideal Sales Price = $97.50
Maximize your profits
Knowing how to calculate shipping costs for small businesses is crucial if you want to squeeze every bit of profit out of every sale.
Cut your shipping costs mercilessly by actively searching for shipping discounts from America’s most trusted carriers, including DHL, USPS, UPS, and FedEx.
Veeqo is a free shipping management platform that unlocks daily shipping discount offers for small businesses. Use automated shipping rules, automate tracking emails, analyze sales, and more.See Veeqo in action with a free account here.