How To Charge Customers
It's the all too familiar story. A new customer comes to your store, finds a product they want, at a price they like, and adds it to their cart. They get to the checkout page and then it happens, they get hit with the shipping and handling rates and all of a sudden they start second guessing their decision to buy.
Suddenly a product they thought was a fair price is starting to seem a little expensive. One of two things happens next. Either they decide to continue despite the increased costs, or they abandon their cart and leave your website. The fact is, the majority of times, they abandon their cart, and according to Statista, unexpected shipping costs are the number one reason for shopping cart abandonment:
Image Source: Statista
Your shipping strategy and how you charge customers can be a critical element in the success (or failure) of your online business. Let's take a look at some of the most popular strategies for charging your customers shipping:
Offer Free Shipping - For example: Free shipping on all orders over $100
Charge Exact Costs - For example: Using real-time shipping carrier rates ($8.36)
Flat Rate Shipping - For example: $10 flat rate to all U.S.A.
Option 1: Offer Free Shipping
Offering ‘Free Shipping’ is a proven way to get your customer's attention and increase conversion rates. However, free shipping is never free, ‘Free Shipping’ for your customer just means the shipping cost has shifted from the consumer to you. Depending on your margins, offering free shipping may or may not make sense.
With that said, large companies like Amazon have left many consumers with the expectation that shipping should be free for consumers, so the marketing effect of 'Free Shipping' on your website can be a significant advantage over any competitors that don't offer the same perk.
Deciding to offer free shipping will require you to either absorb the cost or slightly increase your product prices to help cover or offset the cost to you and the impact on your margins.
Free Shipping Over $X - Another option is to offer free shipping for orders over a certain dollar amount. This type of offer can incentivize customers with free shipping while providing you the benefit of helping to increase your average order value (AOV).
The most common strategy for offering free shipping over a certain amount is to get some sales under your belt first and determine what your average order value is, then, offer free shipping on all orders X% greater than your average order amount.
For example, let’s say you have some orders already for the following amounts:
$86, $112, $71, $65, $105
If you add them all up and divide them by the total number of transactions (5 in this case) you’ll get your average order value (AOV). In this case, it works out to $87.90. With this particular example, you might want to offer free shipping on all orders over $100. This will help increase your average order size which should provide you with a little more profit that can help you partially cover the cost of the free shipping.
Kauffman Mercantile, a high quality homewares company utilize this approach by offering free shipping on all orders over $75.
Image Source: Kauffman Mercantile
Determining whether to offer free shipping on all orders or require a minimum threshold often comes down to your margins, the niche you operate in and what your competitors are doing.
If you offer luxury or handmade, one-of-a-kind items, rolling in an extra percentage for shipping and handling probably isn't too much of an issue and it will be hard for consumers to notice. However, if you're in a highly competitive market where both free shipping and the lowest prices are the norm, marking up your products to cover shipping costs may not the best idea as consumers will immediately notice the increased product cost. This is where you have to consider either a different option entirely, or absorbing the cost for shipping on most of your items.
There are of course exceptions. Large or particularly heavy products like furniture can cause some problems for your 'Free Shipping' promotion as shipping on items like this can be extremely expensive and cut into your margins significantly. Doing your research and knowing your numbers about things like how much each of your products actually costs to ship, how your competitors handle shipping, your average order size, and your profit margin can help you make the best decision.
Option 2: Charge Exact Costs (Real-Time Rates)
In many shopping carts (Including Shopify’s Unlimited plan), it's possible to setup real-time shipping quotes. This means your checkout will be connected with your shipping partner (UPS, FedEX, USPS etc.) and your customers will be presented with a real shipping quote based on the number of products, size and weight of all items in their cart. They will then be charged more or less the same price that you will be charged when you ship their order.
There are always small discrepancies that can happen but in many cases you can end up breaking even between the shipping charges you collect and what you ultimately have to pay to ship the package.
Simple Sugars, a store that was featured on Shark Tank, employs this approach at checkout. Once a customer gets to the checkout, they select where they want their order shipped to, and the calculator does the rest.
Image Source: Simple Sugars
Using a real-time calculator can help you earn trust with your customers. The calculator acts as evidence that you’re not inflating your quoted shipping fees or raising your item prices to cover the charges.
This is also a good option to use for heavy or oversized shipments that you simply cannot or do not want to allow to ship out under a free shipping promotion.
Option 3: Offer Flat Rates
Your third option is to offer a flat rate for every package, or flat rates for weight ranges and order totals.
This flat-rate method of charging for shipping requires a bit of preparation as you need to figure out your average cost of shipping a package. This is a best practice you should be doing anyway to make sure that you don't drastically undercharge or overcharge your customers.
When you hit the right cost, you'll probably be over - or under - the actual shipping cost by a little, but it should balance out in the end.
J.Crew Canada, a clothing brand, utilizes the flat rate shipping approach, and has a simple $9.95 charge for all orders and prominently displays it with a popup on their homepage.
Image Source: JCrew
Truly’s, an all natural deodorant company also charges flat-rate shipping. Angela Collison, the founder of Truly’s said:
My main focus in setting up my shipping prices was to make it as inexpensive as possible while still delivering the product in a reasonable amount of time. My products are relatively inexpensive and I don't think anyone wants to pay as much for shipping as they do for the item ordered. USPS was a good fit for us as they are very affordable for single items and their flat rate priority options allow me to ship out multiple items for one flat rate regardless of the weight. I was able to set up price-based shipping as I have only a few different products, but I am not sure how that would work out for someone who has a large number of products.
- Angela Collison
The above quote highlights an important point about the nature of flat rate shipping: figuring out what flat rate works for you, and if you need to do it by order totals or weight ranges will require some testing.
How To Charge Customers Conclusion
The method you choose to charge customers can have a significant impact on your conversion rates as well as your overall profitability.
You’ll need to decide that will work best for your brand, business and customers and will likely have to test a few methods before you settle on one.
In the next chapter, we’re going to show you how to select packaging for your shipments that will create a great impression with your customers, is cost friendly and protects your merchandise as it moves around the world.