The Science of eCommerce Shipping Costs: Ship Smarter and Save Money

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The Better Shipping Podcast | ShipNetwork
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I met with our in-house logistics experts to talk shipping rates. Here are key takeaways from that discussion. Transcript has been edited for conciseness, listen to the full recording here.

Logistics executives discuss the role of volume and distribution in logistics pricing. How increasing volume does not always lead to significant cost savings, and how balancing the cost of getting closer to customers with the benefits of faster delivery is crucial. They also touch on the importance of understanding the total cost of shipping when building a free shipping strategy. Use this industry expertise to gain insight into the complexities of logistics pricing and how you can optimize your logistics operations to improve the customer experience and drive growth.

When it comes to shipping, unless you're in the trenches, day in and day out, eating, breathing, sleeping shipping, there's really a lot of factors to the cost of shipping that many times we may not realize, or we may fail to factor in when we're making these business decisions.

As an eCommerce retailer, whether you're shipping out a few dozen orders a day or a few 100 a day--

What do you need to understand to make sure you're really getting the full picture when it comes to shipping rates and the cost to ship?

Zach Green, VP of Sales

When we talk to regular eCommerce customers, one of the thing that they don't really consider is, what effect is their box size and their branding. How are they packaging their their items into a box? Do they use too big of a box or put too much dunnage inside of the box, and it's causing those weights to go from under a pound to over a pound?

There's things that you can do on a packaging side when you're working with your manufacturer to package your product.

Ecommerce businesses got into the business because they love their product and the presentation, but are they considering how much those things impact shipping? A lot of factors go into deciding how to ship your package.

Scott Riddle, Chief Operating Officer

In particular, we see customers with branded packaging where they're trying to be more efficient with their branded packaging. So they'll just buy one box size that they think their average order will fit into or in some cases, their largest order will fit into. And then we're building these provided boxes out and putting one or two items in them and filling that box with dunnage because we don't want the items moving around. The larger box is more expensive at the end of the day than a smaller box would be and the transportation cost for that box is moved into a different category in many cases with the big branded carriers.

I think we all know that box could be dimmed out as a one cubic foot box at 10 pounds even though it's only a one pound box. So that's really critical.

The other thing is that many of our customers don't understand all of the other fees that are applicable in this space. And they're not applicable by the warehouse, but by the carrier that moves the package. In general, the weights are rounded up. So a 16.01 ounce box becomes a two pound box, where as two tenths of an ounce would have made it a 15.9 ounce box or one ounce less would have made it a 15 ounce box. And that can mean big dollars in difference on each order.

The other piece is that the base rate that's being offered by most of the carriers is called a base rate for one reason, and it's really simple to think about the base is where it starts. You'll never be charged less than that base rate, but you'll also very rarely ever be charged only that base rate. Meaning that the base rate will have a fuel surcharge applied to it, a dimensional surcharge applied to it, very common accessorials like DAS (Delivery Area Surcharge) and EDAS (Extended Delivery Area Surcharge) in residential, and almost all our customers are shipping nearly 100% of their order volume to residences.

Customers are often surprised to see residential surcharges applying with some of these carriers because they just assume these carriers deliver to the home therefore that cost is included.

Devin Johnson, CEO

Two things are sometimes overlooked or maybe even misunderstood: One, volume is a critical part of logistics pricing, right? It's like anything else, especially something that tends to be commoditized like logistics. Yes, volume does drive greater discounts and can improve margins. No doubt that the pricing for someone shipping 500 orders a month is different than someone shipping 50,000 orders a month.

However, that doesn't hold true into perpetuity. Just because I'm shipping 25,000 orders a month and grow to a hundred thousand orders a month, that doesn't necessarily mean my shipping costs are gonna improve by 300%, just because my volume improved by 300%.

At some point you get to a floor where the increase in savings based on volume becomes very marginal. So when you start getting close to that floor, there are still maneuvers to make, you just have to get more creative.

You have to make investments in other areas. So just one example of that is to continue to invest and improve on our network of shipping facilities that allow for us to look at a customer's zonal distribution and optimize their particular shipping profile to take as much advantage as we can to that kind of zonal distribution.

And you find a floor there also- you get to a point where there may not be much of a lift going from four facilities to six or six facilities to eight or eight facilities to 12. That's all sort of dictated on the density of your particular distribution patterns. It very much could mean that going from four facilities to seven moves the needle an enormous amount. But it also may not. And so understanding that profile, understanding that distribution characteristic and having the ability to optimize for it is critical.

If you're getting to that point where you're shipping a hundred thousand orders a month and you're now at 150,000 orders a month- that's a 50% increase. That's a big deal, but that's not going to move the needle a whole lot in terms of volume discount. That 14 ounce bottle of vitamins is not getting 20 cents better due to volume, it's just not going to happen. At that level, it's maybe a half a penny or a penny.

At some point the needle stops being able to move based solely on volume. So that next level of evolution is staging inventory in more parts of the country.

So you shorten that delivery distance and that comes with other costs. Now I've got to get inventory into more locations. So in theory, there's gonna be a greater cost on the front end of that. And so the whole idea is that balancing act of understanding what's my distribution, how can I get closer to my customers, but also what is the cost to get closer to my customers? Where is that arithmetic black or profitable? Is it more black going to two locations and paying a little bit more for shipping? Or is it more black getting into more facilities and shortening that distance to my customers? I think that's a critical part once you get on that other side of volume.

Just shipping a whole bunch doesn't necessarily mean that my pricing will always get better as long as I'm shipping more.

Scott Riddle

There's one side benefit to add to that, which is that for many of our customers, getting closer to their end consumer, you get this dynamic duo. We have one of our large clients that is in all our facilities, and even though there's a cost to replicating inventory across all of the facilities, they're finding that they're winning more order volume from their clients because they can deliver next day in almost all of their markets with ground services. In other words, they're not needing to spend more to get next day service.

They're finding that when their customers are shopping their product and see that it can be here tomorrow, even if their product might be selling for $5 or $10 more than a competitor... because they can deliver it tomorrow, they're winning that sale.

And it doesn't cost them anything more in terms of transportation. In fact, their transportation spend is actually less because that distance to their end consumer is that much shorter. They have a lot of zone one and two distribution and so they've kind of maxed out on that, but they've found that they're winning order volume based on faster delivery.

So that's the other piece to think about when looking at multiple centers is to think, what is my customer experience going to be like in addition to the savings I'm getting? And will I win order volume from clients based on my ability to offer "free shipping"? I'm not needing to upgrade the shipping and I win that customer order just based on speed of delivery.

We've all looked at purchasing something and compared two similarly priced items, maybe one's $2 or $3 more, but the $2 or $3 more one can be delivered tomorrow morning to my house versus the $2 or $3 less one that's delivered three days from now. And you think, "hey, for two bucks, I'll go ahead and get the one that's gonna get here tomorrow." And that's just one other thing to think about.

If retailers are trying to build in a free shipping strategy, what do they need to know what their total cost of shipping really is?

Scott Riddle

The most common accessorial that is going to apply in transportation on almost all orders is a fuel surcharge. There are some exceptions, but most modes of transit have a fuel surcharge. Dimensional charges apply with virtually every carrier in the country, including the post office. Residential delivery charges often apply for our customers, since the vast majority of orders are going to residences.

Delivery area surcharges are the next most common transportation fee: Delivery Area Surcharge or DAS and Extended Delivery Area Surcharge or EDAS. These apply in major metro areas and then rural areas, which does not room for many exemptions. In addition, more zip codes are included in DAS and EDAS every year.

And so what we found looking at thousands of shipping data sets from customers over many years is that fully 30% of the average customer invoice is accessorial charges.

So for a customer who has received a base rate sheet, it's very safe for them to say, "I'm paying this base rate plus a ballpark of 30%" to understand the full scope of those rates. Each carrier is different, some carriers are giving you more of an all-inclusive price, while many others give you a really attractive base rate. And we find that customers often, for lack of a better term, "fall" for that really attractive low base rate. And because the carrier invoicing is so confusing, they don't often really understand the impact that all those accessorials is having.

One example of a very large customer of ours that came to us now about a year ago and wanted us to dive into the assessorial spend. We found exactly that scenario: About 30% of their spend was accessorials. Plus, looking at the growth of accessorial surcharges from 2021 to 2022, that was the fastest growing part of their spend. In other words, the carriers were raising accessorial charges much faster than they were raising the base rates. This customer went from spending an average of $13 an order all-in transportation to spending an average of closer to $20. When you're budgeting $13 and your actual is $20, you're going to be pretty wildly upside down in terms of your profitability because that $7 differential can have a huge impact on your bottom line. So they challenged us to come back and do a deeper dive and come up with some solutions that would work around as accessorials.

We were able to come back and create some solutions that were able to get their target price back into that $13 range. We were able to find a way to largely offset or neutralize the assessorial surcharges from the big carriers with a little more creative mix (without eliminating the big carriers, they're still a big part of the portfolio). We also found ways to reduce their spend through packaging and some other elements to get them back on target relative to budget, which is really critically important for them. This was a great example of the impact that some of these additional charges will have.

I often find customers who believe they're not spending anything on accessorials. To those customers I say, "Let's look at pulling 30 to 90 days of invoicing and we'll go through that for you..." And what we find over and over again is that they're spending huge amounts on accessorials, they just don't have that transparency, and that's where the opportunity often is.

It's really critically important for folks in this space to understand the impact of those charges and at least be able to accurately budget for them. If you're going to pass some of those charges onto the consignee or your customers, you have to know the full impact of those charges so you can recover them.

Zach Green

Once you understand what your accessorials are, what your base rate is, and what your all-in cost is, you have control at the point of checkout to set a proper expectation. So if you are in one facility or multiple facilities, know the average transit time based on the transit method and cost coming out of that location. Then at the point of checkout, you can list different ship methods for the consignee to choose from.

The faster ship method could be offered as an extra fee. If they know their all-in cost, they could start adding to that shipping fee at checkout to create a little bit of margin on the shipping side as well. But while doing that, they're also setting the expectation. So if I offer free shipping at checkout, but I've got three other options that are faster shipping, when the customer chooses free, they know they will wait a little bit.

Giving customers options gives them the ability to set their own expectations of when to receive their package.

Scott Hale, Chief Finance Officer

When you look at the spend profile of a typical ecommerce business, 70% of the spend is on the shipping side.

When you're talking to a typical 3PL provider, a lot of times the focus is on the pick and pack fees, fulfillment fees, low air rates, etc. and those concepts are important and some 3PLs will deliver better than others— But as far as the cost and the customer experience, what's most important is how well that 3PL is able to manage the shipping aspect: consult on packaging, navigate accessorial fees, leverage carrier networks and technology to optimize volume through those networks, and offer options to get packages delivered next day or two-day or economy as needed.

Having options to save on the shipping side is how you're going to have the biggest bang for your buck in cost savings. If your 3PL is good at the shipping portion in managing your volume, that's also going to have the biggest impact on your customer experience. So that's one of the reasons that the cost saving conversation should focus on the shipping portion of 3PL spend, versus the fulfillment portion.

Scott Riddle

There's two critical elements: one is the ability to ship the items the same day they come in (the fulfillment experience) and the other is the transportation experience. The majority of the average customer's expense in this business is transportation related, only about 25% is going to be inside the four walls of the fulfillment piece.

Spending huge amounts of time, energy, and effort over a few cents on a pick fee that might impact your annual spend by the tune of $2,000, does not make sense if you're not paying attention to a transportation line item that is costing you $20,000 to $40,000 a year. It doesn't mean you shouldn't look at the 2 cents over here, but make sure the shipping is really dialed in first, because those pieces are going to move the needle in a much bigger way relative to your total spend.

Once you have dialed in your shipping strategy, how do you measure carrier and service performance?

Scott Riddle

This is a missed opportunity for many ecommerce retailers when I ask how their carrier is performing. The answer I often hear if they're not having issues, is "they're doing great". But what does that really mean? What is the on-time service percentage? When we look at the data, what we find is that for example First Class is usually performing around 92-93% on time, Priority Mail is maybe 94-95% on time.

We have to start with defining what we are trying to accomplish and what success looks like. For example, if my target is 90% on time and I'm 92% on time, that's a success. But if I started without understanding what success looked like and I'm 92% on time, you might think that's a failure because it's not a hundred percent, it's 8% short, when in fact our target was 90% and at 92% we're exceeding expectations.

So understanding what we're trying to accomplish from a client experience relative to transit performance is really critically important. Then focusing on how to build a solution that will meet or exceed that transit performance expectation is the next step. The follow up to that is reporting on an ongoing basis to monitor whether we are meeting that standard or not. If we're not meeting that standard, determine what changes need to be made in order to meet that service level expectation. If you don't have a reasonable, realistic target out of the gate, then it's very difficult to know if you're succeeding.

What would you say to a retailer that is working with a single carrier who is vetting a multicarrier shipping strategy?

Zach Green

A lot of times when you add multiple carriers to the mix, you're adding new challenges too. Every carrier is different: invoice format, claims process, accessorials and fees. So if you've designed your operations- your box, your automation rules, and your WMS to route around DAS, EDAS, and accessorials and you add another carrier to the mix, now you have to go back and look at every piece to make sure those rules fit within the new carriers.

The other thing that you have to factor in is in the operational component, such as multiple pickups and sorting. When I add multiple carriers, I add a complexity of  problems that I need to be prepared to deal with. And if I'm not prepared to deal with it, maybe I'm not ready for that multiple carrier setup. We've found a way to eliminate some of those multi-carrier complexities by having only one pickup, one invoice, and one claims-- making multi-carrier shipping easier, not complicated.

Scott Hale

That's one reason that your typical ecommerce business is looking to outsource that complexity. Without years of experience in that industry and trying to go at it alone, it's difficult to keep track of all those various things we discussed that you need to be aware of to try to optimize your spend and transit speeds. So focus on finding a partner that has really deep expertise and understands all aspects of transportation to take that complexity off your plates, where you can trust that all those things are being managed.

As far as the multi-carrier concept, when you have all your volume with one carrier that's the simplest solution, but that by definition is going to be sub optimized. There's one carrier that is going to be better or more cost effective for your heavier packages, but more expensive for your lighter packages, or one carrier may avoid or not have really egregious dimension fees or oversized fees. There's just all of these various pieces where one carrier is going to be better than another in different areas.

When you're going out to market to shop for a partner, it's important to ask the right questions. Make sure you understand enough of the complexities involved to know how to ask for help. Say I'm looking for a partner that understands these various concepts we've been talking about, that can help me navigate them, can help me optimize my volume through multiple networks, can simplify the invoicing.

An area that we haven't hit on is there's errors that come through in the invoicing that's actually very common. We've found in years of auditing all the various carrier invoices that errors are not specific to any given carrier, but you see plenty of overbilling in the industry on the accessorial fees, being billed shipments that don't belong to you, being billed duplicate shipments, there's a lot of that. So make sure that the partner you're selecting is going to be help you navigate that and audit all of that data, and is going to provide a high level of confidence to you that the invoice coming through is clean, audited, and there's no overbilling. That invoicing piece is yet another line of questioning in making sure you're finding a provider that can help you navigate that complexity.

Scott Riddle

If you've ever looked at an invoice from one of the big carriers you'll start to understand that it's very difficult to reconcile carrier invoices, and if you have multiple carrier invoices that complexity gets much more difficult. One of the opportunities that we routinely see that 3PLs often don't do or are not very robust around is the carrier invoice reconciliation process. We find that's a weak spot just in general in the 3PL space.

We've invested a huge amount in the technology side for carrier reconciliation. That's allowed us to be able to really understand carrier invoicing so that we can control it and we can make sure that it's accurate. Obviously we're not perfect, but we catch a huge number of of errors through that audit process that then don't get passed on to our customers because we're able to dispute them with the carrier. That alone can provide substantial savings to the average customer.

What is your advice for someone who is trying to tackle this beast of putting together a more optimized shipping strategy? Where should they start?

Devin Johnson

I think the first step is understanding your own business or having access to data to provide someone that can help you understand simple things like volumes, where am I shipping to, do I sell a product that has a particular trait, and identifying patterns. Understanding your shipping characteristics is the baseline.

Most companies play this game of using FedEx for a while and filling the gaps with USPS... in the next year they'll try to get UPS to give them better rates, and switch to UPS... and then after a couple years if I can save a few pennies, I switch back to FedEx. It's just this kind of constant back and forth. But I think those days are going away. I think the carriers don't like playing those games, but I do also think that they recognize they're not the best at everything yet.

There is a balance of maintaining spend leverage. If I'm shipping a thousand orders a day and wanting to optimize, if I optimize across 10 carriers with a thousand packages a day, now I'm shipping a hundred a day with 10 of them and I'm probably not going to get a great result from that. So there's a balance and there's more work into doing that distribution.

Stepping into that carefully by first understanding your business and the expectations of your customers, then outlining the providers that can hit those expectations. Then figuring out what are the best economics to obtain and meet those expectations, and now how do I step into automating that and doing it in a way where I'm not managing spreadsheets manually or spending Monday through Thursday just reconciling shipping and getting customers billed.

Once you've started to understand your needs and how you can automate that without creating so much more work for yourself that you're stuck, you can get into this process of continually optimizing. But the very first thing is understanding your own business so that you then know what you're starting with and what you have to deal with to begin with.

Zach Green

In the shipping world, you get what you pay for when it comes to speed. If you're willing to pay, you can ship it next day. And the less you pay, the slower it travels. So just remember that when you set customer expectations for free shipping.

Scott Riddle

There's all sorts of things that can happen from A to Z in transportation once that order leaves the warehouse. Start with a realistic expectation and then get the data to understand how well you're meeting those targets, and then continue to refine that dial until you're getting into that comfort zone.

Recognize that even something that's performing in an outstanding rate, say 95% on time, with a thousand shipments you're going to have 50 late shipments. So that's important to understand— even with something that performs at a high level, you'll still have a reasonable number of customers on an average month that may be getting an order slightly delayed.

That's just the nature of this business. So understanding that and having realistic expectations is also really critically important.

And then really the most important is finding a partner that you have faith and trust in that has the tools and abilities to work side by side with you to craft a solution that will meet your needs, and can show you along the way that it's actually performing to the standard and expectations that you've set.

Scott Hale

When you're trying to find that partner, make sure you have enough of an understanding of these concepts that you know the right questions to ask. For example, if you've got a provider that's just overly focused on their tech, but they're not talking about the details on operations and functionally how they're going to improve your customer experience, there's a reasonable chance that it's because they're technology first and haven't really mastered the operations side of all of this.

Know and understand the right questions to ask so that you can find a partner that's going to be a good long-term fit. It's not fun to keep having to go back to market. A good long-term partner is going to really help meet your needs in all the areas that have been discussed.