Peter Swan used to buy pet food and supplies on line at Pets.com. Swan, an assistant professor of business logistics at Pennsylvania State University, was amazed at how low the prices were. 'They had free shipping for a while, and I couldn't believe the prices they were offering,' he says. 'They were cheaper than I could get at the supermarket.'
But like many companies that offered free shipping during the Internet's heyday, Pets.com is no more. 'The idea [in the early days] was that if you could acquire new customers and keep them, you'd have a profitable business on line,' says Doug Thomas, an assistant professor of business logistics at Penn State. 'So companies were willing to do things where they were losing money on the first sale, with the hope of attracting and retaining repeat business. I think that's what drove companies to consider free shipping.'
Those that remain standing today learned the hard way that they need to make - not lose - money on shipping and handling. According to Jupiter Research, an Internet research consultancy in New York, half of online retailers now make money on shipping and handling, while the other half still lose money. Charging according to your real costs and making those costs palatable to customers can help you land among those in the black.
Change their Minds
Convincing customers that they should pay S&H charges is no easy task, considering that a year or two ago most online retailers did not levy those charges. According to a May 2001 report from Jupiter Research, 63 percent of online buyers surveyed said they had abandoned an online shopping cart because they thought the S&H charges were too high. Seventy-three percent of respondents said they look at the total cost of a product, price plus shipping and handling, when comparing prices among online retailers.
In developing a shipping policy, businesses need to consider the basics: cost, time, and the relationship they have with customers. Furthermore, they must present that policy clearly and prominently. Some companies pass along shipping charges to customers with no markup. Others add a few dollars to cover the cost of envelopes, tape, and bubble wrap. Still others charge on a per-item basis or use a sliding shipping and handling scale, basically decreasing the cost of shipping as order volume increases. This provides customers with an incentive to spend more. Companies fearful that shipping costs will deter buyers often increase product price to cover shipping charges, then say they provide free shipping.
What You're Spending
When Party Lounge, a costume shop in Huntington, N.Y., opened an online store last year, the owners decided to use UPS and to charge a flat rate according to the service requested. Ground shipments are $7; three-day service is $10; second-day air is $15; and next-day air is $23 for afternoon delivery and $28 for morning delivery.
'We just took an average on what our ground shipments cost and made a flat rate. It was the easiest way to do it,' says Meredith Aboulafia, co-owner of Party Lounge with her parents, Susan and Sheldon Aboulafia.
Aboulafia admits that this arrangement sometimes works to the company's disadvantage. Because UPS figures its costs by weight and distance, a 200-pound package going ground will cost the customer just $7 to ship. Party Lounge will pay more, depending on where the package is going. Some shipments, however, cost less than the $7 Party Lounge charges for ground shipments. In that case, Party Lounge makes money.
Shipping charges are clearly stated on PartyLounge.com when a customer places an order. If a product needs to be shipped in an oversized - and more costly - box, Aboulafia calls the customer to explain that there will be an additional shipping charge. 'We're not really trying to make any money on shipping,' she explains. 'It averages out.'
Deb Gory, owner of Millennium Dynamic Technology in Oak Lawn, Ill., charges her customers nothing. 'I have a good relationship with these people,' she says. 'They pay me faithfully every month. So I thought that this was something they deserved.'
The cost to ship the software she produces for the mattress manufacturing industry ($12.50 to $25 a pop) is factored into the price of the product, a fact that her customers appreciate. 'They tell me that they fell in love with the fact that I am a company that does not nickel and dime them to death,' Gory says. That appreciation, she adds, is worth more than the cost of shipping.
Choosing a Carrier
The shipping and handling issue can be particularly challenging for small businesses. Many ship such low volumes that they can't negotiate with carriers for special rates and they can't afford to hire someone to handle their shipping operations. As a result, many choose a shipping option based on convenience. The U.S. Postal Service and carriers such as FedEx, UPS, and Airborne are the shipping venues of choice for most small companies that sell products on line. Party Lounge chose UPS because it had served the bricks-and-mortar shop well for years and their driver is very accommodating about returning to pick up late packages and such. The Aboulafias log on each day with about 15 online or telephone orders in hand. They type in shipping addresses, print labels, and pick and pack the products in their small brick-and-mortar shop.
Buzz Cason has found the U.S. Postal Service to be the least expensive option for shipping the music CDs he sells on his site, MusicNashville.com. 'They have overnight shipping, but most of our customers are willing to receive their CDs in 10 days or so,' says Cason. 'We may revamp our shipping and just use UPS or FedEx, but the Postal Service has worked pretty well for us.'
MusicNashville.com sells about 10 to 20 CDs per week, everything from country to rock. Cason and his 10-person staff pick, pack, and ship the orders in-house. They get one mail pickup per day; if they miss it, they make a stop at the Post Office located about five minutes from their Nashville, Tenn., office and studio.
Push the Benefits
'Online companies started out by trying to directly compete with the physical store experience,' Thomas says. 'So you need to retrain customers. You need to help them understand that they're getting a different kind of service when they order something on line.'
Help your customers understand this by trumpeting the convenience of online shopping. Offer special shipping or product discounts, and give customers shipping choices - overnight, two-day, or ground, for example. If you handle the delivery of local items, offer a discount to customers who don't request a specific delivery time, or give them the option of picking up their purchase in the store, where it would be packed and ready to go.
Regardless of which shipping option you choose, the bottom line is that home delivery is a convenience, and somebody has to pay for it.
Michele Marrinan is a contributing editor for SBC.