Cutting Shipping Costs: An E-Tailer's Guide

By James Maguire | Posted December 02, 2005

The recent jumps in gasoline and fuel prices have placed a squeeze on Internet merchants. Since e-tailers rely so heavily on parcel shipping, when shipping costs go up, it threatens the bottom line.

Among carriers like FedEx and UPS, "We're seeing tremendous hikes in fuel surcharges," says Beth Enslow, an Aberdeen Group analyst who advises e-commerce companies on controlling shipping costs.

In September 2005, the average price of diesel fuel was $2.59 a gallon — a whopping 72-cent increase from last year. Jet fuel costs have zoomed 60 percent in 2005. Consequently, fuel surcharges are changing "dynamically," Enslow notes, "with many carriers' calculations fluctuating monthly or weekly."

"What that means for an e-commerce company is that, if you were offering free delivery for orders over $50, your transportation costs are going up. So you have to rethink: what am I charging these people?" Deliveries to rural areas can incur particularly high surcharges.

In short, e-tailers have to be cannier than ever when it comes to monitoring shipping costs, to ensure that sharply rising costs don't eat into core profits.

Shipping charges have been a "secret" profit source for many e-commerce companies. Adding a little extra fee onto the shipping and handling charges fattens the bottom line for many e-tailers. But increasing shipping costs shaves this modest profit source.

"You have to be very smart about how you're pricing your services to your end consumer, otherwise you're not factoring in these additional charges," Enslow says. "And you're kind of blind-sided by these big charges."

Tips for Controlling Shipping Costs

1) Good negotiation with carriers is essential
Effective negotiations with carriers requires a merchant to fully understand their shipping patterns. If a merchant knows what zip codes they ship to most frequently, they can get a volume discount by offering to buy a large number of deliveries to those areas.

For example, Enslow notes, an e-tailer can approach a shipper and say, "I'm doing a lot of shipping into these zip codes, and rather than charge this price, let's negotiate how you can give me the next lower-tier price for these specific zip codes because I'm doing so much volume into them."

"In many cases, we're seeing the best companies trying to lock in multi-year agreements," he adds. Enslow says that a merchant wouldn't need to be a big player to get such a multi-year agreement. "I've seen relatively small companies do this effectively."

Delivery date is another negotiating point. Some companies negotiate improved last-day-possible holiday shipping times. For instance, "FedEx might say, 'We will only guarantee next day delivery for Christmas until, say, December 21st,' and you might negotiate that to be December 22."

"Unless you're thinking of them when you go in, you might miss little things like that, but they can really save you a lot of money, or make a difference in customer service," says Enslow.

2) Rate shop — and be aware of the market
Many e-tailers have contracts with multiple carriers and use these multiple contracts to quickly rate shop between shippers. They set up "rule of thumb" guidelines to enable them to quickly choose a carrier, depending on destination and weight.

However, "We're finding that it's not so easy to calculate because of these changing fuel surcharges. The 'rules of thumb' aren't the best way to do it, because the correct way to ship to a customer two months ago might now actually call for a different carrier," Enslow says.

Some companies are moving away from rule-of-thumb guidelines that are set quarterly or annually, in favor of a true per-parcel approach that optimizes the cost of each individual delivery.

Due to rapid price increases, merchants must do two things, Enslow notes: A) Be aware of every cost change as it happens, and B) as soon as a fuel surcharge increases, update your internal rule-of-thumb guidelines as soon as possible — "Every day that you don't, you're probably making the wrong decisions."

3) Use technology to choose a shipper
Many companies have a software program built into their shipping department that helps calculate the best carrier for each parcel. A merchant enters in the variables — location, weight, delivery date — and the software chooses among UPS, FedEx, USPS, DHL or other regional carriers.

The cost of these software-shipping programs is a worthy investment, Enslow notes. "The price point is not extravagant, and there are even desktop systems." One vendor of such software is Kewill Systems.

Not only do these programs allow merchants to choose the lowest cost shipper, but "then when I'm quoting a cost for my customer, I'm quoting them the right cost."

This software also enables a merchant to make sense of the tangled thicket of international shipping. Case in point: Enslow lives in Canada, and when she gets a delivery from the U.S., "I have no idea what it's going to cost me, what extra duties and taxes might be slapped on. UPS will show up at my door and say 'you owe us $40.'" But with the guesswork taken out of international fees, some merchants might consider shipping overseas.

This software, if incorporated into a merchant's checkout process, gives a merchant the advantage of customer segmentation: the segment of shoppers who live in one zip code could be offered a higher shipping rate, while shoppers in a low-cost zip code are offered a far better rate.

One last advantage of these software programs: "The technology automates the process, so you, as an e-tailer, can concentrate on what you do best — selling and merchandising goods — not worrying about what carrier to use."

4) What are you actually paying the carrier?
It's not enough for a merchant to figure shipping costs based on each parcel sent. Instead, they need to examine their monthly bills with an eagle eye.

Merchants, Enslow notes, need to ask: "I'm going to get bills from FedEx and UPS - how do I verify that I'm actually paying them for the service that I did receive - and they're not tacking on charges for 'bad address,' etc.?"

An e-tailer, for example, might get a bill with a charge for 200 shipments in rural areas, but "in reality, maybe for 20 of those, that wasn't the case." Merchants should be aware, too, that in some cases, if there's a late delivery, the cost is reduced. Is this reduction reflected in the monthly bill?

There are companies that specialize in providing technology to track shipping charges, like Accuship.

Plenty of merchants get too overwhelmed to track shipping costs in this detail, "so they just pay it," Enslow notes.

5) shipping considerations should "drive the bus"
In many companies, an order is routed to the shipping department only as the last step in the fulfillment process. But, in many cases, it's advantageous to instead route an order first through the shipping department, to allow this function to drive fulfillment, focusing on delivery at the lowest possible cost. Enslow says that some companies have lessened shipping costs by 10 percent with this strategy.

Controlling shipping costs, "is all about margin management," she says. "People think about that all the time on their products and goods, [but] they also need to pay attention to it on their shipping."

Real World Negotiating Tactics
Alison Castle understands the mysterious art of negotiating with shippers as well as anyone. As vice president of operations for eToys, she haggles with carriers of every type, negotiating a long list of service and price points.

In fact, eToys renegotiates its overall contracts with shippers every year, based on the site's expanding volume. "We're changing our shipping model," Castle says. "Where we predominantly used one carrier in the past, this year we'll be about fifty-fifty, with two of the primary carriers."

"Volume makes a big difference," she says. "If you can commit to them that you're going to give them 50 percent of your business, and in the past you could only give them 10 percent, that makes a big change."

eToys has rate shopping software installed in its warehouse management system. "We load the rates of all the carriers in there, and the system looks at the weight and destination of the parcel, and says 'Okay, who's going to get it to that customer with a comparable service level, but the most cost effective price?'"

"Our carriers know that we have that functionality in our system, so they're anxious to become the winner when we rate shop, so they will work with me pretty well," Castle adds.

When Castle negotiates with carriers, it's on a multi-point basis - not cost alone. "You really need to look at service level, because the service level of all these various carriers vary significantly," she says. "It's really important for us to know that when we ship something from our Virginia warehouse, that a high majority — 90 percent — of those parcels can get to the West coast in five days."

If a carrier offers six-day service with a lower rate, Castle tends to counter with a request for the lower rate, but a five-day delivery, with perhaps some different routing possibilities. "So we do all sorts of negotiations, it's not just a matter of saying 'Okay, what's the flat rate?' — you really have to look at other things."

One of these negotiating points involves parcels that have a lot of "dimensional weight." That is, a very light box that takes up a large space. Even though the box weighs, say, a mere 1.5 pounds, shippers still charge a hefty shipping fee for it. "You can usually negotiate with the carriers, and say 'For dimensional weight, I'm not going to pay that box size, but I'll give you 80 percent of that price.'"

Additionally, "You can negotiate [over] your residential surcharge — the various carriers do it different ways. Some carriers add $1.75 to drop it at someone's door step, others don't, but they change their base price," she says.

For the holidays, delivery date is a critical negotiating point. "We're selling toys, so we want to be able to take orders up until the last possible day. So you work with your carriers, and you say, 'look, I want to be able to still take orders through, for example, the 17th of December, but I need to know that you'll pick them up on the 18th, and ensure me that they'll get to the doorstep the day before Christmas Eve," Castle says. "Some carriers will do that, some carriers won't."

In summary, she says, "The negotiations are very time consuming, and you really have to understand all the factors that go into the pricing."

Adapted from ECommerce-Guide.com, part of Internet.com's Small Business Channel.

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