How to Make Shipping a Profit Center – MCM March 2009

By September 27, 2013 News

(Originally published by Multichannel Merchant as “Secrets to Savings on Shipping & Handling”, March 1, 2009)

 

Is your shipping a cost or profit center? We asked several hundred shippers in a recent survey and determined several important conclusions (complete results published in Parcel, Nov 2008 and Traffic World, December 2008).

51% of companies reported shipping is a profit center (“Group 1”), while 49% either did not know or reported shipping is a cost center (“Group 2”).

By analyzing the survey responses, we identified both tactical as well as strategic differences between these two groups. The conclusion for Group 2 companies striving to make shipping a profit center: Identify and replicate the behaviors and activities of Group 1 organizations.

As a general observation, Group 1 shippers know much more about their distribution than Group 2. For example, 77% of Group 1 shippers could specifically quantify shipping costs as a percentage of Cost of Goods Sold (COGS) versus only 63% of Group 2.

The most obvious difference between the two groups is charge back policy: 91% of Group 1 organizations charge back shipping costs, whereas only 52% of Group 2 companies do so. When asked the question “How have you dealt with higher shipping costs?”, Group 1 companies pass along any increase in costs to their customers (37% vs. Group 2 only 25%).

Group 1 companies review and adjust their shipping charges much more frequently than Group 2. 41% of Group 1 companies adjust rates every 1-3 months (26% for Group 2). In fact, 95% of Group 1 adjust rates every 1-12 months. 59% of Group 2 adjust rates annually or longer. (See Table 1)


When should you adjust your shipping rates? With fuel surcharges changing monthly, we recommend a review at least every 30 days. However, one way to ensure adequate profitability of shipping orders is to use software to lookup your discounted rates in real-time and automatically assign a markup.

The carriers offer application programming interface (API) software that allows you or your customers to access designated rate tables in real-time, generally when your customer is about to finalize an online order.

One of our clients created a table that not only includes their discounted rates plus a 10% markup, but also residential fees, delivery area surcharges and fuel surcharges on every shipment. This strategy doesn’t always ensure they capture 100% of their costs on every single shipment, but based on historical averages, shipping creates profits of 20%.

A dramatic difference between Group 1 and 2 is how often the companies renegotiate carrier rates. 43% of Group 1 companies negotiate at least every six months, versus only 28% of Group 2. (See Table 2)


While it is important to take a long term approach to partnering with your carriers, you may not be taking advantage of current market conditions and pricing. In today’s challenging economy, your carrier may be willing to give you incentives and concessions that were not previously available.

One of the most significant challenges in making shipping a profit center is the fact that numerous charges are tacked on after a shipment is manifested. These include common accessorial charges like address correction ($6 Ground, $10 Express, $50 Freight), residential surcharges ($2.05 Ground, $2.40 Express), additional handling service ($7.50), large package surcharges ($45), over maximum limit ($50), delivery area surcharges ($1.60 Commercial, $2.40 Residential, $7.50 Hundredweight), invalid account number or refusal ($10), dimensional adjustments, duties and taxes, and additional fuel surcharges.

We estimate that 25-35% of total shipping charges are applied on the backend. These supplemental charges are often invoiced separately from the original freight charges, and matching the two prior to customer charge back is challenging (if not impossible). Still, Group 1 companies try to recover both freight charges as well as supplemental charges. And they also assess an additional “handling fee” to account for unaccounted discrepancies (34% of Group 1 companies versus 20% Group 2). (See Table 3)


To ensure you charge back total costs, work with your carriers to install solutions to capture as many upfront charges as possible. For example, to capture delivery area surcharges (DAS) at shipment origin, use third party or carrier manifesting systems that recognize DAS ZIP Codes and include charges as the shipment is processed.

Also consider address validation software to reduce address correction fees. Apart from avoiding fees of $6 to $50, there are many additional benefits including fewer reships and returns, and most importantly, a greater customer experience by getting the original shipment delivered on-time.

Similarly, residential delivery indicator (RDI) software can help you properly classify residential and commercial addresses to proactively avoid backend charges on your carrier invoice. There are many companies that offer address validation and RDI software. Before making a purchase, be sure to talk to your carrier rep as they may provide similar tools free of charge.

Another way to avoid supplemental charges is to use prepaid or flat rated products. Both flat rated and prepaid products allow you to purchase domestic and international express services in advance at a preferred rate. Since you’ve already paid a set rate, you could avoid backend fees like residential, DAS and other surcharges.

Moreover, you can potentially reduce costs by shipping heavier items that normally would be rated on a per pound basis. You can mark up the rate to ensure a profitable shipping transaction. Again, consult with your sales rep as each carrier offers slightly different products.

According to our survey Group 2 companies tend to ship more to residences (54%) than Group 1 (38%). Residential shipments not only get additional surcharges, but discounts are often less for residential
than commercial delivery. If feasible, have Customer Service ask for commercial addresses at order entry.

In addition to RDI, residential shippers should consider several other cost savings strategies. Be sure to negotiate accessorial concessions and deep incentives with your carrier. Moreover, residential shippers should consider using USPS Priority Mail, 1st Class Parcels and Parcel Select services over costly private carrier Express and Ground services.

Review your carrier invoices for dimensional charges and carrier reweighs. If you find you’re adversely impacted by these additional fees, consider investing in accurate scales and cubing equipment so you can precisely determine the billed weight of the shipment.

If you’re a UPS shipper, ask your rep about “scan-based billing”. Without scan-based billing an invoice is triggered for most shippers when a shipment is manifested. With scan-based billing, an invoice is not generated until the shipment has been delivered. By then, most if not all supplemental charges have been identified.

Returns offer another point of separation between Group 1 and Group 2. Group 1 shippers are twice as likely to charge a combination of actual carrier costs including surcharges and a handling fee (16% vs 8%). Group 1 companies are more than twice as likely to charge published (undiscounted) carrier rates for returns (12% vs 5%). 40% of Group 2 companies, on the other hand, do not charge anything for returns (vs 31% of Group 1 companies). (See Table 4)


Interestingly, Group 1 shippers offer their customers a choice in shipping methods and/or carriers (86% versus Group 2 only 68%). These results initially seemed counterintuitive since a common cost control strategy is to dictate carrier and mode. (See Table 5)


However, we concluded these results have more to do with Group 1 companies acting in concert with best practices more than a means to generating profits on shipping. Consider that 60% of consumers and 72% of business owners want to choose their delivery company when making an online purchase; and 12% of consumers and 28% of business owners will not even make an online if not offered a choice for delivery (ComScore, Dec 2007). Group 1 companies simply have their act together.

In conclusion, there are a number of opportunities for shipping to become more profitable. Group 2 companies are encouraged to identify and mirror the behaviors and activities of Group 1 shippers as identified above.

Moreover, it is important for both groups to meet regularly with their carriers to identify services and technologies that can reduce your costs and improve efficiencies. Finally, closely monitor total shipping charges and frequently evaluate chargeback methods.

Shipware

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