Calculating shipping costs is not always as easy as plugging data into a shipping calculator. Yes that will give a general idea of what one package costs to ship with one carrier. But when determining how to calculate shipping costs for your small business, there’s more to consider. A smart shipping strategy means looking at all the factors involved, including the big picture. It’s possible a small business will send all their products via one carrier and one shipping method. But that’s not likely. More likely, you’ll want to adapt your shipping strategy to account for all factors of importance to you and to the customer. 

What’s included in the shipping fee? It involves the packaging, the postage or shipping rate. It might include shipping insurance and surcharges or an additional shipping fee for specific add-ons. For international shipping, it’s the landed cost – adding in tariffs and customs fees. The shipping cost includes any direct cost from transporting a product from your warehouse to the customer’s location.

How do I calculate shipping costs?

Let’s go in depth about the various factors that make up the shipping cost for a single shipment.

Packaging Material

As you evaluate your shipping program, consider the most cost-effective packaging material you can use. Cost effective doesn’t necessarily mean the cheapest shipping material and products, but the ones that give you the best value. A poly bag can safely transport many clothing items without damaging them, and the poly bag weighs little. But you wouldn’t want to ship a computer in a poly bag, as it would get damaged and that adds to your shipping cost. You would have to replace the item, which means eating the cost of one computer and additional shipping. Plus you’ll lose a customer. That’s an extreme example, but there’s no reason your ecommerce business must stick with only bags or only boxes when it comes to your shipping supplies

Some products can be shipped in their own boxes, which saves packaging costs, but also the extra weight for shipping supplies like bubble wrap and other filler. Additional packaging can also increase the parcel dimensions, increasing the price with the shipping provider

Multiple carriers offer free packaging for some of their services. USPS offers free envelopes and boxes for Flat Rate shipping, and UPS, DHL and FedEx offer boxes, envelopes and a shipping label as well. You may need to stick with the shipping method associated with that packaging, which could be a higher service level (i.e. more expensive) than you need, which is something to consider when using the free packaging. 

Dimensional weight

Packaging costs aren’t as simple as measuring and weighing something, then finding the price on the shipping cost calculator. If you’re a major carrier, you use dimensional weight pricing. Dimensional weight shows the package density, how much space it takes compared to its real weight. Dimensional weight (DIM weight) is measured by multiplying the package length by the width by the height in inches, giving the cubic size. This cubic size is then divided by a rate type divisor, a number that may depend on your negotiated status with the carrier. This results in DIM weight in pounds, and the major carrier will use this weight or the actual package weight — whichever is larger. 

DIM weight is used to account for space in the truck, so that large, lightweight packages aren’t too low in price to justify their space. Carriers are trying to increase efficiency in packing the trucks, and not charging enough for large packages with low weights can be costly to the carriers.

Shipping method

The amount of time it takes for delivery is factored into how to calculate shipping costs as a small business. This impacts the shipping option. If the customer expects delivery in one or two days, that will cost more. Delivery time is also affected (as is pricing) by the shipping zone. A shipment going from California to New York will usually cost more than shipping just within California because the cross-country travel goes through more shipping zones, traveling farther. 

Is it cheaper to use a Flat Rate box or your own box? The answer depends, of course. Since a USPS Flat Rate box can ship up to 70 pounds at one price, in many cases, it may make more sense to ship Flat Rate if the box can hold heavy items that would be more expensive to ship another method. But sometimes it’s just cheaper to use your own box and use a different shipping option, like Priority Mail. It really depends on what you’re shipping, how far, whether you want to use the free boxes, and if it’s easier to ship everything in the boxes without needing to weigh them.

Shipping carrier

Different shipping carriers have different prices, and it pays to do your research to find the best shipping carriers for small businesses before shipping. A regional carrier might be less expensive for shipping in a specific area, than using one of the major carriers. If you have a large shipping volume, you can likely negotiate a better price with your chosen carrier. Using a mix of services can be more cost-effective in some cases. Last mile delivery is the most expensive part of the shipping process. UPS and FedEx offer hybrid services with the USPS, where UPS or FedEx are the initial shipping provider. They hand over the package to USPS at a station closer to the customer’s location. Since the USPS delivers to residences and businesses every day anyway, it is cheaper for them to do the last mile delivery. It’s a win-win shipping solution, as long as the package can take a little longer to arrive. 

Insurance

Small businesses don’t always consider the cost of insurance when calculating the shipping price. The shipping carrier, like UPS, FedEx, and in some cases USPS, offer a set amount of shipping insurance on their packages, if they are lost or damaged. A customer may want to pay for insurance. But sometimes it’s worthwhile for the shipper to pay the additional amount for insurance, just to protect their business. Using a third-party insurance company can be less expensive than getting insurance through the carrier.

Accessorial fees

In addition to the shipping charge, there can be accessorial fees. This can be for an additional shipping service like getting a signature from the recipient, Saturday delivery, an oversized package, or additional handling on freight. It’s helpful to know what accessorial fees your packages need on a regular basis, as that can impact what carrier you use, and you may be able to use that information when negotiating different rates. It’s also possible to change some of your shipping characteristics so you don’t encounter those fees as frequently. Maybe that means using standard-size packaging, or using USPS for free Saturday delivery. Freight shipping might be cheaper if everything is packed evenly on pallets, so the pallets can be stacked in the truck. Freight cost can be higher if the inventory isn’t squared off on the pallets or if they are oddly sized on the top. 

Free shipping

If you offer free shipping, you need to pay extra attention to your shipping costs as a small business, because you are footing the entire bill. In this case, the shipping costs could be factored into the item pricing, if you’re not competing based on the lowest price. Offering free shipping is usually worthwhile if the customer orders a certain amount, so you’ll have a positive profit margin even after paying for shipping. Avoiding the higher priced shipping options like overnight mail can also help.

International shipping

International shipping is not the same as domestic shipping when it comes to complexity. You’ll need to consider landed cost, which is the total shipping cost for not only transportation, but the taxes and duties, brokerage fees, and even currency conversion. Sales tax or tariffs will be country-dependent. The shipping also involves filling out customs forms and declarations, and doing it incorrectly can tie up the item at the port. 

Shipping software

Shipping software is a great way to help determine your small business shipping prices. The software can be a stand-alone program where you pay a monthly fee or a fee per shipping label. Or it can be incorporated in your other software programs. These shipping software programs have a shipping cost calculator you can use to determine the best option per package. They often have negotiated shipping discounts for small businesses with the major carriers, so you don’t necessarily have to have high volume shipping to participate. Some link in with your own carrier contracts, and you negotiate your own shipping prices.

Contract optimization

Every shipper should reevaluate their carrier contract on a regular basis. While you may not know all the ins and outs about negotiating a shipping contract, Shipware’s experts do. They help shippers behind the scenes with contract optimization by structuring a contract that includes those unique elements most important for your small business. Your shipping characteristics are different than other companies, and that should be incorporated in the discounts you seek. Shipware can evaluate this in depth from your records, and use proprietary benchmark data to set the guidelines for what to ask of the carrier to get the best contract terms for your small business.

You can also gain shipping characteristics information using Shipware’s spend management portal. These real-time insights into your shipping logistics show how the variables affect your service and pricing. You can measure your KPIs, see how a rate increase impacts your shipping over time, develop cost-saving strategies that align with your growth predictions, and get access to individualized charts to use during executive meetings.

Shipware knows how much can be saved by a shipper when optimizing the contract and understanding your shipping details. We’re happy to share with you how to use these services to save money. Please contact us at (858) 879-2020 for more information and shipping tips for small businesses.