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How to Calculate Shipping Costs for an Online Store

Mychelle Blake
Woman using a digital tablet in a warehouse

One of the more difficult aspects of setting up your own online store is deciding on your shipping rates. There are many options and your choice can affect your sales, product fulfillment and business reputation. Taking the time to calculate all of your choices can provide real monetary and customer retention benefits for your new business.

Setting Up Shipping for Your Online Store

Starting to determine shipping means learning about the different choices. There are three main options that most online stores choose from or you can go with a combination.

Free Shipping

Obviously offering free shipping is the easiest as there aren't complicated calculations. The downside to free shipping is cost. Some vendors will offer free shipping after you purchase a certain amount in order to incentivize buyers to increase their total purchase. This can be a useful sales feature assuming a business can afford to provide free shipping. Some businesses will increase the price of the product and offer free shipping, so that the price actually covers some or all of the shipping cost.

Flat Rates

With flat rate shipping, you decide on one set rate for all orders and this information is available to buyers before the initiate a purchase. Another option is to have set flat rates for different tiers of sale. Flat rate shipping is another easy option to calculate since you're going with set rates. The difficulty is in finding a flat rate that will cover the costs of shipping and handling without losing money for your business.

  • For example, if you use tiers based on price, it could $5 for orders up to $20, $6 for orders $20.01 and above.
  • With weight-based shipping, the tiers are based on the total weight of the order. With weight-based shipping you will also need to be sure you've accommodated special packaging in your cost if large and heavy items require more or unusual packing materials.

Real-Time Carrier Rates

In this option, you use a shipping service to calculate the cost based on their actual current rates. For example, you would work with your carrier, such as the U.S. Post Office or Federal Express to price your total sales based on what any user would pay to ship the same size and weight of items.

  • The benefit of this type of shipping is that customers know they're paying the "real" rates for shipping instead of higher rates based on a vendor's profit calculations.
  • Another benefit is to provide more than one option to buyers, such as overnight shipping and ground shipping and even a choice of more than one carrier. This can make potential buyers happy and more likely to use your service.
  • The downside is that these rates are usually calculated once they have begun the shopping cart process, and many orders may end up abandoned because the potential buyer found the shipping price to be too high.

Variable Shipping

With variable shipping, you may have a combination of two or more of the above options. For example you might ship with real time carrier rates up to a certain total purchase amount and then offer either free shipping or a flat rate. This shipping can be more time consuming to track and program into your website but it may be one that customers enjoy because of the flexibility and incentives for buying more to get a better shipping rate.

product for online business

Choose a Shipping Service

One important piece of data you will need is what it actually costs to ship your products via services like the U.S. Post Office, United Parcel Service and Federal Express.

  1. The easiest way to do this is to "pack" a few of your items so that you have a set of envelopes and boxes that you would typically send out (or expect to send out).
  2. Then take the measurements and weights of these items and go the websites for each of these carriers.
  3. You can use their online calculators to find out the exact cost:
  4. It's a good idea to pick several zip codes for your destinations so you can get an average idea of price. For example, if your business is in Chicago, get the rates to ship to Seattle, Los Angeles, Dallas, Miami, Washington DC and New York.
  5. If you intend to ship internationally, you should do the same and pick some countries that you know you will be shipping to. You should also find out about required customs information such as forms and fees.

Determining Shipping Cost

When deciding on your shipping rates, there are a few costs you need to consider to determine an amount that gives you a profit while incentivizing your customers to continue shopping with you.

Packaging and Materials

How much does packaging cost for your items? An item that needs a simple padded envelope will be less costly to ship than one that needs a box, packing material, styrofoam and shrinkwrap. Review your costs for supplies so you have an idea of the cost of supplies per item.

Fulfillment and Handling

How are your products shipped out? Do you have to pay a fulfillment service, use a drop shipping company, or have part-time or full-time staff? Do they require any special training to pack your items, such as food? All of these costs need to be added up and divided by your product sales to find an average per item cost.

Insurance

If insurance is required to ship items, such as specialty or luxury products, that cost will need to be added in to your calculations.

Customs and Taxes

If you need to pay taxes depending on your location, or customs' fees if shipping internationally, these need to be added to the cost of shipping an item.

Calculating Shipping

Once you have an average cost to produce, pack and ship a product, you can look at the price and figure out what the best shipping rate will be.

  • You can either put the entire cost onto the customer which is not unusual for higher end or heavier items.
  • You can split the cost and only charge the customer half while you assume the other half.
  • You can eat the entire cost of shipping and charge the customer nothing.

With each of these options you will need to see how much profit you can expect to make and choose the one that keeps you in business. How much you decide to charge will then influence what type of shipping method you use.

What's the Best Shipping Rates for An Online Store?

The answer to what type of shipping rates you should use for your online store is dependent on your type of business, the costs involved in packing and shipping your product, and your own profit margin calculations. The best option is to review all the possible ways you can go with shipping, whether that's flat rate, variable rate or real time carrier, and price them out with your costs included to find a happy medium between profit for you and a reasonable cost to your customer.

How to Calculate Shipping Costs for an Online Store