How to Prevent Shipping Costs from Decimating Your Profit Margins A business world that constantly offers shipping discounts has cut into business's profit margins, but it doesn't have to be that way.
By Johannes Panzer Edited by Ryan Droste
Key Takeaways
- Shipping deals, notably free shipping offers, have become common and expected by consumers in today's world. This inevitably eats into profit margins for businesses.
- However, business owners can gain back some of that lost profit by using a few key strategies.
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Retailers and distribution-oriented businesses are feeling the squeeze on their bottom line.
Profit margins are under siege by escalating operational costs, due in part to the volatile price of energy and commodities and the ongoing labor shortage. With the Fed raising interest rates 11 times since March 2022 and inflation still out of range of the government's 2% target, many ecommerce merchants are facing business challenges. Notably, the majority (52%) of small business owners rank inflation costs as their biggest challenge, causing balance sheet headaches and driving businesses to seek out innovative ways to protect profits.
Related: What New Entrepreneurs Should Know Amid Rising Inflation
Profit margin squeeze intensifying
Spooked by stubbornly high inflation, price-sensitive consumers are taking pause, causing ecommerce growth to slow and business owners to take a hard look at their bottom line. Indeed, when compared to the consistent double-digit growth for 46 consecutive quarters (except Q1 2019) from Q4 2009 to Q2 2021, the tepid single-digit ecommerce sales growth for six of the past eight quarters (including the last three) is a cause for concern for retailers.
While ecommerce growth has slowed, however, 2023 holiday sales projections look healthy and U.S. imports of containerized goods in October are at their highest levels since the pandemic boom. Deloitte forecasts U.S. ecommerce sales will grow 10.3% to 12.8%, year-over-year, during the 2023-2024 holiday season, driving potential sales of $278B to $284B this season. This is good news, right?
Shipping costs draining profits
While news of an influx of orders is music to retailers' ears, holiday shoppers will expect fast delivery of purchases. Unfortunately, most won't want to pay for this service. To satisfy customer expectations, the majority (72.2%) of retailers now offer free shipping in some capacity — a costly burden that takes a big bite out of profits.
And for ecommerce vendors who've expanded to selling via multiple channels (e.g. Amazon, Walmart, eBay), margins are being squeezed even tighter. Consider an ecommerce vendor that previously earned $10 on an order, for example. With the channels taking $2 and free shipping gobbling up $4, finding a way to recover some of that margin becomes top priority.
Related: Why "Free" Shipping Isn't Really Free (And Why It's Getting More Expensive)
Savings hiding in plain sight
While retailers are painfully aware of the high costs of shipping, logistically and from a bottom-line perspective (and 2024's general rate increases are expected to be 5.9% on average), most are unaware of the risks and hidden costs of relying on a single carrier to get the job done. Earlier this year, the threat of strike action by UPS cast unpredictability in the industry and exposed the risk that a single-carrier shipping model poses for delivery reliability and affordability.
Yet few ecommerce retailers use a multi-carrier shipping strategy, combined with technology-enabled rate shopping, to help curb costs while ensuring consistent delivery performance. An internal Descartes study of September 2023 shipping volumes for 1,600 merchants showed that, on average, those who used rate shopping saved $4.39/shipment. This translates into average potential shipping savings of ~34%. Another compelling finding was that ~45% of merchants studied were candidates to save shipping costs by adding another carrier to their mix.
The decision to not adopt rate shopping — the ability to automatically compare and select the best shipping rates available in real-time — is largely due to the perception that rating structures are complicated and comparing carrier services is a tedious and labor-intensive task. With 100 orders to get out the door by end of day, no shipper has the time to manually check prices in each carrier's system to find the cheapest rate.
Plus, many retailers feel satisfied that they're getting "volume discounts" by giving all, or the large majority, of their shipping volume to one carrier, unaware that rate shopping could trim up to 30% off their shipping costs — savings well beyond any discounted rates a single carrier could offer.
So how do you simplify and accelerate rate shopping, reduce your shipping spend and start building back margins for your ecommerce business?
Shoring up margins with automated rate shopping
In today's consumer-driven world, the need to compete with lightning-fast delivery and free shipping is real.
By implementing shipping software with automated rate shopping capabilities, you can instantly compare rates and services of multiple carriers — between two to five carriers is generally the sweet spot — to select the best carrier for the job and keep your shipping costs under control.
For each transaction, the software communicates with a carrier API to obtain the rate, compares shipping costs and transit times for multiple carriers and selects the least expensive or most expedited (or whatever criteria you've set) option — all in an instant, without any heavy lifting on your part.
Related: What Does 'Free Shipping' Really Mean for Retailers?
Shipping as a competitive differentiator
The cheapest price is not always the goal. With automated rate shopping, you can build business rules for both performance and cost, handling exceptions based on your business's unique parameters. For instance, the technology can help you capitalize on regional and local infrastructure to optimize deliveries, enabling you to apply business rules to leverage carriers' strengths and weaknesses in their networks.
Imagine you're shipping a parcel from Charlotte, NC to San Francisco, CA. Carrier X may cost $0.20 more but if its performance shipping to Northern California is consistently better than competitors, reliably getting parcels to your customers a day faster, it might be worth the small rate increase. And the beauty of automated rate shopping is that you can set a business rule to automatically recognize and act on this exception to improve the customer experience.
Alternatively, there may be a smaller carrier that specializes in West Coast shipments that would typically be overlooked by shippers relying on a single carrier. With automated rate shopping, you can build business rules to take advantage of the regional carrier's cost competitiveness and shipping proficiency in a specific geographical area.
Final thoughts
The pressure to balance customer expectations with profitability is intense. Ecommerce businesses that spend more money than they need to on shipping or waste time manually searching for the cheapest shipping option are setting themselves up for failure.
By leveraging automated rate shopping and business rules, you're able to build competition into the shipping process, diversifying and augmenting carrier networks to strengthen your operations. The multicarrier approach not only protects your business from crises like carrier strikes but it reduces shipping costs to protect margins, while enhancing the customer experience on a day-to-day basis.
