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How to calculate shipping costs for your online store

By Tony Hou / On Feb 22 2017

Free shipping? Fixed rates? Price by weight? Welcome to the great shipping rate debate. There are many ways to calculate shipping costs for your online store; but which way is best for your business?

I believe the best way to calculate shipping costs is with your customer in mind. How much are they willing to pay? And what will keep them coming back for more?

The answer is probably zero. Most customers don’t like to pay for shipping because they don’t believe it adds value. (Shipping does add value because it saves the customer from physically travelling to a store, but most people don’t see it this way).

An ‘unexpected shipping cost’ is the number one reason for someone to abandon their shopping cart.

If customers see an unexpected shipping cost, they will probably go elsewhere.

With this in mind, plus many years of conducting A/B tests on shipping costs, my personal recommendation is to offer free shipping if you can.

If you can’t afford to provide free shipping, make sure you clearly state shipping costs throughout your website, so your customers don’t get an unwelcome surprise at checkout.

Option A: Free shipping

If you can control your profit margin, then build your shipping costs into your pricing structure and offer free shipping for all products. You will probably win on some and lose on others; it will even out in the end.

Can’t afford free shipping across all products? Offer it over a certain cart value, such as $150, to encourage shoppers to spend more. A good way to define the free shipping threshold is to set it a bit higher than your average order value. For example, if your average order value is $90, set the free shipping threshold at $100. This will help you increase your average order value and offset the margin loss.

Option B: Flat rate shipping

A popular alternative to free shipping is flat rate shipping, where you charge the same fee for all orders to the same destination.

The benefit of flat rate shipping is it’s super clear and easy for customers to understand; there should be no surprises.

As with free shipping, you will win on some orders and lose on others. You want to set a rate that will ensure you’ll break even.

Option C: Matrix rate shipping

Matrix rate shipping is a little complicated. It’s determined by calculating:

shipping cost x weight x cart value x destination

It’s commonly used by stores that have a wide product range or sell big-ticket items like furniture or musical instruments. It’s difficult to communicate to customers before they add items to their cart because it typically requires their address and cart total.

However, it’s still crucial to try to communicate shipping costs to the customer as early as possible. One way to get around this is to offer a shipping calculator on the product page. Customers can enter their location, and the calculator will provide a shipping cost estimate.

Option D: Real-time shipping

Some eCommerce platforms connect to courier providers at checkout and calculate real-time shipping costs based on product weight, volume, and destination.

While this seems fair to everyone, it’s my least favourite shipping strategy. Customers hate surprises – and this method almost always results in surprises.

One way around this is to connect to the courier API and provide a shipping calculator on the product page. Otherwise, my recommendation is to avoid this method.

Choose what’s best for your customers

In summary, your best shipping strategy is the one that you can easily communicate to your customers. Set expectations before they add products to their cart and offer free or fixed-rate shipping wherever possible.

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