Most e-commerce businesses are familiar with the importance of calculating Cost Per Order (CPO) and finding ways to optimize the cost of fulfilling orders. But it’s equally important to break this down to analyze the key costs with a lot of influence over your fulfillment costs – namely, the cost of shipping.
Shipping cost per order is a vital metric in e-commerce to help an online store control its shipping expenditure and find new ways to keep their strategy cost-effective. Calculating shipping cost per order empowers businesses to understand shipping expenses on a more granular level, enabling them to make more informed decisions about their shipping strategy and how to scale efficiently without their shipping costs spiraling.
In this blog, we’re going to explore how to calculate shipping per order, why it matters, and what e-commerce brands can do to lower their domestic and international shipping costs and increase product margins.
Shipping cost per order is a metric used to calculate shipping costs incurred by an e-commerce brand to ship a single order to a customer. This is expressed either as a flat figure or as a percentage of total order value.
Your average shipping cost per order can be calculated by dividing your total shipping costs over a certain period of time by the number of orders shipped:
Shipping Cost per Order = Total Shipping Costs / Number of Orders Shipped
If shipping expenses are not monitored closely or used to inform shipping strategies, this can result in e-commerce brands making a loss on some orders and losing profit margins. Taking the cost of shipping into account means that brands understand to what extent they need to offset shipping costs, especially if they plan to offer free shipping or run flash sales that include shipping promotions.
There may be circumstances where shipping costs need to be passed on to customers fully, either as a separate shipping fee or as part of the order’s total cost. By calculating shipping cost per order, brands can make an informed decision about how to price their products and pass on shipping expenses. Moreover, tracking shipping cost per order over time helps to highlight trends and fluctuations, allowing brands to assess the efficiency of their shipping strategy over periods such as peak season.
For all of these reasons, it’s important to consider shipping costs as a separate expense rather than just as a part of the Cost Per Order (CPO) metric, which encompasses the total sum of storage costs, fulfillment costs, marketing costs required for an e-commerce business to receive and fulfill orders.
Shipping distances are calculated by the number of shipping zones that a package needs to cross to get from its point of origin to its destination. The more zones that are crossed from the starting shipping zone to the end, the more expensive overall shipping costs will be. For example, if a parcel is being shipped from coast to coast in the U.S., it has to cross a larger number of shipping zones than a parcel of the same origin which is only going half the distance. This can cause domestic shipping costs to vary wildly between orders.
The larger and heavier a package is, the more it will cost to ship. Parcel carriers use dimensional weight or DIM weight to calculate shipping fees both domestically and internationally, meaning package dimensions or actual weight (whichever is greater) determines shipping prices. This is because packages that are lightweight but bulky will take up a lot of space within a delivery truck that could go to other parcels.
Expedited shipping options are a growing expectation by online shoppers, thanks to the standards set by the likes of Amazon. However, rapid shipping times carry a much higher cost per order than economy shipping methods, especially over longer distances. If you want packages to get to customers within the same timeframe no matter where they are based, you will need to consider either paying for expedited shipping rates or shipping from a location that’s closer to your customers (more on this later).
Many businesses don’t factor insurance into their shipping costs, assuming that parcel carriers will include insurance as part of the shipping rate. While this is true in for some service levels, lodging a claim with a parcel carrier isn’t as easy as it might sound. For high-value or fragile purchases, investing in separate shipping insurance is a good decision to avoid the hidden costs of shipments.
Even the best shipping strategy can encounter unexpected roadblocks that result in damage to shipments, delays to delivery, or orders being lost in transit. When this happens, it is the brand’s responsibility to remedy the situation, which usually means incurring additional costs, such as replacement items or orders. Insurance isn’t going to cover every eventuality, so it’s important to make sure you have a shipping budget large enough to handle these situations when they come up.
In an ideal world, an e-commerce brand would be offering free shipping to all of its customers. But in practice, this extra cost would be too high for many businesses to stay profitable. To lower shipping cost per order, brands may find themselves needing to charge customers shipping costs on certain orders, or else bake the cost of shipping into their product prices.
Moreover, indiscriminate free shipping can do your online business more harm than good. While it might help to convert customers, free shipping can result in brands making a loss, especially if they have a smaller average order value. Alternative strategies to charge customers for shipping include:
Lowering the number of shipping zones a package needs to cross is one of the easiest ways to access cheaper shipping options. The closer your fulfillment center is to your end customer, the lower your final shipping costs will be. However, a single fulfillment center is unlikely to be close to all of your customers, which makes it difficult to calculate the cost per order for shipping.
A multi-node fulfillment strategy composed of several fulfillment hubs makes it possible to stay within a few zones of most customers, allowing you to cut costs and also lower shipping timeframes for better customer satisfaction.
Adding a flat-rate shipping option to your strategy can help brands to standardize their shipping costs in situations where order characteristics may be very diverse when it comes to DIM weight and shipping destination. Flat rate shipping is when carriers charge a fixed shipping fee for the service, so long as the package contents fit into the dimensions provided.
Moreover, many parcel carriers also include packing materials as part of the shipping rate, making it a very effective way of lowering shipping cost per order. Flat-rate methods also help to streamline order fulfillment by providing personnel with a more standard approach to packing orders. However, it’s important to assess your current order volume and characteristics to check that flat-rate shipping is a good fit.
Split shipments result in shipping cost per order – and packaging costs – jumping up by two or even three times, depending on the number of times an order is being split into separate packages. While there are circumstances where split shipments can lower the cost of shipping, such as when the dimensional weight of a single package is prohibitively expensive, this is normally a result of insufficient inventory rather than careful planning.
On another note, split shipments also result in more packaging waste, something that today’s consumers are not appreciative of. Offering them the option to consolidate their order doesn’t just reduce shipping costs, but gives your customers more control over their delivery experience.
Partnering with an e-commerce fulfillment provider like Ryder E-commerce is one of the most effective ways for brands to reduce shipping cost per order. Outsourcing fulfillment and shipping to a 3PL allows you to leverage volume discounts with major parcel carriers that are difficult for brands to access independently.
Moreover, a partner with multiple fulfillment centers can place you in a facility that offers the shortest transit times to your customers. With 25 fulfillment centers nationwide and an experienced e-commerce parcel team, Ryder E-commerce lowers shipping cost for customers by offering 2-day shipping capabilities to over 90% of the U.S. Our streamlined order fulfillment processes ready packages for dispatch before cut-off times, ensuring rapid delivery to more customers.
Shipping costs have an outsized impact on the profitability of digitally-native brands, especially as customer expectations rise for faster shipping options. As well as ensuring your business is financially sound, keeping an eye on shipping cost per order helps you to identify where shipping costs can be streamlined to improve customer satisfaction and responsiveness.
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