What are the top two direct costs of your ecommerce product line?
For most brands, product cost tops the list.
But shipping cost comes in second.
That’s right: shipping cost. It’s not sexy. It’s not viewed as terribly strategic. And it’s often dismissed by non-ops ecommerce leaders as “overhead” and just a cost of doing business.
And that’s a big mistake.
That’s because reducing – or even better, optimizing – delivery and shipping costs can have a major and almost immediate effect on improving ecommerce margins.
See how Etail clients cut their shipping costs by an average of 21%. Check out our white paper: Shipping Cost Reduction: The Biggest Ecommerce Profit Driver That You’re Probably Ignoring. Click here to download.
Often ecommerce businesses looking to improve their bottom line focus their resources on expensive, complex customer-facing initiatives. New channels. New merchandising strategies. New advertising campaigns. Their thinking makes sense: by increasing topline revenues, they’ll increase bottom line margins – at least on a dollar if not on a percentage basis.
And while there is room for these high-stakes initiatives, there are issues with focusing only on this approach:
- These are complex, resource-intensive and often costly initiatives – with a lot of the expense coming upfront.
- They take time to realize results.
- They are subject to a variety of outside “x-factors” like competitive moves, marketplace changes or other unforeseen challenges that could limit their effectiveness.
Often the single biggest lever for increasing margins – both on a dollar and a percentage basis – lies much closer to home. In fact, it lies in the Shipping Department.
Why Focus on Shipping Costs?
Focusing on shipping cost reductions provides a rapid return with minimal risk when you’re looking to boost ecommerce profits.
- Shipping is often one of the top components of direct product cost. Reducing shipping cost quickly reduces the overall product cost and raises gross margins.
- Shipping cost reductions are immediate, often affect every order, and are under your control – they don’t depend on timing, luck or outside x-factors to be successful.
- Shipping cost reduction is relatively simple, straightforward and easy to model – making the strategy easy to “sell” to organizational leaders and other stakeholders.
- Shipping costs are growing as a major drain on profitability. After a brief, COVID- fueled boost, ecommerce growth and revenues are still growing but leveling off. However, driven by supply chain issues, inflation, seasonal demand and carrier capacity constraints, shipping costs are escalating at double-digits or more – far exceeding the pace of ecommerce revenue growth.
- Not all shipping cost reductions need to be dropped to the bottom line. The dollars freed up by optimizing shipping can be reinvested in customer acquisition – including, ironically, funding shipping-based customer promotions like free or 1-2 day delivery which have been proven to be among the most effective tactics in driving sales.
Cutting Shipping Costs: A Step by Step Approach
Let’s unpack (sorry, bad pun) the components of shipping cost and how they can be optimized.
Shipping cost and the customer’s experience is a function of parcel size; parcel weight; product protection such as special requirements for fragile, frozen, hazmat or bulky items; delivery distance, and customer or marketplace delivery expectations. Carrier rates are another component since the shipping cost of identical items can vary widely depending the carrier and on rates you may have negotiated with carriers by shipping location.
Note that we are using the term “parcel” here – not package.
By “parcel” we mean the outer container used to protect the product during shipping and delivery. “Package” refers to the actual product packaging – which by extension is part of the product. Fortunes have been made, and YouTube overwhelmed with videos, by providing a unique “unboxing experience”. But even these clever, expensive and brand-right product packages have to be protected during the shipping process.
Strategies Used to Save 20% (or more) on Shipping Costs
Here are four strategies that Etail clients focused on to reduce their shipping costs by an average of 21 percent.
Parcel Design and Optimization
An obvious first step is to minimize the size, dimensions and weight of your parcel while still protecting the product inside.
Review your packaging components. Are your boxes too large? No one wants to pay for shipping air and empty space. How do you fill voids in the carton? Bubble wrap and sealed-air packets are lightweight, but less expensive options might be available.
Are your boxes too sturdy? Would a cheaper poly- or poly-bubble envelope also work?
Do you have too many packing options? Too many shipping carton or envelope sizes limit your ability to get volume discounts from packaging suppliers. By validating the size needed to ship the majority of products, you can usually opt for three or four carton sizes that meet most of your needs.
Cartonization automates the process of selecting the best packaging option for each order – or multiple options if it makes sense to split the order.
Don’t confuse cartonization with “box on demand” equipment that wraps corrugated cardboard sheets around a pile of items on a conveyer belt to produce a custom box for each order. While that technology is impressive, it lacks the intelligence to put the right items on the conveyer in the right configuration to reduce shipping expense.
Cartonization algorithms are designed to factor in package size, weight and dimensions; product protection needs; customer and marketplace delivery expectations; carrier rate and configuration “hacks”, and other business rules to recommend the optimal parcel size and carrier for each order.
For example, cartonization can:
- Assign orders to be shipped in carrier flat-rate shipping packages, “shopping” among carriers for the ideal package and lowest shipping cost.
- Split large orders to fit into multiple smaller orders to adhere to shipper weight and size limitations, then supply the marketplace or customer with the right tracking information for the multiple orders.
- Determine what items should be packaged together. For example, you wouldn’t want to ship matches and lighter fluid in the same package.
Cartonization offers ecommerce sellers several benefits:
- Orders are optimized to ship at the lowest possible cost that still meets the customer’s delivery expectations.
- Packing is optimized to fill each carton. When orders are packaged as efficiently as possible, the cost of cartons and packaging materials is reduced.
- Properly packed orders also reduce the chances of product damage during shipping, lowering the number of returns and boosting customer satisfaction.
- Picking and packing operations are made more efficient. Packers don’t have to decide which cartons to use or have to repack boxes when they make a mistake. Workers also can pick items directly into the final shipping container with the correct label. That means a greater number of orders can be filled per employee with a lower cost per order.
Plus, because cartonization is focused on cutting shipping costs, that usually involves reducing package size and weight, an important factor in addressing customer and corporate sustainability concerns.
Amazon as trained consumers to demand fast and free (or low cost) shipping.
The trick to meeting these expectations without breaking the bank lies in embracing a distributed fulfillment model.
A distributed fulfillment strategy places inventory strategically across the country to be closer to consumers. That cuts delivery time and expense by minimizing delivery distance. Also, by positioning your inventory closer to your customers, you only need ground or economy shipping to get their orders delivered in 1-2 days.
How many locations are needed?
McKinsey & Company estimates that sellers can provide two-day delivery to 80 percent of the US population by using three distribution centers across their network. Offering next-day delivery to 80 percent of the US population would require eight distribution centers.
Given the high cost of building warehouses, the shortage of available labor, and the sheer amount D2C expertise required, even the largest brands often balk at building out and owning this level of fulfillment infrastructure.
Fortunately, outsourced fulfillment options such as Amazon FBA, Walmart Fulfillment Services and 3PLs can step in to help provide this level of geographic coverage.
Strategies for reducing shipping costs range from the simple (optimize package size) to somewhat complex (distributed inventory placement).
The good news is that these initiatives often can have an almost immediate effect on boosting margins.
The bad news is that your current ecommerce software platform may not be up to the task.
If you are one of the many brands who’ve come to realize that you need to take control of your D2C ecommerce future, you’ve probably also come to realize that your D2C transformation involves a major operational shift from shipping pallets of products in truckloads to a handful of retail distribution centers to being able to ship single parcels to individual shoppers.
Most legacy WMS systems were designed for the B2B world of shipping pallets to retailer warehouses. The explosive growth of ecommerce forced vendors to add order and inventory management capabilities.
But D2C ecommerce fulfillment has become more complex than just managing orders. We’ve seen it involves multiple packaging options, fulfillment locations, 3PLs and other partners, and integration challenges to pull it all together.
What required is not better order management software; what’s needed is new order optimization software.
What does this have to do with reducing shipping costs?
Order optimization is built on a technology called Distributed Order Management (DOM).
DOM systems process every incoming order, in milliseconds evaluating the inventory availability and shipping cost for every fulfillment location, then routing the order to the lowest cost fulfillment location that meets the customer’s delivery requirement.
And in nearly every case, that lowest cost option is driven by low shipping costs.
But while traditional DOM systems often base their shipping decision on distance and proximity to the customer, Etail’s order optimization platform combines powerful inventory management tools, cartonization algorithms and a DOM engine to make the optimal fulfillment decision.
For example, the fulfillment location nearest the customer may not be the optimal choice. Another fulfillment location, although farther away from the customer, may offer more shipping options for that specific order. That might include more carriers available and, therefore, more flat-rate shipping carton options that will reduce the cost of shipping the order without compromising on delivery time.
So a modern order optimization platform does more than just route orders. The platform is the glue that holds your D2C fulfillment and shipping strategy together while reducing costs – overhead costs, inventory costs, integration costs, returns cost – and, yes – shipping costs.
Interested in learning how Etail can help cut your shipping costs, boost margins and increase customer satisfaction? Reach out. We’re here to help.