How Shipping Cost Strategy Can Create Cross-Border E-commerce Sales Growth
Deciding what to do about shipping costs has been a challenge for retailers ever since the first customer asked for their purchases to be delivered to their home.
It costs money to deliver any order, but how much of that cost should you absorb rather than pass on to the customer as a shipping cost? Should they pay for all of it? Are the delivery costs just another cost of doing business and something the customer shouldn’t be burdened with?
As with all decisions in your business, your shipping cost strategy should be designed with one goal in mind — to maximise profitability.
Shipping Costs are a Huge Barrier to Purchase…
There’s no getting away from the simple fact that shipping costs (and delivery speeds) stop customers from buying.
The customer picks their products, adds to basket, sees the cost and speed of shipping and abandons the purchase.
Ever since customer surveys about e-commerce barriers to purchase began ‘Shipping costs’ have been a top reason customers give for failing to complete their purchase.
The Royal Mail’s Delivery Matters Report for 2018 reveals that shipping costs are the number one reason shoppers abandon their carts with 40% of people stating they have abandoned because they weren’t happy with the delivery charge.
If you’re charging more than the customer expects to pay to deliver them their parcels, you are losing sales.
…but delivering the goods costs money
However you go about getting the product to the customer, it costs you money — couriers, packaging, staff it all adds up.
One way or another those costs will be paid by the cash you get from the customer. Whether the customer sees it as a “shipping cost” or you cover it with the margin you make on the products, the customer will be paying for the shipping.
Any decision to reduce the “shipping costs” you charge the customer should be taken with care. Reducing them should both increase your sales volume and your profits.
These are the shipping cost strategies retailers most often adopt:
In each case it’s about, how all the delivery activity balances out, rather than trying to achieve this on every individual order.
“We’re going to make a profit on our shipping costs”
Total income from shipping costs is greater than total cost of delivery.
This was normal back in the 2000s (when it was also acceptable to make the customer wait 28 days for delivery), but as Amazon has increased customer expectations it is difficult to get customers to pay shipping costs at a level that would make this work.
Even if you can achieve this it’s probably a terrible business decision because your overall sales and profit will be less than they otherwise should be.
“We aim for break even on our shipping costs”
Total income from shipping costs is the same as total cost of delivery
Very hard to do on an order by order basis without resorting to a very complicated delivery calculation system. It’s usually managed across the board — with a profit made on orders it’s cheap to deliver and a loss on orders it’s more expensive to deliver. All balanced out to reduce barrier to conversion for all customers without it costing the business too much.
“We are happy to make a loss on our shipping costs”
Total income from shipping costs is less than total cost of delivery,
but overall sales & profit are much better
Moving to this approach means that either you are taking a profit hit to reduce/remove the customers’ barrier to conversion because the sales uplift will make up for it, or that you’re increasing the prices of your products to cover the loss on the shipping fees and maintain overall profitability.
When working out which is right for your business don’t do it in isolation — take a look at what your competitors are doing and revisit your delivery costs (is it time to find new couriers? Or lower the cost of packaging?).
Don’t forget to consider both standard and premium delivery services too, customers are generally more willing to pay for faster or more convenient services.
Selling cross-border means you need to focus even more on your shipping costs
When you’re selling into a foreign country your parcels are going to take longer to arrive than parcels of the retailers native to that country — it’s simple geography! That means you are already on the backfoot when competing with the local retailers.
How much it costs you to deliver the parcel is probably going to be more than it costs the local retailer, so you’ve got to be very savvy about how much of the delivery costs you chose to pass onto the consumer as a shipping cost.
Feeding a bit of competitive analysis into these strategy decisions can be hugely beneficial, consider:
· if the country you’re shipping to has their own Amazon operation then customer expectation of speed and free delivery will be higher — so you should probably reduce shipping costs by more than you would if Amazon aren’t there
· Look at your competitors in the country what delivery (shipping costs and speed) are they offering consumers and how do you measure up? Also look at their product prices — are they similar to yours?
· Look at products that compete with yours on the marketplace you’re selling on, how do your product prices compare, as well as your shipping costs and speeds?
Looking at all this will give you a guide as to how far you need to reduce the stated shipping costs. For example if your product is £5 cheaper than the competition on the marketplace but your shipping costs are £4 higher — it’s probably time to reduce shipping costs to that country.
You may find you need to take a different approach in each country to hit your own targets and maximise sales.
Does reducing shipping costs in cross-border e-commerce really create sales growth?
The short answer is YES!
At Fruugo whenever a merchant gets in contact for advice on how to increase their sales shipping costs are the first thing the team look at because it is fairly easy to change and has such a fast impact on sales performance.
Here’s some examples of how reducing shipping costs quickly increased sales.
In these examples we’re using GTV (Gross Transaction Value) which includes both the cost of shipping and the product cost to measure the sales impact. The rolling 7-day average GTV simply makes the data easier to understand.
The right shipping cost strategy can double sales
This health and beauty retailer were trying lots of things to increase their sales, but hadn’t reviewed their shipping costs in a long time (despite several changes to their overseas delivery services).
They undertook a review of their full shipping cost set up in April 2019 as they were advised that the shipping as a percentage of GTV was high in many overseas countries which could be detrimental to their sales. They reduced their flat rate shipping costs significantly to ensure they were competitive as possible in each country.
This led to shipping cost decreases in many countries, but also increases in some. For example:
· Sweden from £15 to £8
· Ireland from £11.50 to £5
· Spain from £4.50 to £5.50
As you can see on the graph it quickly made a huge impact in their overall sales.
Further Fruugo internal research we found shipping clearly has a role in the conversion rate of a product. A product with free shipping can have a conversion rate twice that of its not-free-shipping counterpart, on average.
If the product is at the lower end of the price range, the conversion rate of the free-shipping product can be as high as 5 times that of its not-free-shipping counterpart, on average.
This is shown in the chart below. For clarity, the Price Tile relates to the item price. For example, Price Tile 1 includes products with a price between €0.01 and €8.00 and we can see the conversion rate is 6.52% for products with free shipping v. 1.13% with shipping costs.
Regularly reviewing shipping costs works in every category
This second example is a fashion retailer who hadn’t reviewed their shipping costs in over 18 months.
A short project to review the costs again led to big improvements in overall sales.
Full flexibility to manage your shipping costs the way you want to
On Fruugo you have complete control of your shipping costs, which makes it very straight forward to adopt the right shipping cost strategy to maximise your cross-border sales.
On Fruugo you manage the shipping costs for each country separately and can set up both a “Standard” and an “Express” option in each country.
There are 4 different ways you can set up the pricing for each country:
· Flat rate shipping — whatever the customer orders that’s the price they will pay
· Value Based Shipping — the shipping cost is calculated based on the total value of the items ordered (if you want to offer free shipping over £x this is the way to do it)
· Weight Based Shipping — the shipping cost is calculated based on the total weight of the items ordered. A great way to manage particularly heavy items.
· Quantity based Shipping — the shipping cost is calculated based on how many items the customer orders.
Full details of shipping costs on Fruugo are here
Want to know more about how the right shipping costs can grow your cross-border sales? Speak to us today
