How to Reduce Ecommerce Shipping Costs
Strategies and ideas to reduce shipping expense appeal to most every ecommerce merchant. We recently spoke with John Haber, founder and CEO of Spend Management Experts, a shipping and logistics consulting firm, about ways for merchants to reduce their shipping costs.
Practical eCommerce: How can merchants know if they are overpaying for shipping?
John Haber: “One of the easiest ways for a merchant to know if he’s overpaying for shipping is if he’s losing sales. In today’s environment, a lot of times the decision on who to purchase from can boil down to shipping costs, and that’s why free shipping is playing such a big role within online retail. So losing sales is a good indicator that your customer may feel that he’s overpaying for shipping and that you may as well be overpaying for shipping.
“Another way that you can identify that you’re overpaying for shipping, especially in the world of parcel shipping, is if — when you look at your invoices, perhaps with the UPS or FedEx — you are getting hit with charges on the back-end after you invoice a customer or after you manifest a package, you’re likely overpaying for shipping. Things such as not manifesting a package correctly as a residential shipment and not putting in the correct dimensions of a shipment, result in billing charges that come after the fact and it’s very difficult to recoup those costs. So if you look at your invoice and you see additional charges, then you’re likely overpaying for shipping.”
PEC: Additional charges, meaning merchants shouldn’t be paying additional charges?
Haber: “Additional charges can come in the form of what we would call a ‘billing adjustment,’ especially with carriers that bill on what we call dimensional weight. Those are charges based on the dimensions of the package, rather than the actual weight of a package. A lot of time we see that our customers are simply putting in the actual weights, and charging for actual weights and not dimensional weights — when you charge based on actual weight, the carrier does a billing adjustment and charges you a fee after the fact. Most of our clients have already either passed on that shipping cost and are not able to invoice it, or they haven’t identified that cost and they’re overpaying in those areas. And so they don’t set the price correctly on the front end when they’re selling the goods.”
PEC: What are other mistakes that you — a shipping expert — see ecommerce merchants make when it comes to shipping costs?
Haber: “There are three really good examples that come to mind when thinking about common mistakes that merchants make. The first one we see is that customers or merchants are using the wrong [shipping] products or perhaps the wrong carriers. There are a number of products that provide very good service levels at lower costs than the traditional UPS or FedEx ground or air shipment. We call these hybrid products, and they are partnered with the USPS to do the so-called ‘last mile’ delivery. Again, a lot of times we see that just not looking at what’s available is a common mistake.
“The second area is that we often find is that merchants are using the wrong services within their particular carrier. A good example is that I’m based here in Atlanta and I need to get a package to Chicago in two days. Most of the general public, would say ‘Ok, I need it to be there in two days. I’m going to ship two-day air.’ What they don’t know is that UPS and FedEx both guarantee that a ground shipment from Atlanta to Chicago will arrive in two days or you get your money back. So you pay a premium for using an air product versus a ground product and you also pay a fuel surcharge cost, which is approximately 5 percent higher. So understanding how long it’s going to really take a package to get there utilizing various services is an area where we see a lot of mistakes being made.
“The third area that we see common mistakes made is not properly auditing your invoices from carriers. A lot of times carriers do not bill accurately, and you need to keep a real close eye on your bills and make sure that you’re being billed accurately and charged according to what you contractually agreed to, and if you’re not paying close attention to that, then you’re likely overpaying.”
PEC: How often does a billing error occur?
Haber: “Generally we see billing errors occur on every invoice. Our clients experience anywhere from 1 percent to 3 percent of their overall net spends as due to incorrect billing adjustments.”
PEC: How does a merchant select the proper carrier? We have found the comparisons to be difficult because each carrier may have a specific instance where it is better than the other one. But no one carrier is necessarily universally cheaper for every single product. Thoughts?
Haber: “It is very difficult, and the carriers – they all have different tariffs and rates structures. For UPS and FedEx the ground tariff up is the same for packages from 1 to 70 pounds. But anything over 70 pounds is different. And then when you move over to the air products, they have different grade structures entirely. They are entirely dissimilar. And then when you move over to other options that we may explore; things that are hybrid products with the U.S. Post Office or other carriers like a Streamlite or a DHL Global Mail — they have different tariffs entirely. So it’s very difficult to do an apples-to-apples comparison.
“One of the things that you can do is invest into a manifesting system where you have a multi-carrier platform. It allows you to input the shipping characteristics. What is the origin zip code? What is the destination zip code? What is the weight? What service do I need? And then once you manifest that package, it will return what the cost is with a number of different providers so that you can make a decision based on the information that’s returned by the manifesting system. That manifesting system in turn will create a shipping label for the carrier that you select. So you can automate the process.
“It costs money to invest in the manifesting system, but even for smaller merchants, there are reasonable vendors that make this cost pay off over a certain amount of time whereas if you’re not making a sort of investment on the front end, you’re likely overpaying over time. So it’s a wise investment one that we encourage. It’s something that we help our customers with and we know a lot of vendors that provide that and it’s also a service that we help provide to our customers.”
PEC: Tell us about the company you founded, Spend Management Experts, and the services that it provides.
Haber: “I’ve been in the logistics space for almost 20 years. Like many logistic experts or people with logistics experience, I started off with UPS and did quite a bit of work for UPS within corporate finance and corporate strategy and did a lot of work with them on understanding, helping them understand the profitability of their largest customers, their national accounts, and portfolio segments. When I left UPS, I worked for another consulting company and started up a supply chain consulting practice called NPI and was there for six years. We built up a pretty large customer base and have branched off and formed a new company called Spend Management Experts.
“Our mission is to provide visibility to our clients as to areas in which they are overspending across their supply chain, particularly with regards to freight costs. We work with a couple of hundred different customers and we’ve been very successful in helping companies across all industries, whether it’s retail or manufacturing or insurance and banking or fulfillment. If you spend money on freight, we have been very successful at helping mitigate some of those costs and turning those into profits and putting money back in our clients’ pockets.”
PEC: You’ve described the hybrid models that both UPS and FedEx offer. A lot of merchants aren’t aware of those hybrid models, which combine private carriers — such as UPS — and the United States Postal Service to actually do the delivery, frequently home delivery. Could you explain those to us?
Haber: “Yes. With business-to-consumer shipping, unlike business-to-business shipping, in the parcel world there is a lot of competition and many merchants don’t understand that they have a lot of options available. There are products offered by UPS, such as UPS Sure Post and UPS Mail Innovations. FedEx offers a product called FedEx Smart Post. There’s a new national carrier called Streamlite. There is a carrier called DHL Global Mail and there are regional carriers that offer hybrid products where they do the pickup and they do most of the movement of the package and the USPS does the ‘last mile’ delivery.
“Many of these services provide full tracking and tracing capability, but they do so at a much lower cost than your traditional ground parcel products with UPS and FedEx. They may take one day longer to arrive to the end customer. A lot of them arrive at the same time and the thing about using these products is that you’re able to eliminate some of the very costly surcharges associated with normal ground shipments, such as delivery area surcharges and residential surcharges. Sometimes these costs can add up to almost half of the freight costs on an individual shipment. So if you can eliminate just the these additional charges on those shipments, you could eliminate up to 50 percent of your freight costs on that particular shipment.”
PEC: Can a smaller merchant — a merchant that’s shipping a half dozen packages a day — utilize these services?
Haber: “Yes, they can absolutely utilize the services. The thing about these services is they are not sold proactively. You have to ask for them. And so you should ask your UPS account representative or whomever you’re shipping with, whether or not these types of services are available. They’d rather you use the old bread and butter because the profit margins for them, internally, are better. However, simply ask them if they’re available — they’ll tell you that they’re available and they’ll set up a program in which you can utilize these services.”
PEC: How would they ask that question? What exactly would they ask for?
Haber: “They would ask if there are shipping services that are lower cost, that still provide good service levels. Another way to position it is that you’ve heard of products where the U.S. Post Office makes last mile delivery but the pickup is made by a UPS or a FedEx or one of these other carriers. Simply asking if there are hybrid products in which your carrier picks up the package but the delivery is made by the U.S. Post Office. Your carrier will know exactly what you’re asking them about.”