With these new weight measurement rules, you may now even want to consider if it’s worth having larger – lighter items ever sent back for restocking.
With the use of new “dimensional weight” formulas for shipping, it’s even more complicated now than it’s ever been to know how much you should charge for shipping. Then there’s the internal question you need to answer; Are you trying to recover your actual shipping costs, should you make a profit on shipping, or are you willing to underwrite some of the shipping expense by reducing shipping costs? It’s not as simple as you might think, and thanks to Amazon-like tactics, many now expect shipping to be free. However, the truth is, depending on product mix, weight and now even size, shipping can get very expensive.
So yes, Dimension Weight. UPS and FedEx now use Dimensional Weight to determine shipping cost. True shipping cost is determined by size and no longer by scale weight. Shipping carriers typically do not fill up a truck based on maximum weight they can carry; they fill up the truck based on how many cartons they can fit on a truck. Larger packages means they need to have more trucks on the road and more drivers. To determine dimensional weight, take the Length + Width + Height of the shipping carton and then divide by 166. This calculated value (called “dimensional weight”) is compared to the actual weight on the scale; whatever “weight” is higher is the weight used to calculate shipping cost. And notice that they use a “value” as their calculator for the final Dimension Weight? This so, they can easily change (raise) the value any time they want.
Because size now matters, it’s important to be efficient on both your product packaging choices as well as packing efficiently for shipping. Many people are surprised when the shipping cost is almost the same as the product cost. With these new weight measurement rules, you may now even want to consider if it’s worth having larger – lighter items ever sent back for restocking.
Five Methods Commonly Used by MLMs
We have observed five methods that MLM companies commonly use for determining how much to charge for shipping. Each method is straightforward and simple, and there are benefits to each that will support your underlying product and marketing strategies:
- Free Shipping
- Using this method, a company absorbs all of the shipping charges. It’s an increasingly common feature in e-commerce transactions, and the obvious way to make this happen is to ensure that shipping costs are absorbed in product pricing. One caution is that where MLM products depend on multiple-times markup, we find that the better practice is to keep shipping out of the product cost and allow it to stand alone, because of its potential impact in the mark-up analysis.
- Free Shipping when the overall Order value exceeds a specified dollar threshold
- This method allows a company to recapture a base amount of shipping, and the company subsidizes what it does not recover on larger orders. The argument is that the higher dollar volume (and the margin that goes with it) contains sufficient to boost revenues and volume, the extra shipping cost of which the company is willing to absorb.
- Flat Rate
- All orders are charged a flat rate for shipping
- Tiered Flat rate based on Order Value / dollars
- Tiered Flat rate based on order weight
The threshold problem with each of the methods described is that an MLM startup may not be able to determine whether they are charging too much or too little. Considering that the decision is in part a marketing decision, as well, the early unknown will also include an analysis of the MLM distributor sensitivity to shipping.
Thus, the key questions will be these:
- Are we making / losing / breaking even?
- Will the law of averages work in our favor?
- How sensitive to shipping fees will the distributors be and will it affect optimizing revenues?
- What marketing considerations should affect our decision?
Actual Cost Shipping
Another method worth mentioning, and one that is usually reserved for larger companies, is charging actual cost, which works well when an intelligent system is in place. The system automatically calculates the number of shipping cartons required and the size(s) of each carton based on the items in the order. This will optimize shipping “weight.” Through a direct interface with the shipping system, actual costs will be determined based on your negotiated rates and discounts with the shipper. The cost is then captured at the point of sale and included in the order. Though technologically advanced, this approach is my personal favorite; and the formulas can still add a percentage mark-up (small percentages) to cover not only the actual shipping cost but also packaging and an allocation for labor. In this regard, it becomes conceivable that your pick & pack operation is self-funding if not profitable.
Don’t overlook using USPS flat rate boxes, depending on your product mix. As long as items fit in one or more of the box sizes offered, the flat rate is 100% predictable. With some thoughtful planning, you might be able to overcome the USPS branding that screams much louder than your branding could do on a box.
In the end, your goal should be to select the method or hybrid of methods that work best for your product mix, marketing and branding objectives, and shipping budget strategies.
A simple way to determine which method makes the greatest sense is to create a sample set of orders that best represent what you will ship to your distributors and their customers, and then calculate the shipping cost for each order. By running various scenarios, you will begin to see patterns emerge that will help you get real close. Yes, this is time consuming, but doing so could save you a substantial amount of capital.