Shipping Costs and Their Effect on Profitability
This post is a follow up to Shipping strategies to run a marketplace.
In the previous blog post related to Shipping, we reviewed the main considerations and options for your shipping strategy, without going into much detail about costs, which we will do now. The profitability of a marketplace heavily relies on striking the right balance between shipping costs and revenue. Overcharge your customers for shipping, and they may refrain from placing orders, undercharge them or your vendors, and you may be giving up too much of your margin to run a sustainable business.
The Shipping Costs Trinity: Marketplace, Customers, Vendors
The starting point for setting your shipping costs strategy needs to be your customers. There is no one-size fits all solution. However, you need to keep top of mind that customers may not place an order if they find the shipping costs unreasonable, uncompetitive with other players in your sector, or if they are unclear and unexpected.
The advice is to benchmark your competitors on their shipping rates, create clear shipping information pages that give your customers a preview of what is going to happen at checkout so they are not caught by surprise (we love Paazl's white paper focusing on shipping rates for e-commerce stores). Also,make sure the rates strike the right balance not to deter customers and to assure the right profitability for you.
Understanding How Shipping Rates Can Affect Profitability
After understanding what your shipping rates should be, you'll need to understand how that affects your profitability. Having started from the customer perspective, you now need to assess whether you will subsidise, break even, or potentially even slightly profit from shipping, by comparing the shipping rates charged against actual shipping costs.
Depending on your commercial agreement with your vendors, shipping costs can be your responsibility to absorb, or the vendors’. Ultimately, you just need to achieve an overall commercial model that assures profitability for both you and your vendors, that could be a lower commission rate with your vendors covering for shipping, or an all-in commission where you are covering shipping costs as well.
For example, you may negotiate a lower commision rate of 20% instead of 30%, if your vendors take responsibility for the shipping costs.
This will be an iterative process over time, where you gather data to understand how your customers respond to your shipping charges, how your costs evolve over time, and if profitability is being assured for both you and your vendors. Be willing to revisit all these parameters often, as you'll grow your understanding of your customers, the supply chain, and also of the commercial relationship with your vendors.
We hope to have covered some of the foundations that should be considered for a marketplace shipping cost strategy, in an upcoming post we will discuss the different possibilities for shipping rates implementation.