A Small Business Guide to Handling Fees

To charge, or not to charge, shipping and handling fees? That question plagues online business owners of all sizes.

Additional fees can be deal-breakers. The average cart abandonment rate is almost 70%, and 50% of shoppers leave a site before checkout because of high shipping and handling fees, according to the Baymard Institute.

Fee-free shopping is an increasingly common benefit online businesses use to woo customers away from competitors. Unfortunately, waiving fees for customers doesn’t mean those costs disappear. The seller must still pay for the labor to package an order and the cost to ship it.

The good news is that deciding to charge or skip the fees isn’t necessarily an all-or-nothing strategy for e-commerce fulfillment. For example, Chewy.com offers free shipping only on orders that exceed $49, and Amazon Prime offers free shipping with a paid annual subscription. The membership includes additional incentives for choosing slower shipping methods and fewer shipments.

Other companies offer free shipping and handling for smaller, lighter items but charge for heavier products.

Ultimately, the best strategy is the one that fits your business based on your customers, your products, and the marketplace.

Overview: What is a handling fee?

A handling fee is an amount added to a customer’s subtotal at checkout. Handling fees offset the expenses associated with storing, packing, and sending an order.

How to calculate your shipping and handling fee

Shipping and handling fees are technically separate costs. Shipping is the price of sending an order through the mail or with another delivery carrier. Handling fees are the costs of the time and labor to prepare an order. Both are straightforward to figure out but require different approaches.

1. Calculating handling fees

Here’s a simple formula you can use for figuring out how much it costs your e-commerce business to prepare a package. The calculation is based on the employee’s hourly rate and the time it takes to package an item.

Let’s say you pay someone $12 an hour and it takes that person an average of 20 minutes to box an order.

First, divide the time required to prepare the package by 60.

20 (Time Required) ÷ 60 = 0.33

Then multiple the outcome by the hourly wage.

0.33 x $12 (Hourly Wage) = $3.96

In this scenario, the process of getting an order ready to ship costs you $3.96.

You can use the same formula even if you’re doing it all on your own. Just substitute your hourly rate for the wage used in the example above.

2. Estimating shipping fees

Shipping fees are one of the biggest overhead expenses for e-commerce businesses. Postage isn’t cheap, and prices keep climbing. Prices also are based on the carrier. This handy online shipping calculator helps you find the cheapest way to send a package. The tool shows rates from UPS, USPS, FedEx, and DHL all in one place.

Shippers base their rates on several factors.

• Dimensions
• Weight
• Delivery distance
• Speed

3. Including packaging fees

Envelopes, boxes, bubble wrap, and tape aren’t free. Skipping this expense can negatively impact your bottom line.

If an envelope costs $2 and the packaging material is $0.25, that adds $2.25 to the expense of processing an order. Building the $2.25 into the selling price of an item is one option, and incorporating it into a handling fee is another.

Using the example from above, add the labor cost to the materials for a total handling price.

$3.96 (Handling Fee) + $2.25 (Packaging Fees) = $6.21

Pros and cons of passing the handling fee onto your customers

Passing shipping and handling fees along to the customer is a double-edged sword. Doing so can simplify pricing, cover expenses, and increase opportunities for cross-selling.

Simplifies pricing

Without handling fees, the costs of shipping, packaging materials, and labor all get figured into the price of each product. Adding handling charges as a subtotal line simplifies the pricing strategy for individual items.

Covers expenses

Charging for the time, effort, packaging, and shipping of orders helps ensure that all related costs are accounted for.

Increases upselling and cross-selling opportunities

Passing fees along to customers increases opportunities for larger sales volumes and overall profits. Target only offers free shipping on orders of more than $35 or purchases made with a Red Card credit card.

Shoppers are more likely to spend an extra $10 or $20 to purchase an item rather than on shipping, which has no perceived value. E-commerce platforms can suggest options based on a customer’s cart and buying history to help them meet their minimum.

Passing handling fees along to customers has its drawbacks, too. Consider the impact of lost sales, sales profits, and future lost opportunities that handling fees can create.

Lost sales

Many customers now consider shipping and handling costs before adding items to their online shopping carts, according to the National Retail Federation (NRF). This sentiment was reflected in a 2019 NRF survey.

• 75% of shoppers expect fee-free orders of less than $50.
• 38% of consumers expect retailers to offer free two-day shipping.
• 65% of customers look at free-shipping thresholds before adding items to a cart.

Failing to take these customer sentiments into account could lead to lost sales that exceed the cost of free shipping and handling.

Lost visibility

Customers shopping on price alone remember which businesses offer free shipping and those that don’t. When consumers know where they can get the best bargain online, they’ll skip visiting pricier options. Fewer page views translate into fewer opportunities to convert a shopper into a sale.

Lost opportunities

Online retailers often see free shipping and handling as a promotional tool to entice customers. No added fees is one way to move customers through a conversion funnel. However, free shipping may have a higher cost per acquisition than other offerings.

A Phoenix bakery found customers were more likely to choose a 10% or 20% order discount over free shipping and handling. Customers walk away feeling like they have received a benefit, and businesses realize higher profits.

3 best practices when determining your handling fee

Deciding what to charge for handling fees can feel a bit like Goldilocks testing the three bears’ porridge. Fees that are too high chase customers away. Set them too low, and they cut into profits. Determining a fee that is just right balances both your need to cover expenses and to meet customer expectations.

1. Know your customers

Your customer should drive your decisions for waiving or including handling fees. Consider these questions.

• Are your customers local, a few hundred miles away, across the country, or on the other side of the world?
• Are buyers willing to spend a little more by purchasing additional items to avoid shipping and handling?
• How price-sensitive are your customers? Bespoke buyers are willing to pay more for high-end products, whereas others are strictly budget shoppers.
• Is this a one-time transaction, or a loyal customer with the potential to add long-term value to your business?

2. Know your costs

It’s impossible to create a reasonable fee without accounting for all the details. Use hard data to understand the average shipping and handling costs for your business.

• Get a current rate chart from the carriers you use.
• Ask about surcharges and restrictions.
• Analyze material costs such as boxes, tape, and envelopes.
• Understand the labor required for preparing an order.
• Consider warehouse rent and stocking expenses.

3. Explore other options

Alternative fulfillment options, such as Amazon FBA and Shopify Dropshipping, may be more cost-effective than packaging and sending from your e-commerce site. Dropshipping leverages volume discounts larger companies can negotiate with carriers, and it also reduces your overhead for storing products onsite.

Covering costs while satisfying customers

Covering costs is only part of the equation; customer satisfaction is the other. Customers may increasingly expect fee-free orders, but there are still opportunities to charge these fees and maintain satisfaction.

Leave the best lasting impression with a customer by avoiding surprise fees at checkout. Clearly display your shipping and handling policies throughout the website. Customers value transparency even more than a bargain. Being upfront about additional fees could win you more customers in the long run.