To free ship or not free ship. That's the question.

[dpd1]

I think this was brought up before, but I wanted to put my spin on it.

I've given up on being able to automate my shipping. For the kind of orders we have, it's just too complicated. It's big long stuff mixed with little tiny stuff. So it's one of those things where only a human can figure it out and be truly efficient. Otherwise in most cases... I'll lose out, or the customer will. The importance of this was brought home to me last night, when I was looking through a few people's sites, while trying to buy some little hobby items for myself. I was shocked to see that most sites were trying to charge me $7-9 to ship me two tiny things that literally could have been put in an envelope. Guess what... I abandon my order on all of them.

I'm sure some programming genius could come up with something for my site to automate it, but I just don't have the time or money to deal with it. So I thought of this today... How about just adjusting the prices and offering free shipping for everything. The problem is... The prices would have to be raised to cover it. These items are mostly not small... Many exceed dimensional weight, and I just can't absorb that on my own. It has to be made up in the price.

So here's the big question... How many people are going to look at the price and go: 'Nope... Too high, no thanks'... and how many are going to go: 'Well, but I do get free shipping, so that price is OK'.

We mainly sell products that we make ourselves and they are not retailed anywhere else... So it's not like I'm competing with a million other people for the same exact items. However... There is somewhat of a generic acceptance of price for certain items that other people do sell. Not the same exact product, but similar. So there's a chance I could bust that price a little in some instances.

So I'm curious what people think... Obviously, making it known that people are going to get free shipping would be paramount.

[jwolthuis]

COGS = cost of goods sold, whether they are shipped, picked-up, or sold in your store.

[SevenCubed]

Ok guys I have to just accept that I don't understand this. I readily admit that sometimes the most simplest of concepts escape me. That's typically because I have trouble focusing on a micro-cosmic scale. My thought processes always lead my to search for a macro-cosmic scaled solutions.

This thread is a good example of why I choose to not do my own book-keeping :P

[jwolthuis]

Quick example:

I buy a widget from my supplier for $20 + $4 postage.

I sell the widget for $40 w/free shipping -OR-
I sell the widget for $35 + $5 shipping (pick either scenario).

I ship the widget at a cost of $3 postage.

My revenue is $40 in both cases. My COGS (cost of goods sold) is $20 + 4 + 3 = $27. I had no labor costs (for this example). My gross profit is $40 - 27 = $13.

It doesn't matter what the customer paid for shipping, or whether it was buried in the price or not. I received $40, period. My COGS is $27, period.

Whether he paid more than I paid for shipping, or less than I paid, has no effect on my gross profit.

Hope this clears things up.

Off topic: The above discussion doesn't touch on State, City or County Sales Taxes, where the rules vary everywhere. Some states tax shipping, others don't. Check on your state's website for their rules.

[edited by: jwolthuis at 6:25 pm (utc) on Jul 2, 2011]

[SevenCubed]

Thanks jwolthuis

[votrechien]

Cost of goods sold

[SevenCubed]

^

[dpd1]

SC... They're right, because I forgot you're taking out the shipping cost anyway, no matter which way you do it... I get what you're saying, but it just comes down to the order in which you do the adding or subtracting in your head. Whether the shipping cost is hidden in the price advertised, or set aside separately... You still have it mixed in with your total amount of money taken in at the end of the year, and you still subtract it out as non profit/income. If you deduct your actual cost of shipping from your total intake, then you are left with whatever you overcharged for shipping being counted as income. So that way, you are actually being honest. But it would be the same, no matter how you advertise it, as far as what's "income".

[votrechien]

SC... They're right, because I forgot you're taking out the shipping cost anyway, no matter which way you do it... I get what you're saying, but it just comes down to the order in which you do the adding or subtracting in your head. Whether the shipping cost is hidden in the price advertised, or set aside separately... You still have it mixed in with your total amount of money taken in at the end of the year, and you still subtract it out as non profit/income. If you deduct your actual cost of shipping from your total intake, then you are left with whatever you overcharged for shipping being counted as income. So that way, you are actually being honest. But it would be the same, no matter how you advertise it, as far as what's "income".

Remember dpd1 though, this item we called 'shipping' that we charge to customers is a 'make-believe-number'. When doing your books it will always be counted under the general heading 'revenue' not as a separate line called 'shipping revenue'. The IRS doesn't care how we account for the money we have coming in, they just want to know how much money we have coming in.

Think of when you buy an airplane ticket say from American Airlines. You are charged the price of the ticket, a fuel surcharge, a checked-baggage charge, etc.. When American Airlines does their books (at least for legal purposes) they do not have different lines for "Checked Baggage Revenue", "Fuel Surchage Revenue", etc. It is all accounted for under Revenue. It's the same for your business.

[jwolthuis]

votrechien's example is simplified for sake of this thread.

In reality, you'd divide your Revenue into 'In-State taxable', 'Out-of-State non-taxable', and do the same for Shipping. If you have other tax jurisdictions, break it down even finer.

Some states place a sales tax on shipping; others do not. Same for "handling" charges.

So the States *do* care where your revenue comes from. The Feds do not.

Clear as mud yet?

[votrechien]

And one thing to clarify with jwolthuis is that if shipping costs are non-taxable, it's your actual shipping receipts you deduct, not the amount you charge for shipping. Other wise, I've just become the World's greatest accountant as I've figured out a way to make almost any company's tax liability nearly zero- I'll sell iPhones for $1 and charge $399 for shipping ;)

[ssgumby]

Seems everyone understands the tax side of it now ;)