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.

[SevenCubed]

Strictly from a business perspective, including shipping cost into product price makes it become a profit that you must pay tax on. Whereas a separate shipping charge is a business expense that can be claimed to reduce taxes paid. In most jurisdictions anyway.

[CPC_Andrew]

I think the bottom line is, if you're competitive with the final price that other merchants offer, or your price is fair for the items that you create, conversions will not suffer and could possibly improve.

[dpd1]

Wait... Wouldn't free shipping be tax deductible? Seems like kind of a fine line... So we happen to raise our prices a little. Know what I mean?

I was also thinking, maybe just add a flat rate for foreign destinations. As it works now, we quote each one. Which is a giant pain.

[lorax]

Simpler is better for both the merchant and the customer in my opinion. For me, when a site is straight forward about their prices, shipping costs, and returns policy, I have a bit more confidence then when it's not.

Intuitively I know I'm paying for shipping even when the site says "free" but I also know I don't have to waste my time. The fact that I either see a free shipping notification OR a shipping calculator OR a table rate someplace in an obvious location where I don't have to look for it, eases my mind that I won't have to waste my time going through the purchase process before I find out what I will have to pay for shipping.

[dpd1]

That brings up another point... Is it better to say "shipping included"? Since technically that's what it really is. Or is that removing too much of the psychological effect that you're offering them something positive.

[courier1]

We see many of our clients select free shipping - great for remote area buyers as the rates are more expensive in Australia to regional locations. As I am from down under and flat rates are a scary way of ecommerce shipping due to the distance of the remote buyers. Huge price fluctuations for our country towns ..and these are the guys buying ( due to no local stores ) A delecate balance none the less.

[adamnichols45]

Test that is the answer!

[Planet13]

Test that is the answer!

+1

Or is that removing too much of the psychological effect that you're offering them something positive.

I think that if you offer ANYTHING for free, you have to also STATE THE MONETARY VALUE of it right next to the offer. Otherwise, research has shown that it cheapens the value of the gift in the eyes of the customer.

So let's say that flat rate shipping is $5. You should say something like:

"Get Free Shipping - A $5 Value!"

or

"Purchase $50 worth of merchandise, and get a $19.95 widget for FREE!"

Have you noticed how all the infomercials on TV will basically sell two of the same item for one price (let's say $20). But they don't phrase it that way.

They COULD state something like this:

"Buy two widgets for only $20"

But instead, what most of them do is this:

"Buy this widget for the price of only $20, and for a limited time, we will throw in a second widget for FREE!"

this associates a value ($20) with the widget that they will be receiving for free.

~~~~~~~~

The word "Free" is one of those Pavlovian things. One study I heard about really opened my eyes:

Researchers were selling two kinds of chocolate bars at way reduced prices. One was a domestic candy bar (normally sells for about 80 cents), and they were selling it for a penny.

The second was a Swiss chocolate bar that normally sells for about $2, and they were selling it for 15 cents.

When customers were presented with the offer of either paying one cent for a run-of-the-mill chocolate bar, or 15 cents for a deluxe bar, they preferred the deluxe bar.

Now, when researchers dropped the price one cent (the deluxe bar was only 14 cents, and the domestic chocolate bar was now free), the results were reversed. Customers overwhelmingly picked the free domestic bar.

There is also the story of how amazon France used to charge only one franc for shipping (about 20 US Cents). That was their tag line: One Franc Shipping!

Then when they started offering FREE shipping, sales increased dramatically.

[jwolthuis]

The prices would have to be raised to cover it.

How much do you raise the price when the customer might order two or more of the same item?

If each item ships separately, it not an issue. But what about items that can be combined into the same box?

[dpd1]

Well, I don't think we could raise the prices the full value of the shipping per item anyway. It's a complex issue... Honestly, I've got no problem just continuing to do it the way I have been... I do a quote on multi orders and that way everybody gets the fair amount. We're probably more a manufacturer than retailer anyway. Most manufacturers don't sell stuff directly at all. But some people online don't see it that way... They want the fully automated 'Amazon' scenario.

[olimits7]

I was actually thinking about the topic of "free shipping" the other day, and there is one issue I see with this that I didn't realize before; looking at it from the merchant side.

For non-defective and defective returns, I only refund the item price minus any shipping costs. However, the issue I see with offering "free shipping" is if I include the shipping cost into the item price I would end up refunding my customer the shipping cost along with the item price.

This is why I like keeping the item and shipping price as 2 different lines that make up the order total amount; this way I still receive the item back which I can resell again, but not take a hit on the shipping cost which are charges I already incurred and won't get a refund on.

olimits7

[PCInk]

olimits7: Looking from the customer point of view, if an item is defective then I would want all my money back including shipping charges. It wasn't my fault the item was faulty therefore why should I be out of pocket?

Free shipping means full refund for a faulty item which is peace of mind. If your laws permit you can have a handling and restocking fee for unwanted returns.

[If anyone reads this in the EU, restocking fees can only be applied in certain situations and refunding shipping for faulty items is the law - check your local laws for full details.]

[Planet13]

One thing to mention is that a store like Zappos made their name by offering free shipping both ways - in the cases of returns as well.

I think the thing is to see if your competitors DON'T have a free shipping policy, then maybe you could compete against them that way.

[dpd1]

I only know one guy that sells what I do and does free shipping... But I think he is insane, because he sells stuff so cheap to begin with, I don't even know why he bothers being in business. He must be incredibly bored or something.

But yes, I think a way around the return issue is using a restocking fee. Which I've actually thought about doing anyway, because we simply don't have defects... and if something is askew on our side, normally I can just send a missing part, which I do for free. But anything else would be a customer simply 'trying' something out... which turns it into a used item, which I don't believe I should have to pay for. But luckily that rarely happens.

[SilverShine]

But instead, what most of them do is this:

"Buy this widget for the price of only $20, and for a limited time, we will throw in a second widget for FREE!"

this associates a value ($20) with the widget that they will be receiving for free."


Only now, these ads say "Just pay separate S&H" (for the 2nd item).
The S&H is usually quite high, like $10-20 and anyone who believes that S&H costs that much for these TV advertised items is fooling themselves.

When you ship 2 of something, they usually don't cost twice the amount as shipping 1 of something.

[ssgumby]

With regards to taxes (here in US). Building the shipping cost into the product cost will only matter with regards to taxes in sales tax. You can most definitely still use the shipping cost as a business expense. Your shipping charges paid to the shipping vendor are an above the line item that can be factored into COGS and reduce your overall taxes owed.

[Essex_boy]

This is weird but ive found customers like.

No free shipping. Customer figures that somewhere they are paying for the delivery in the price of goods they feel ripped off, so I offer postage charge of $1 per item plus P+P shipping of $2.95 per order.

Customers think that ive arrange a good deal for delivery, in other words the true cost is being hidden in the overall price, customers just fail to realise.

We're both happy that way.

[WorkTogether]

or is it not worth getting a programmer from one of the freelance sites to program it for you. Given the cost of a few hundred dollars (I expect) I would have thought it has a short payback time. May be worth getting a quote? Sure it could be programmed to work by size, weight, price or by whatever rules you wanted.

[votrechien]

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.

We have the same problem- many different sized items. We've found a pretty good system that calculates cost based on the weight. However, we don't always use the 'actual weight' we use a 'shipping weight'. If an item is big and bulky and only weights 5 lbs, it might be billed at 15 lbs. UPS uses the same system and it works well.

Strictly from a business perspective, including shipping cost into product price makes it become a profit that you must pay tax on. Whereas a separate shipping charge is a business expense that can be claimed to reduce taxes paid. In most jurisdictions anyway.

Woah woah woah woah! This is one of the most incorrect statements I've ever read on these forums.

If you charge $20 for a widget with free shipping and it costs you $5 ship, that $5 is a business expense. If you charge $20 for a widget and it costs you $5 to ship and you charge $10 for shipping the $5 and not the $10 is an expense.

For non-defective and defective returns, I only refund the item price minus any shipping costs. However, the issue I see with offering "free shipping" is if I include the shipping cost into the item price I would end up refunding my customer the shipping cost along with the item price.

I'll ignore the defective returns part. For all other returns, the whole idea of charging free shipping is an issue. That's where it becomes important to charge the customer for shipping on checkout and then show it immediately crossed out indicating they're getting free shipping. This way not only do they feel better about the value they're getting but also they understand that shipping charge will be withheld on any returns.

[dpd1]

I could see if somebody wants to take a shot at programing a formula... But for instance... We could have something that goes in a 6x6x70 box. Or have that with something the size of a penny added to it. Or a cable added to it that we could fit, or one that's too long and has to go separate. Or have a 6x6x64 with one item. Or have five of those, but now be in a 10x10x64 that goes over the dimensional weight, recalculating the whole thing. Or add the some small cables to those, or long cables with those that have to go separate. Or 6 of the 70" items that have to be broken into two boxes, two charges. On top of that, we have custom stuff where the dimensions aren't even known until it's made.

You get the idea. Obviously it can be done automatically... But I would bet that no matter what you do, either the customer would end up paying too much, or we would. It might come out in the wash, but how many people are you ticking off in the process. But thinking about it... I don't think the free thing would really work either.

[votrechien]

I could see if somebody wants to take a shot at programing a formula... But for instance... We could have something that goes in a 6x6x70 box. Or have that with something the size of a penny added to it. Or a cable added to it that we could fit, or one that's too long and has to go separate. Or have a 6x6x64 with one item. Or have five of those, but now be in a 10x10x64 that goes over the dimensional weight, recalculating the whole thing. Or add the some small cables to those, or long cables with those that have to go separate. Or 6 of the 70" items that have to be broken into two boxes, two charges. On top of that, we have custom stuff where the dimensions aren't even known until it's made.

You get the idea. Obviously it can be done automatically... But I would bet that no matter what you do, either the customer would end up paying too much, or we would. It might come out in the wash, but how many people are you ticking off in the process. But thinking about it... I don't think the free thing would really work either.

You're never going to get it completely right. I've only ever run into one company who does get it completely right and they charge shipping about a day later after they've calculated the cost and run the credit card through again, and this is a horrible way to do it IMO.

It is possibly to get a system down that is accurate to within a few percentage points. Individual orders will never be correct but overall, it will be.

With that in mind, I believe the best way to keep your customers happy is to always undercharge, even if it's only by 10% or so. That way the cases where they are overcharged for shipping are few and far between.

[SevenCubed]

Woah woah woah woah! Woah woah woah woah! This is one of the most incorrect statements I've ever read on these forums.

Not by a longshot. I re-read the OP again and I still understand it as dpd1 implying he is considering just bumping up the cost of the product wherein the cost of shipping becomes a hidden expense when he said..."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...". In that case he would have to pay tax on a profit he's not actually making plus he would loose the tax credit of a business expense. The spread between the two can become quite significant. Shipping cost seamlessly buried into the product cost cannot be claimed as a cost of doing business. It has to remain a separate item on his books. Unless I misunderstood the OP that stands true. To resolve this maybe dpd1 can clarify if that was what he was considering or did I misunderstand the OP.

[ssgumby]

Im confused on this tax issue, the business expense doesnt come from what you are charging the customer, it comes from what you are paying for the shipping. If I charge $15 to ship it and $60 for the product or $75 for the product and $0 to ship it, I still pay (for example) $8 my cost to ship it and that $8 is the business expense. Shipping charged to the customer IS income whether it is in the product or charged as a line item, again its the amount YOU pay to the shipper that is on the expense side of things.

[dpd1]

If the customer is paying you for shipping, then you deduct that from your sales total, and claim the rest as your actual income (before deductions). What he's saying is... If the shipping is 'hidden' in the price under the guise of "free shipping", then if you were going to be a Dudley Do-Right about it, you should not deduct shipping expenses on your taxes, because technically you were paid for shipping within the price of the items. But in reality... Do you really think anybody does that? People put up a price, say it's free for shipping, then they deduct the the shipping expenses on their taxes. An IRS guy would probably fall off his chair if he found somebody who did NOT do that. Now if you publicly stated that shipping was "included in the price". Then that's a different story. All they'd have to do is point to that, and you're hosed.

[SevenCubed]

I'm just going to let this fade away. For me it's not a matter of being a Dudley Do-Right. I'm basing my opinion on the way you worded your statement of..."The prices would have to be raised to cover it"...I understand that as meaning the shipping expense will be integrated [hidden] in the manufacturing expense and added to the retail price. When it comes time to produce the invoice for your book-keeper he/she will see only 1 item on the invoice -- a revenue of some dollars -- he/she will enter it into the ledger as revenue, you pay tax on the hidden shipping plus you've lost the tax credit that you would have otherwise had if it was a separate item on the invoice.

If there is a book-keeper or accountant here maybe you can straighten me out if my logic is wrong. How would you view this situation. If I reply anymore here I'll just be repeating myself.

Hope you figure out whatever will work best for you dpd1.

[votrechien]

For me it's not a matter of being a Dudley Do-Right. I'm basing my opinion on the way you worded your statement of..."The prices would have to be raised to cover it"...I understand that as meaning the shipping expense will be integrated [hidden] in the manufacturing expense and added to the retail price. When it comes time to produce the invoice for your book-keeper he/she will see only 1 item on the invoice -- a revenue of some dollars -- he/she will enter it into the ledger as revenue, you pay tax on the hidden shipping plus you've lost the tax credit that you would have otherwise had if it was a separate item on the invoice.

If you're charging for shipping, you still must account for it as revenue. Your shipping expense will then be an expense. If you're some how managing to charge for shipping exactly what you're paying, you still must account for one entry as revenue and one as expense even though it may be a complete wash.

Even if you're hiding shipping as a manufacturing expense (and I have no idea how you could as it's a variable cost across all products) it will still be ultimately deducted as a Cost of Goods Sold.

The point being, whatever you get as a receipt for your cost of shipping, be it from the post office or UPS, becomes an expense and tax deduction. The Tax Man does not care 2 cents how you market the price to your customers.

If the customer is paying you for shipping, then you deduct that from your sales total, and claim the rest as your actual income (before deductions). What he's saying is... If the shipping is 'hidden' in the price under the guise of "free shipping", then if you were going to be a Dudley Do-Right about it you should not deduct shipping expenses on your taxes, because technically you were paid for shipping within the price of the items.

You would be a dudley-pay-too-much-tax! Yes, you account for the revenue from the shipping when you sell the item and therefore you will not have a separate 'shipping revenue' line (although having a separate line for shipping would be very atypical IMO). However, your expenses are not affected whether you want to charge free shipping or $1mil for shipping on a box of kleenex.


There seems to be some confusion around this whole expenses and revenues thing when it comes to shipping. When I first started off, it was confusing for me as well. It's definitely something you want to get down pat though...there'd be nothing worse than the IRS discovering you've been accounting for things incorrectly and asking to see your past 5 years of records.

[edited by: votrechien at 5:29 pm (utc) on Jul 2, 2011]

[jwolthuis]

Revenue minus COGS equal Gross Profit/Loss.

Examples of Revenue:
- Product sales
- Shipping collected from customers

Examples of COGS:
- Product costs
- Shipping costs

It makes no difference where the cost of shipping is/is-not placed.

Your Revenue is the total collected on the order (products + shipping). Your COGS is the payments you make to your suppliers + shippers. The difference between the two is gross profit/loss.

[SevenCubed]

What does COGS mean?

[SevenCubed]

^ Never mind about COGS, I think it means cost of goods shipped.