Drop Shipping & eCommerce Blog | Doba

3 reasons to use flat rate shipping

Written by Spencer Durrant on March 4, 2016 in

flat rate shipping

Shipping costs are amongst online retailer's biggest concerns - especially for retailers who use drop shipping to fulfill their orders. 

Shipping rates play a big role in how successful your online store is. If your rates are too high, customers will experience sticker shock at checkout. If they're too low, you'll find yourself losing money. 

Many shipping solutions exist, but one of the most effective is flat rate shipping. This post will look at how to employ a flat shipping rate in a cost-effective manner, and why a flat rate is one of the most effective shipping solutions for small-to-medium-sized online retail stores.

Related content: What consumers expect of shipping in 2016

How to set up a flat rate 

The heaviest hitters in the ecommerce world use flat rates, and they work just as well for SMBs. The only difference between your flat shipping rate and that of the ecommerce giant is adjusting the price to a point where you're not losing money by offering it. 

As Jeremy Marsan wrote for Fit Small Business,

In an ecommerce forum, one retailer said, “I can sell a $50 locket with free shipping, but I can’t sell a $7, 1 pound bar of soap with free shipping. I would lose on every customer.” In this situation, it would make sense to offer free delivery on the locket (a light-weight and expensive item), but charge for the bar of soap (a heavy and low-cost item).

You'll have to run these numbers for yourself, but I've come up with a fictional scenario below to illustrate how to use flat rate shipping for your ecommerce store. 

Let's say your store's average order is $25 - not including shipping. According to Marketing Sherpa, the average profit margin for an online retailer doing up to $100,000 in revenue per year is 30%. Using those numbers, you'd be making $7.50 per order. Not bad, right? 

Now, using that same math, let's say you decide to set your free shipping threshold at $40 (Amazon recently bumped their free shipping threshold up to $49 for almost every order). If a customer comes and buys $40 worth of product from your store, and you're making a 30% profit, that means you've just made $12 on the order. 

Great! You've just made $12 on the order, but you still have to ship the product - now what do you charge your customer? 

According to UPS, average Ground delivery rates (within five business days) vary according to zone and weight, but for the purposes of this exercise, let's say that your average order weighs 3lbs. That's a cost of anywhere between $7-11 depending on shipping zones. If you offered free shipping, at those rates, you'd be making barely $1 per $40 order - not nearly enough to stay in business.

But if you charged a $5 flat rate on orders over $40, and your average shipping cost was $7, you're still making $10 per every $40 order. 

Again, you'll have to tweak this model to fit your own budget, profit margins, and shipping costs, but this gives you a general idea as to how you'd set up flat rate shipping for your online store. 

Now that we've covered how to create it, let's discuss why using a flat rate cost is such an effective shipping strategy.

Eliminates sticker shock

The number-one reason to use a flat shipping rate model is simple: it lets customers know what they're paying as they proceed to checkout. Instead of hiding your shipping fees, (like a lot of ecommerce stores do) be upfront about the shipping costs. This tactic helps improve conversion rates. 

Higher-than-expected shipping charges accounted for 74% of cart abandonment in 2015, according to Fit Small Business.

By eliminating any "surprises" at checkout, you'll convert more shoppers into customers, and you'll build trust with consumers as they go through your store. Once they complete one purchase without any hidden shipping or processing fees, they're far more likely to turn into return customers. 

Return customers are ridiculously profitable - 40% of revenue generated by an ecommerce store is produced by only 8% of customers. That 8% represents return customers. 

An honest, flat shipping rate might take a dollar or two out of your per-order profits, but you'll make up for that loss with the customer trust you gain by offering a transparent system.

Related content: How to offer free shipping today

Encourages customers to buy more

If customers know they can get a cheaper shipping rate simply by spending $40 instead of $25 on product, they're far more likely to spend more money in your store.

According to the above-linked Fit Small Business article, 58% of customers will add something to their cart if it means they qualify for discounted shipping. 

If more than half of online shoppers are willing to buy something extra just to take advantage of discounted shipping costs, then it's a win-win for every retailer who offers it.

Sets your store apart

A huge part of being successful in the ecommerce world is having a solid unique value proposition. No matter how niche-focused your store is, there is probably someone else out there in the world selling the same product, so you need to give customers a reason to buy from you instead of the competition. 

Flat shipping rates could definitely be incorporated into your unique value proposition. Once you come up with a flat rate that will work for your business, don't be afraid to advertise it. Put banners up on your website, pay for sponsored tweets, add it to your Facebook cover photo - put the information anywhere customers might see it. 

That way, when people search for your products, they'll see a transparent, flat shipping rate. This tactic may give you the upper hand as customers compare your prices to another store that likely doesn't offer the same level of shipping cost transparency. 

Flat rate shipping can be an effective strategy that will encourage larger orders, increase customer retention, and set your store apart from the rest of the sellers in your niche. While you may swallow a dollar or two in profits per order, you'll make those minimal losses up in the increased order volume and return customers.

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Photo courtesy Kate Ter Haar

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