Have Shipping and Handling Charges Gone Too Far?

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I recently received a copy of a letter sent to three catalogers from an avid direct marketing shopper. The following excerpts, along with the chart appearing on this page, articulate customer frustration with shipping charges that I believe is widespread.


Gentlemen:


Within the last two weeks I have placed - and received very promptly - orders from each of your catalogs. You have wonderful catalogs and really fine products. I have ordered from two of you many times in the past and would like to continue to in the future.


What I am writing to all of you about is your shipping and handling charges, which are OUTRAGEOUS.


I have a couple of concerns about this:


1. My own pocket book. But, of course, I can deal with this simply enough by just not ordering again.


2. Our industry. This is the primary reason I am writing to all of you. I have been involved in cataloging as a shopper and have worked at a business related to the industry for over 20 years. American consumers are not stupid. They may be a bit lazy and find catalog and Internet shopping saves them time, but there are limits to what they will spend for convenience. S&H charges such as yours will hurt not only your own operations, but act as a deterrent to all catalog and Internet sales.


3. The past couple of holiday seasons Internet sales have shown clearly the salutary effect of "Free Shipping." I am not suggesting that shipping need be free, but it certainly needs to be reasonable. Many times customers abandon the order (whether on the phone or online) and simply say "I can do without this," or "I will pick it up at retail." As UPS, FedEx and USPS continue to charge more (especially to non-business locations) catalogers are going to have to bite the bullet and cover some of these costs themselves.


Just some thoughts for you to consider.


Sincerely,


Avid Catalog Shopper


As direct sellers have become better versed on catalog and Internet metrics, they have homed in on reasons for cancellation and abandon rates. We can measure Internet shopping cart abandon rates accurately and do something about them. An analytical tool that catalogers have paid far too little attention to is the abandon rate of mail or phone orders.


My guess is 10 percent to 15 percent of all catalog orders are harmed by excessive (in customers' minds) shipping and handling charges. We cannot know the percentage on mail or fax orders that are never received. Your telephone people can estimate order cancellations resulting from S&H charges.


Fact: Shipping and handling expenses will continue to grow at a rate faster than inflation.


If we took a detailed look at the historical cost of shipping a catalog order, I am certain we would see the cost of shipping and handling has exceeded inflation in the past five, 10 or even 20 years. While the U.S. Postal Service's postage fees and parcel shipping rates are regulated carefully by the Postal Rate Commission, the same is not true of private carriers such as UPS, FedEx, DHL and other smaller alternatives. The private companies have raised their rates regularly. UPS ascertained that it was drastically more expensive to ship catalog orders to homes than businesses and instituted higher rates for parcels going to a home address versus a business.


Private shippers will continue to raise rates to cover their expenses. The USPS will make its case whenever it can before the PRC for increased charges regarding parcel post rates.


Fact: Most catalogers (and Internet companies) expect to keep shipping and handling revenue from customers as a positive cash flow against expenses.


Most catalogers expect customer-generated shipping and handling revenue to be a profit center, exceeding outbound shipping expenses. This metric is a catalog norm. Though catalogers don't expect all of their fulfillment costs to be offset by customer S&H income, it must or usually does exceed the USPS, UPS, FedEx or other cost of shipping a parcel.


The Federal Trade Commission ruled that direct marketers can include the following in shipping and handling fees:


• Actual outgoing postage or freight charge.


• Cost of the carton and packing materials.


• Cost of direct labor to pick, pack and prepare the parcel for shipping.


• Reasonable cost of overhead (rent, utilities and direct supervision) to ship the parcel.


Other so-called indirect charges, such as returns processing, the call center, depreciation, etc., typically are excluded from what can reasonably be charged.


Though few direct sellers accumulate all of these costs and include them in shipping and handling fees, as a minimum they want to cover outbound freight costs.


If we examined overall fulfillment costs as a percentage of net sales on a catalog or Internet company's financial model, it should be around 10 percent to 12 percent. The fulfillment cost center traditionally includes:


• The call center, including equipment and people.


• Receipt and input of orders coming by phone, fax, mail and the Internet.


• Computer processing (the catalog operating system).


• Warehousing, including receiving, quality control, item numbering or barcoding, pick, pack and shipping.


• Outbound postage or freight.


• Banking and credit card authorization and credit card fees.


• Returns handling.


• Customer service (problem resolution).


• A credit for shipping and handling income received from customers.


It is incorrect to include shipping and handling income as part of gross sales. It is better shown on the P&L as a credit to operational or fulfillment expenses. This lets a direct seller calculate exactly what it costs to ship a single order (total net shipping cost for the year divided by the number of parcels shipped).


Fact: The Internet has scored huge sales gains in the past five years, and free shipping and handling has become near standard for Internet selling.


The Internet is value-driven, and "consumer surfers" seek special values. Free shipping and handling helped boost online sales in 2003 a record 51 percent to a whopping $114 billion, according to an annual survey by Shop.org, an online arm of the National Retail Federation, and Forrester Research.


If free shipping and handling beats the control of no offer and gives sufficient gain in response/AOV to pay for the shipping, it's a no-brainer to continue. The Internet will remain very much a "special value/offer" channel of selling.


Fact: Research tells us that shipping and handling charges are, or are close to, the most sensitive variable in completing the buying transaction in direct marketing.


If shipping and handling are near 10 percent of the selling price, customers have little trouble with the charge. As S&H charges exceed 10 percent and reach 15 percent or more of the merchandise, bells and whistles go off in consumers' heads. They know they can buy at retail without incurring this "exorbitant" charge.


Direct sellers are fortunate, especially those with facilities in only one or a few states. Two Supreme Court decisions confirmed the nexus ruling, asserting that firms not having a physical presence in a state are exempted from collecting sales tax. As Internet sales continue to grow, and states have severe deficits, the challenge to the sales or use tax ruling is certain to raise its ugly head.


Consumers view shipping and handling as an offset if they don't have to pay sales taxes. If that rule changes, direct sellers could be in trouble. They will become just another retailer that not only collects sales tax, but also charges for shipping and handling.


The issue of shipping and handling charges will not go away soon. Smart catalog and Internet marketers will address it and find innovative ways to change consumers' perception that they are being gouged. If free S&H is part of your offer strategy, test it against other offers to ensure that it is paying for itself.


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