How We’re Making Shipping Better For Our Customers (Without Going Broke)

In my last post I discussed my views on the changing landscape of shipping charges. Increasing costs along with the fear that changing/eliminating shipping offers will upset your customers means that it’s imperative to understand the current costs associated with any ongoing shipping offer and to have a pretty good idea of the future costs. If an offer barely works for you now, it probably won’t work for you in a year or two. We try to look out 3 – 5 years and assess whether there’s a reasonable chance that we’ll be able to keep the offer untouched. One of the reasons I had no problem with Amazon raising the price of Prime is that the cost had remained unchanged since 2005.

We recently put a lot of effort into improving our variety of shipping offers. Here’s a breakdown of what we’re doing, starting with a recap of our ongoing Ship & Save codes:

DI Ship & Save

Detailed Image Ship and Save

We rolled out our Ship & Save codes back in August of 2012. Ship & Save codes are coupons that are available every day to our customers. Customers can receive $4.99 shipping on orders over $49 with coupon code DI499 or free shipping on orders over $149 with coupon code DIFree.

There are two keys to making this work:

  • Customers value free shipping offers more than other offers of equivalent or greater value (see the original post for the data behind this)
  • We only allow one coupon code per order, so customers cannot combine this free shipping offer with other offers like percent discounts or free items

In almost two years since we’ve released these codes they’ve held up remarkably well. I don’t foresee us rescinding them any time soon. We did careful analysis at the time, but even some back of the envelope math shows that this works pretty good. We have 10% off codes available everywhere (Facebook, Twitter, forums we sponsor, etc). We’ve shown that customers not only would rather use a free shipping code over 10% off, they’d rather use it over 15% off. But lets say that on a $150 order a customer chooses the free shipping code over a 10% off code. Instead of $15 off products, we’re shipping their order for free. Sometimes that’s for less than $15, sometimes it’s more, but in most cases it works in our favor. And that’s at $150, the bare minimum requirement.

Guaranteed 3-Day Delivery

Detailed Image Guaranteed 3 Day Shipping

We’ve always perceived that one of our biggest problems was that packages to our most popular states – California, Florida, Texas – took up to 5 days to be delivered. If someone in California ordered over a weekend, the package would ship on Monday but wouldn’t arrive until Saturday or the following Monday, depending upon the shipping option. If they ordered Monday afternoon, it definitely would not arrive until the following week. Detailing is an industry where much of the action happens on the weekends, particularly for the detailing enthusiasts that make up a large portion of our customer base. Getting them their products before the weekend makes a big difference.

On the first day of Spring this year, March 20th, we announced that we’re now offering guaranteed 3-day delivery to anywhere in the contiguous US at Ground rates. If a customer lives in an area that would normally take 4 or 5 business days, we upgrade the shipping to FedEx Express Saver so that they receive the package in 3 days.

I could literally write a book about what went into making this a reality. We’ve lobbied FedEx for years to adjust our pricing model so that we can make this happen. We ran numbers for them and for ourselves showing what we thought this could do for our volume. I probably spent weeks of my time over the past two years building out pricing models related to this offer. Unlike the Ship & Save codes, there is no coupon code involved here so the math is much more complex. The volume has to make up for the associated costs. Finally over the winter we had enough things line up that we were ready to roll this out. Still, we were uncertain exactly how the numbers would work out so we attached a “limited time offer” to it.

Combined with our Ship & Save codes customers can get guaranteed 3-day delivery for free on orders over $149. It is incredible that a company our size can offer something like this. I really hope that this is something we’ll end up keeping permanently, but the numbers will be what dictate our decision.

FedEx SmartPost

FedEx SmartPost

We love a lot of things about our warehouse and our industrial park, but one of the huge downsides is that the US Postal Service does not pick up or deliver within the park. We have to drive to a local post office to get our mail at a PO Box. We’ve lobbied for postal service within the park, but so far it hasn’t happened.

Of course, this means that we can’t easily offer USPS shipping options. For most orders, this doesn’t matter. USPS rates, even with a volume discount for us, don’t come close to FedEx. Where they do beat FedEx however is on small, light packages. Without having the option to offer USPS services, we turned to the next best thing: FedEx SmartPost. SmartPost is a collaboration between FedEx and the USPS where FedEx delivers the packages to the local Post Office and then the USPS actually delivers the package. The rates are comparable to USPS Priority, but delivery takes a few days longer. This also was an easy way for us to offer delivery to PO Boxes and US Territories such as Puerto Rico and Guam.

We began offering this in February. It only shows up as an option when SmartPost is cheaper than a FedEx service because FedEx services are always faster and more reliable. We were uncertain of the impact, but almost immediately a surprising number of orders started coming through. It really shows just how sensitive customers are to shipping costs. A few dollars in one direction will almost definitely affect conversion rates.

The savings aren’t huge, but they were enough to allow us to start testing some new pricing offerings on these small, light orders. For example, right now if you checkout with less than 2 lbs in your cart, we automatically adjust the SmartPost rate down to $5.99. The test is to see whether that small subsidy increases conversion rates enough to make it worth it (remember these are small orders so the profit can be small as well). We’ll likely test this along with other models (say, rounding down the rate to the nearest $0.49 or only subsidizing certain subsets of customers), as well as continue to push for postal service in our park.

Shipping Speed

One of the simplest things that we can do is ship orders quicker. We now guarantee that orders placed before 1 PM are shipped on the same day. Our FedEx pickup is roughly 3 PM, and on many days we continue to process orders right up to the moment they show up. Our warehouse operations have become efficient enough that this relatively easy for us to do. There’s no better way to increase shipping speeds by a day than to get the orders out a day faster!

Wrap Up

We also improved recently how our cart handles a few fringe cases where we were losing big on shipping. Plugging the leaks, so to speak, is also an important part of making sure your overall shipping strategy is healthy.

I think some people will read this and think “that’s it?” This isn’t anything revolutionary, nor is it intended to be. When it comes to ongoing shipping offers, it’s prudent to tread carefully. Always be negotiating your rates. Create offerings that are profitable. Make decisions using past data and future projections, and then revisit that data constantly. We’ve shown that it’s not enough to just charge customers what you’re getting charged. You have to get a little creative and come up with offerings that help them save on shipping while still increasing your profitability. If the goal is to build a profitable, long-term e-commerce business, than shipping is something that should always be at the top of your mind.

4 comments on How We’re Making Shipping Better For Our Customers (Without Going Broke)

  1. peter says:

    Hi Adam,

    I am surprised to read that your FedEx rates are better than USPS?

    For our store, I wish we would not have to use USPS at all, however, the residential delivery charges on FedEx packages kills the rate as the residential delivery charge is about $2.80 and then if it’s in a rural area, there’s an additional $3.35 DASI Residential Fee. That’s $6 before even counting the regular fees!

    How big are your orders normally in weight and size?

    Because we use the USPS Regional A Box which is is a flat fee of the rate of a 2 LB USPS Priority shipment. So for example, if you use Regional A to IL, the fee is 2 LB USPS Priority to IL, if to NY, it’s 2 LB USPS Priority fee to NY. We were able to fit a bunch of heavier items in the Regional A box and save quite a bit on shipping. If only USPS service and tracking is better……..

    • Adam McFarland says:

      Good to hear from you Peter.

      Yea the residential surcharge sucks. Calculating the total cost of a FedEx shipment requires a spreadsheet. For us it breaks even around that 2 lb mark. Packages less than 2 lbs are cheaper with USPS/SmartPost, packages greater than 2 lbs are quite a bit more expensive even factoring in the residential surcharge. Since we’ve shipped w/FedEx almost exclusively we have pretty good discounts with them (one positive to using SmartPost over Priority is that these shipments help increase our overall discount).

      Most of our packages are over 2 lbs. A 16 oz bottle of liquid, our most common size, weighs around 2 lbs. Gallons weigh around 10 lbs. Tools are about 10 lbs too. Most people order more than one product. There are enough people who order just a towel or some pads that it was important to us to offer a cheaper option of lightweight packages, but it’s still a minority overall.

      Believe me, I’d love to be in a business where most orders are lighter and smaller. It gives you so many more options. If I ever start another e-commerce company from scratch that will be one of the criteria for sure!

  2. Tim says:

    All of the details aside, I think the one HUGE takeaway for aspiring entrepreneur’s is that many of the details and behind the scene’s projects that a consumer will never even know exist will consume far more of your time than you could ever imagine. Everyone thinks opening a business is the work itself, service or product you’re offering. That’s very small piece of a business that will be around for years, all of the little behind the scene’s things are often the difference between making money and not making money. How many people would think sorting out shipping would be this consuming? Well unless of course they’ve already lived it! Great post Adam.

    • Adam McFarland says:

      Good observation Tim. It’s easy to set up an Etsy or eBay or even Shopify account and get started, which is great. But at some point this level of detail becomes “the difference between making money and not making money” as you said. The amount that we spend as a company w/FedEx right now is astonishing. Improvements of a percent here and two percent there are significant amounts of money, and it will only get bigger from here. All types of businesses are hard to perfect and e-commerce is no different. It’s a lot of work.

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