I placed my first catalogue order when I was nine years old. I remember saving my 25 cents-a-week allowance for six weeks to pay the $1.50 shipping and handling charge for the free secret agent decoder ring that I earned from clipping the box tops from my favorite morning cereal. I waited another six weeks for delivery. When my order finally arrived, I saw that the postage on the envelope was only five cents, and I was mad. I felt ripped off. That early experience may help to explain why I have devoted the past 30 years to helping shippers reduce their costs.

The question of whether or not to charge shipping and handling fees is a hot topic. In a survey published in Practical eCommerce (2006), 72% of the respondents cited shipping charges as their top reason for shopping cart abandonment. For the eBay community, the amount sellers charge for shipping is one of the most controversial topics discussed on the blogs.

Fees through the Years

Shipping and handling fees include all of the costs that the carrier charges for freight. If the terms of the sale are Free on Board (FOB) Origin, the buyer is responsible for the freight charges and all other costs and risks. FOB is a contractual term between a buyer and a seller that defines where title transfer takes place. The understanding is that the buyer is paying for all charges that the seller has incurred from the carrier.

In the 1970s, the only two options for shipping were UPS and the United States Postal Service. Meters printed the amount charged on a white strip that was affixed to the package, which made it easy for the buyer to see exactly how much the seller had paid for shipping. The handling fee was added to compensate the seller for packaging material, boxes, fill and, sometimes, for the labor utilized to ship the package.

In the 1980s, when electronic scales and manifest systems were introduced, a common practice was to add one dollar for each box to pay for the increased costs associated with these systems; since this new shipping technology did not print the postage costs on the label, it was easy to hide the true cost of freight.

By the 1990s, UPS started providing discounts in order to compete with a start-up carrier, RPS. Over time, the actual cost of the sellers shipping charges became more and more arbitrary.

Eventually, large corporations, like General Motors, realized that their suppliers were charging them retail shipping rates plus handling, and consequently, the corporations issued new directives that prevented suppliers from charging them the higher retail rates for shipping and handling. RPS facilitated this action into a competitive strategy, and UPS soon followed suit by offering a new service, consignee billing, which would bill the buyers, like GM, their discounted rates for packages shipped to them from their suppliers. This forced the suppliers to compete exclusively on the price of their goods.

This example illustrates the power that large companies have to impact change, and how in this case, they were able to prevent suppliers from determining the shipping and handling rates. Today, the Internet has enabled this shift in policy to benefit the rest of us.

Lessons from eBay

eBay provides us with a micro-economic view of the free-market system. The issues or friction points in conducting business over the Internet exemplify the challenges that face every seller and buyer of goods.

One of the major problems that the management of eBay has had to address is the charging of excessive fees for shipping. A buyer, for example, would purchase an item for $4.95, which the buyer thought was a fair price. The seller would then charge an additional $9.99 for shipping and handling. The buyer is now unhappy because even if he had bought the item from another seller at a higher price, the total cost of the transaction might have been less because of the excessive shipping fees. eBays policy is that the seller should charge a reasonable fee for shipping. The conflict arises because the terms reasonable and excessive are subjective.

In January 2007, William Cobb, president of eBay North America, announced that management was taking action. Another way we improve the buyer experience is to adjust the standards to which we hold sellers on eBay. Its a fact that the majority of bad buyer experiences result from circumstances controlled by sellers. Buyers are less likely to return to the site after having a frustrating experience like finding the shipping and handling charges are excessive, receiving an item that is not as described, or experiencing poor customer service. Since last summer, weve made significant progress cleaning up categories where egregious cases of excessive shipping and handling charges are most prevalent. For instance, in our cell phones category, the average shipping cost on cell phones has come down by around 25%, and the buyer experience has improved. The competition between these sellers is fairer now, too.

The Internet is forcing every business to be more competitive because the buyers ability to see options and compare alternative sources is easier than ever before. I have met with thousands of shipping managers to discuss the methods and the technology that would reduce their companys shipping costs. One of the objections that I frequently encounter is that since the company policy is to charge the customer for shipping, any reduction in shipping cost does not benefit the bottom line. But the buyers are getting smarter. This strategy is not going to work anymore. Sellers need to manage their shipping costs in order to remain competitive.

Ken Cassar, a retail analyst who conducted a study for Jupiter Research in 2001, discovered that reductions in shipping fees are among the most effective promotions out there. Retailers can see greater returns from one dollar off shipping costs than one dollar off product costs.

More and more, we are seeing Internet retailers offering free shipping. In a Wall Street Journal article (June 2006), a study found that free shipping is a significant factor for buyers in selecting a seller. Shipping costs can factor heavily into how consumers shop online. In an online survey of more than 8,500 people conducted this spring by ForeSee Results Inc., an e-commerce research firm in Ann Arbor, Michigan, more than one-third of those polled said a free-shipping offer was the most influential factor in their decision of where to make their most recent online purchase.

If shipping is free, then the onus is on the seller to do everything possible to reduce their shipping costs; this makes shipping a cost of goods sold instead of a pass through expense. Sellers need to renegotiate their carrier discounts, rate shop among different carriers for the best rate, evaluate their packaging costs and invest in technology that reduces shipping costs. It is no longer a marketplace of let the buyer beware; instead, it has become a marketplace of let the seller be fair. The key to long-term success for an eBay seller or for any business is satisfied customers. When it comes to shipping costs, sellers need to be fair and reasonable.

Mark A. Taylor is the President of TAYLOR Systems Engineering Corporation and the Chief Logistics
Officer of RedRoller, Inc., the worlds first free Internet-based shopping service for shipping that compares the rates and delivery options of multiple carriers. Contact him at Mark@RedRoller.com.