Posted on 14th May 2018
Have you ever noticed that your e-commerce shipping estimates don't match the real cost of shipping? These differences can add up quickly into significant losses.
Shipping carriers use dimensional weight (also known as volumetric weight, cube weight, equivalent weight) which applies a density factor to all shipments. This density factor is the minimum density calculated for all rates and greatly favours small, heavy parcels over large, light parcels when it comes to generating rates. When carriers apply their dimensional weight formulas to your shipments, the impacts can be costly for your business.
In other words, shipping 1 Kg of popcorn will cost more than shipping 1Kg of popcorn kernels.
Popcorn Parlour sells popcorn online. They sell popcorn kernels but specialize in flavoured, popped popcorn. Based in Montreal, they ship on average 150x 1Kg boxes per day to hungry customers all over Canada. At $14 each 1Kg box, that’s $766,500 in annual revenues!
Like most online retailers, Popcorn Parlour uses real-time rates to display the shipping options and prices to customers. Below are two average shopping carts, as seen by the customer, with some cost and profit information following.
Super Delicious Popcorn, 1Kg
Unpopped Popcorn Kernels, 1 Kg
With the cost of goods sold (COGS) on the Super Delicious Popcorn at $4/Kg, they make a healthy 71% gross margin (GM%) and a gross profit (GP$) of $10. They sell on average 5 boxes of flavoured popcorn for every box of kernels, giving them an average GM% of 70.5%, which would mean an annual GP$ of $540,382! Since Popcorn Parlour has operating expenses around 40%, they would earn a very respectable net profit of $233,782.
When fulfilling orders, some smaller companies and resellers choose to ship each item separately. While this can reduce costs and simplify logistics, most customers prefer to receive one box with all items rather than multiple separate packages. Popcorn Parlour prefers to ship the combined order in a single box, adding some branded packaging, the purchase receipt and a handwritten thank you card.
With the order packed and verified and the thank you card written, a waybill is created. Creating the shipment requires the package dimensions along with the weight and so the measured parcel details are entered.
The final rates:
Super Delicious Popcorn, 1Kg
Package dimensions: 33x30x30 cm, 1Kg
Unpopped Popcorn Kernels, 1 Kg
Package dimensions: 12x12x12 cm, 1Kg
After adjusting for the difference in shipping costs, Popcorn Parlour’s GM% is now 52.6% resulting in an annual GP$ of $403,179 and leaving only $96,579 after operating expenses. That’s a difference if $137,203 lost to inaccurate shipping estimates!
To understand why this is happening, let's define a few terms:
Actual Weight: The total weight of the parcel including the packaging.
Dimensional Weight: The calculated weight based on the dimensions (length, width and height) of the parcel. Each carrier has their own formula which is used to estimate the volume of the parcel from the weight.
Billable Weight: The greater of the Actual Weight and the Billable Weight.
Density Factor (DIM): The minimum density (weight/volume) for billing purposes.
Density Factor (cm3/kg)
|
5000-6000 |
5000-6000 |
5000 |
5000 |
5000-7000 |
|
|
Since Shopify doesn’t allow for entering product dimensions, therefore a third-party solution is required.
If Popcorn Parlour had real product dimensions in their shop, the could have avoided losing more than half their net profits to unexpected shipping charges. Their shopping carts would have looked like this instead:
Ship•Systems uses real product and box dimensions, determines the smallest box that an order will fit and gets real-time rates on the final, packed dimensions of the order. Customers pay the real cost of shipping and merchants protect their profits.
When it’s time to pack and ship orders, Ship•Systems takes the guesswork out of fulfillment by showing exactly which box to use and how to best pack orders using Intelligent 3D Packing.
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