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Guidance for Establishing and Substantiating Shipping and Handling Charges

Most direct marketers charge consumers for delivery of products. What the actual charges are and how these charges are calculated are significant issues for consumers.

More than 70% of consumers say they compare the total cost of a product, including shipping and handling charges, when they compare sellers. Those who shop online say excessive shipping charges is the number one reason they abandon their shopping carts before buying.

Setting shipping and handling costs is not as easy as it might, at first, seem. In a marketplace of sophisticated consumers and close scrutiny by regulators, direct marketers must be very careful. Positive consumer perception of your charges is critical to your success. Regulators are concerned about what they might view as unclear or unfair charges.

It’s Important To Substantiate Your Charges

That way, if you receive an inquiry about the fairness of your shipping and handling charges, you will be able to respond easily and well, having done in advance the careful analysis that must go into such charges.

This fact sheet is intended to help you develop a sound approach to calculating and substantiating shipping and handling charges.

Although not required, you may consider doing a fulfillment cost study that can help you determine what your actual costs are so that you can charge consumers reasonably. Further, should your method of charging be questioned, you have the evidence to prove that you took all reasonable steps to set charges appropriately.

You should consider consulting your accounting department or internal audit department to help identify the costs involved in shipping and handling.

Unless you are confident that you have sufficient in-house expertise to do the job, it can be useful to have an impartial outside expert do this study. Any study done should clearly report details as to the information reviewed and the conclusions reached.

It’s important to substantiate your method of charging for whoever may have a question about it. A fulfillment consultant or industry analyst would be an appropriate person. But whether an in-house or external person, the task is the same: to make fair, credible, objective and defensible decisions.

Some marketers take the position that so long as there is clear disclosure on how much the consumer pays in total for the shipped product, the amount the marketer charges for shipping and handling should not matter. There appears to be a trend by law enforcement agencies, however, to insist that a consumer who is charged shipping and handling costs should be paying a fee reasonably based on the marketer’s cost. The latter position is consistent with existing DMA guidelines.

Review Your Costs

When there is any significant change in your incurred costs or in your method of determining shipping and handling charges, it’s time to review your costs.

Costs Included In Your Shipping And Handling Charges

This decision is, at the same time, a matter of consumer perception, a marketing issue and a legal issue.

The charges should be clearly understandable and fair to the consumer. From a consumer perspective, high shipping and handling charges can be a deterrent to customer purchases and customer satisfaction.

From the marketing perspective shipping and handling charges are a factor in your competitive stance and in your brand reputation.

Legal and regulatory actions have claimed that some marketers have been deceptive about setting their shipping and handling charges and should cause all direct marketing executives to take care in determining which costs to include and in substantiating shipping and handling charges.

Each consumer should be charged fairly. Your goal should be not to charge consumers as a whole more than you pay in total. No single or “correct” formula exists for calculating or charging shipping and handling. For simplicity, some marketers create an easy-for-the-consumer-to-understand method of charging based on price or weight or distance of delivery.

Some consumers think the price of shipping and handling should be limited to your actual common carrier cost. Of course, much more is involved and you must be prepared to explain the justification for the individual cost to an individual consumer inquiring about the fairness of his or her individual charge.

There are clearly risks associated with including certain categories of expense in your shipping and handling charge. Below we’ve identified some costs that some marketers have included. There may be others. In general, the more indirect your charge, the less consumers are likely to understand why you are charging them for it.

Direct Costs
  • Common Carrier Costs
  • Land Delivery Costs
  • Express Delivery Costs
  • Extra Heavy Package Costs
  • Packaging Materials
  • Direct Labor Costs
  • Other Special Handling
Semi-Direct Costs
  • Warehousing
  • Insurance for Assured Delivery, Loss, Damage
  • Rent
  • Returns Processing
  • Inbound Call Center Costs for Processing Returns
  • Depreciation of Distribution Center Equipment
  • Distribution Center Rent
  • Cost for Outsourcing Fulfillment
  • Overhead Costs, Conservatively Allocated
Indirect Costs
  • General & Administrative Expenses
  • Inventory Carrying Costs
  • Item Replacement Costs
  • Aggressive Fixed Overhead Allocation

Disclosing Costs To Consumers

Shipping and handling costs should be disclosed clearly and conspicuously and in advance of the consumer’s completing an order. Consumers should receive notice of the exact charge before the sale is finalized.

Providing consumers general information on how shipping and handling charges are computed can be easily done by your customer service staff or by reference to your Web site. For online shopping, consumers should get information on the actual cost early in the order path, so that they do not go through several purchase screens only to abandon their carts when they learn the cost at the end.

For catalogs and other direct mail channels, shipping and handling charges should be prominently displayed and readily visible to consumers. On the telephone, consumers should be told the applicable shipping and handling charge when the total cost of the order is given. Where shipping and handling charges may vary depending on the amount of the order, an easy method for consumers to determine their exact charges should be provided.

Special Disclosure Issues

Continuity, Negative Option Or Subscription Programs
In continuity or negative option marketing plans, an individual consumer’s order may differ from month-to-month, causing a variation in shipping costs. In this instance it may be best to disclose an estimated range of shipping costs before they sign up, so that your customers are not unpleasantly caught by surprise. Of course, when the order is shipped, the exact shipping and handling charge should be clearly stated.

Free Products In instances where you offer free products--where the consumer pays only for shipping and handling--it is critical that you disclose very clearly and close to the word “free” the costs of shipping, the entire plan for which the consumer is obligated and the total costs that consumers will pay. Consumers object strongly if they perceive that the cost of shipping and handling for an otherwise free product is too high.

Free Shipping And Handling
Nothing in this document should dissuade you from offering your customers free shipping and handling, or a decreased cost of shipping and handling when a consumer buys a larger order.

It is not appropriate, however, to eliminate your delivery charge and concurrently increase retail prices and still call it “free delivery.” If you have in fact increased the price of the product to cover your shipping and handling charges then a term such as “shipping included” should be used instead of the word “free.”

In Summary…

Shipping and handling costs should be fair, reasonable, clear and justifiable.

This fact sheet was developed in consultation with attorney George Isaacson of Brann & Isaacson.

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