One of the major differences between an online store and a brick & mortar retail store is how customers get their games. In an online store, we generally ship the vast majority of our orders to customers, while customers in a brick & mortars business pick the games up directly.
Online, there are numerous ways to charge shipping. I’m going to discuss the shipping methods and their benefits and drawbacks from my view.
Let’s start with the actual cost method where customers just pay the cost of shipping. For a retailer, it’s the best option – there’s no discounts so no profits are loss. On a customer end, they pay for exactly what is shipped – which can be a good thing for those customers who are close to the shipper. It can also allow a company to put all potential gains into lowering the cost of the games themselves.
There are 2 common Free Shipping options out there. Firstly, there’s the complete Free Shipping option – i.e. buy a product, it ships free. In these cases, the cost of shipping is generally rolled into the product cost already. This is the most disadvantageous for customers who are purchasing more than 1 product and is not something you see with retailers who have more than a few SKUs.
The second option, a Free Shipping Threshold is what we use. Here, customers pay the actual shipping cost of an order till the Free Shipping threshold is reached. At this point, customers then choose to ship their entire order for free.
It’s a very popular shipping method for a variety of reasons. For the merchant, the goal is to push customers to buy more products; so the shipping threshold is set at a point that encourages consumers to add ‘just a little more’. In addition, orders below the threshold – the majority – pay for themselves.
Customers like this method too because they can get something for Free. In addition, it rewards the customers who buy the most.
Unfortunately, it does mean that the retailer must absorb the cost of the free shipping. In addition, customers might alter their buying behavior to take advantage of the free shipping.
Flat Rate Shipping
This is a shipping method that is used by our competitors. There’s certain advantages – it’s the simplest method to calculate and uses the least amount of resources on an IT side to set-up. Since the vast majority of costs are similar by Province, the retailer should come out approximately even for small orders. Larger orders will of course be higher cost, but will be subsidized. It also lets customers know what their shipping costs are immediately.
Flat Rate Shipping methods are a balanced approach – the retailer does not lose as much moneyby subsidizing a portion of their orders, while ensuring most of their shipping costs are met.
Shipping methods & Margins
So how do all these different methods effect the price of goods? Let’s assume that a retailer wants to hit a specific % margin for their gross profits i.e. after taking away cost of goods sold and their shipping costs. Let’s say we’re looking at a product that has a cost of goods of $100. The retailer wants to keep a 50% gross profit margin and shipping cost is $15. As such, the revenue that must be generated from a customer is $165.
In this case, the price of the game would be $150. The customer pays the $15 immediately, so the retailer can just put the game price direct into the $150.
Let’s assume tat the flat rate shipping is $10. In such a case, the price of the game is $150 plus 5 = $155.
With an option that is purely Free Shipping Threshold the retailer must then absorb the entire cost of the shipping. In this case, he would then set the game price to be $165 since no shipping is charged.
Now, if the Free Shipping Threshold is $175, the game would not meet shipping, so it would be the same price as the Actual Cost method i.e. $150.
Of course, things get complicated when more than 1 product is purchased.
E.g. What if a customer decides to buy 2 games? In the case of the Free Shipping Threshold, you’d want the Price to be $157.50 (i.e. ($300 + $15)/ 2 )- slightly higher than a Flat Rate method, but certainly lower than a pure Free Shipping option. In a Flat Rate scenario, it’s $152.50.
Obviously then, the actual cost of the game in the Flat Rate or Free Shipping options needs to be calculated based on the buying patterns of your customers. What are the size of your orders? What are your margins now? What % in/decrease in price is required to hit your margin?