How to Calculate the True Cost of Delivery and Its Impact on Sales Pricing?

With more customers shifting to online shopping than ever before, timely deliveries of everything, right from groceries to electronics, have become the cornerstone of customer experience on eCommerce websites.

Yet, many business owners and retailers struggle with getting the delivery aspect of their operations right, especially estimating the true cost of delivering a shipment. Since Australian customers are increasingly leaning towards faster and more affordable shipping options, finding a robust invoice generator and the right freight partners.

We will look at the process of identifying and calculating every aspect of your delivery cost and how it influences your pricing model. 

Which Factors Should You Consider To Calculate the True Cost of Delivery?

Before we delve into the process of calculating the true cost of delivery,  let us look at the primary factors that contribute to the overall cost. Typically, every courier partner or freight forwarder will calculate the cost of shipping your goods based on the combination of the following factors:

1. Delivery Distance

Whether you are transporting your goods within the country or across borders, the delivery distance is often the largest contributor to your delivery costs. After all, the delivery distance will impact the carrier charges and the regional or country-specific surcharges. But as a rule of thumb, you must keep in mind that the longer the delivery distance, the higher your shipping costs are likely to be.

1. Direct, Indirect, and Hidden Costs

There are several different types of costs associated with the process of transporting goods from one location to another. Some of the direct costs associated with the shipping process include shipping or carrier fees, with domestic vs. international disparities, labor costs associated with picking, packing, and the dispatch process, and packaging costs.

The indirect costs associated with the process include technology costs for tools like delivery management and sales force automation software, returns management, customer service, and insurance costs. You must also account for hidden costs, such as charges associated with navigating regulatory compliance and environmental surcharges, when calculating the overall shipping cost.

1. Product Type

Not all products are created equal, and the type of product you are shipping is important, as it contributes to your total shipping cost. When shipping goods, you must first identify whether they are bulky or light, as they may require special handling and attract higher base rates.

You should also figure out whether your shipment includes perishable goods such as rice, meat, or groceries, as they may require refrigerated transport or express shipping, adding quite a bit to your overall shipping cost. Moreover, shipping restricted items such as alcohol or medicines may require additional compliance checks and formalities, thus increasing costs.

1. Shipping Speed & Options

The timing and delivery speed associated with your shipment have much to do with your overall shipping costs. Opting for same-day or express delivery options for your shipment can end up incurring a lot of carrier fees and operational resources, draining your shipping budget. 

You can also end up having to put in additional logistical planning and incur extra charges if you want to deliver shipments at specific delivery windows. You must also consider the additional charges associated with shipping during peak periods such as weekends, holidays, and major sales events such as Black Friday.

Moreover, if you opt for sustainable or eco-friendly deliveries, using electric vehicles or green practices, you will end up with higher costs or operational expenses with limited availability. 

1. Platform/Service Fees

If you sell through third-party marketplaces, you may have to account for additional fees, such as:

• Service fees: A percentage of the order value, including or excluding delivery fees
• Marketplace commissions: Service charges levied by specific platforms to cover operational costs
• Integration costs: Additional per-order fees associated with 3PL providers or delivery management software

The process of calculating your true delivery and shipping costs entails accounting for all the aforementioned charges and expenses. Moreover, you should consider a few additional aspects depending on whether you are shipping your goods locally, regionally, or internationally.

How Do Delivery Costs Impact Sales Pricing?

As a retailer, delivery costs can be a prominent part of your sales pricing strategy. To maintain your profitability and competitiveness, you must understand the relationship between the delivery costs and your margins and customers’ purchasing decisions.

Direct Impact on Profit Margins

Every dollar you spend on your deliveries cuts into your profit margins, and if you don’t adjust your sales prices accordingly, it will inevitably disrupt your bottom line. However, you must keep in mind that in price-sensitive markets like Australia, trying to pass all your costs to customers can lead to a revenue decline.

Customer Sensitivity & Cart Abandonment

High shipping costs often deter purchases and lead to customers abandoning shopping carts without finishing their purchases. According to a study in 2023, about 9 in 10 customers abandon their purchases for this exact reason. To prevent this scenario, you must consider implementing strategies that balance shipping costs and customer satisfaction.

Aside from these direct consequences, you must also consider choosing the right pricing model so that most of the shipping costs can be absorbed, while setting aside a decent profit margin on all your orders. While tiered or conditional free shipping works the best in such cases, unconditional free shipping can take a hit on your business performance since you will end up raising product prices.

In most of the aforementioned cases, you can use a wide range of strategies to balance your delivery costs and sales pricing. You can negotiate carrier rates, leverage technology, offer multiple delivery options, and even optimize packaging and fulfillment to maximize your profitability.

Concluding Remarks

With the endless potential and competitiveness that Australian eCommerce offers, the true cost of delivery can be a significant deal-maker or breaker for business owners and retailers. You must account for several direct/indirect and hidden costs, and several parameters such as shipping speed and services offered to calculate the overall shipping costs. When utilized correctly, deliveries can be much more of a strategic opportunity than a logistical challenge for you, as long as your pricing models are optimized and updated accordingly.