Shipping and handling: The ultimate guide

How do you decide how much to charge for shipping and handling? It’s a complicated decision—and it’s vital to your bottom line. Here’s what you need to know in order to make the right decision.

What is shipping and handling?

The term shipping and handling encompasses everything involved with getting an order from the warehouse to the customer. Shipping and handling charges are the way to recoup the many different costs involved, which include packaging, labor and overhead in addition to shipping charges. Making the correct decision on how to charge for shipping and handling is crucial to the success of an ecommerce business and can have a significant impact on customer satisfaction.

What is the difference between shipping and handling?

A frequently asked question is “What is handling in shipping and handling?” The answer is a bit complicated. Shipping and handling are the two main parts of a multi-step process. Handling, which happens first, refers to all activities involved in getting the order ready for shipment. Items are “picked” from inventory, then moved to an area where they can be assembled and packaged for shipping. This process may include additional steps such as gift wrapping, enclosing a gift card, or kitting. Next, the package is measured and weighed, and a shipping label is printed and attached. 

Shipping refers to what happens after the handling process is complete. The package is either transported to a shipping location or loaded onto a carrier’s truck for shipment via the delivery method specified by the customer. The entire process is only complete when the merchandise arrives at the customer’s door. 

While many ecommerce companies take care of handling activities in house, some contract with a third-party logistics provider (or 3PL) that provides complete fulfillment services. 

What is a shipping and handling fee?

Shipping and handling fees are charges over and above the cost of merchandise in an ecommerce order. They not only cover the cost of fulfilling orders, but can also help maintain profit margins. Some merchants bundle the cost into the price of merchandise, while others make it a separate line item. In that case, the shipping and handling fee usually appears just below the merchandise subtotal. Either way, it’s important to keep costs competitive: If customers think shipment fees and handling fees are too high, they may abandon their order.

The amount charged for shipping and handling fees varies from package to package. The average handling fee is based on the costs incurred to assemble a package, and process it for shipment. These include the costs of labor, packaging materials, storage and equipment related expense.

What is a shipping and handling tax?

Shipping and handling tax refers to any taxes (usually sales taxes) that states impose on the shipping and/or handling charges billed to customers as part of an ecommerce or freight delivery. Each state has its own laws, but in most cases combined shipping and handling costs are considered taxable if the merchandise itself is taxable, and not taxable if the merchandise is exempt from tax. 

Separately stated shipping or handling charges are not taxable in Alabama, Arizona, Colorado, Idaho, Indiana, Iowa, Louisiana, Maine, Maryland, Massachusetts, Nevada, Virginia or Wyoming. Some states do not have sales taxes, so shipping and handling costs are not subject to tax; a few others, such as California, have complex tax laws that determine taxability based on a number of factors.   

How does shipping and handling work?

Whether it is done by shipping and handling companies or in house, the shipping and handling process is made up of a series of events that begin as soon as the customer’s order has been accepted and confirmed. Each step must be completed accurately and as efficiently as possible. Failure to do so can result in increased costs, delays in delivery, a poor customer experience and lost revenue.

First, the customer’s order is processed and a packing slip is created with information about the products (or SKUs) included in the order, along with details about the number of units, color, size and where the product is located in the warehouse. This step can be automated with order management software that connects to the online shopping cart. 

Next, the items are collected or “picked” from inventory according to instructions on the packing slip and delivered to the packaging area. This is where the order is assembled and labeled for shipment. Workers choose the optimal package and handling supplies to keep the dimensional weight (and shipping cost) as low as possible. They also enclose return shipping labels and perform any optional steps, such as gift wrapping, that may be required. When all of these steps are complete, the package is either transported to the carrier’s shipping location or moved to the loading area for carrier pickup.  

Shipping and handling are essentially all the activities done to prepare and fulfill an order: pick, pack and ship.

How do you calculate shipping and handling fees? 

To calculate your shipping and handling cost, you must first know the cost of labor, packaging and shipping. You can determine your labor cost with a simple formula. Divide the average number of minutes required to assemble, package, weigh and label an order by 60, and multiply the result by the hourly rate you pay the employees who do this work. For example, if the handling process takes an average of 18 minutes and your employee rate is $15 per hour, your labor cost is $4.50.

calculating labor handling cost

The cost of shipping for ecommerce is whatever the carrier charges to deliver the order, and will vary widely by the package’s dimensional weight, distance, speed of delivery and the volume of packages that you ship. To improve the customer experience, you may want to incorporate the basic shipping cost into your base product price and thus avoid telling the customer that “shipping and handling costs will be additional.” For instance, if delivery charges are $8 and product is $50, you can describe this the product as “$58 with free shipping.”    

The cost of packaging materials will vary based on the size of the order and the type of packaging you use. You may choose to use free carrier-supplied packaging to keep your handling costs as low as possible. Ordering generic cartons in bulk will also help keep packaging costs down. Alternatively, if branding is important, you may want to use custom-printed materials that are more expensive but help build brand identity and customer loyalty. This additional expense can sometimes be rolled into the product price to keep handling charges competitive.

To help ensure profitability, you should also factor in the cost of overhead such as facility and equipment costs and related expenses such as insurance or taxes. Last but not least, you may want to investigate what your competitors charge. If your calculation results in a figure that is above average shipping and handling costs for similar products, you may want to consider outsourcing your fulfillment to a third-party logistics supplier.

You can also save time and money fulfilling online orders with the PitneyShip™ Cube. Link your Amazon, eBay and Shopify stores to automatically import order information. Weigh, print, ship and track all from one device using your phone or computer.  

Why is shipping and handling so expensive?

It’s a basic principle of economics that when demand exceeds supply, prices rise. And that’s exactly what has been happening with freight and handling charges. 

U.S. parcel shipping volume was already on the rise when the pandemic hit, triggering an explosion in ecommerce that led to logjams in ports, backlogs in supply chains and scarce capacity in the global shipping network. 

Today, demand for shipping capacity continues to exceed supply. According to the Pitney Bowes 2022 Global Parcel Shipping Index, U.S. parcel volume rose seven percent from 2020 to 2021, totaling 21.6 billion parcels, or 59 million per day. The trend shows no sign of slowing down.

In addition, inflation has raised the cost of fuel and vehicles while labor shortages have forced shipping carriers to pay higher wages to the people who load the trucks, fly the planes and deliver the packages. So, it may not be realistic to expect lower shipping and handling costs any time soon.

However, with PitneyShip™ software and PitneyShip™ Cube, you can access shipping discounts across carriers and streamline your shipping workflow. Save time and money shipping with PitneyShip™ solutions.

How to develop a shipping and handling strategy for your business

One of the most important strategic decisions an online retailer can make is whether or not to charge separately for shipping and handling. Why? Because in much the same way that consumers have been conditioned to want fast delivery, they have also come to expect low, or even non-existent shipping costs. 

Survey after survey indicates that shipping costs are a leading cause of cart abandonment. In light of that fact, it’s not surprising that more than 70 percent of online retailers now offer some form of free shipping. They are able to do so by either absorbing the costs themselves, or building them into the product price. 

Retailers that absorb shipping costs may set a minimum order size to qualify for free shipping, or require the customer to open an account. This strategy works best with higher priced items; they have hefty margins that leave plenty of room for profit, even after subtracting a few dollars for shipping. It doesn’t work as well for cheaper items that compete on price, or for heavy items that are expensive to ship. Online merchants that add shipping and handling into the product price must be careful to keep the total cost competitive, or risk losing customers. 

Which strategy is best for your business? To make a smart decision, you’ll need to gather some detailed data, including:

  • Your average order value
  • Your profit margins
  • Your customers: where they’re located and how much they spend
  • Your average shipping costs
  • Your handling costs, including packaging, labor and overhead

Although it may take some effort, identifying the right shipping and handling strategy can help you improve the customer experience, build loyalty increase the average order value and maximize profits.

How Pitney Bowes can help your business with shipping and handling

As this article explains, shipping and handling costs can be very complex. Pitney Bowes solutions can help remove complexity from your shipping operations. Plus, thanks to our long-standing relationships with UPS and the US Postal Service, we provide access to discounted rates that can help you better manage costs.

If you ship less than 100 packages per month, our PitneyShip™ software is your best choice. You’ll have the ability to access discounts on stamps Priority Mail shipping labels, and quickly find the best rates across USPS, UPS, and FedEx using our best match tool.

With PitneyShip™ Pro, our advanced, cloud-based shipping software, online retailers and office shippers who typically ship more than 100 packages per month can enjoy all the benefits of PitneyShip™, plus access to the deepest carrier discounts available. They can also boost productivity with single sign-on access, and easily scale as needed with multi-user and multi-location access.