Someone asked me an interesting question about the impact of shipping costs to the bottomline.
The asker has developed a product that is considerably better and resolves the problems of the main competitor’s product. This new entrant will also offer more with the product in terms of features and size. The competitor’s product is simplier and needs limited shipping space in terms of box size.
However, having a bigger and better product presents a challenge for this new entrepreneur: the product has to be shipped in a larger package. His main question: How will having a bigger box affect his shipping costs, and more importantly, the bottom line?
My suggestion was that he should start cranking his shipping costs numbers — get estimates on what the box will cost (especially if it is custom) and get quotes from shipping carriers as to how much the shipping will costs. The only way he can know how shipping will affect the bottomline is when he knows exactly the costs it will need to ship the product.
A high shipping cost can affect a business in several ways:
1 – increased costs in terms of shipping and handling that can eat up profits and tighten cashflow
2 – the high shipping costs translate to high shipping fees paid by customers, and some customers may opt for cheaper shipping (his competitor)
3 – leaves the entrepreneur little room to maneuver if there are shipping errors
Given this challenge, I told him that he needs to clearly establish the superiority and added value of his product. Most customers buy from a specific company because they like the product or the price. Since he knows that he is at a disadvantage with his higher shipping fees, he must be able to convince the customers that they will be getting a better product so they will not mind that they are paying higher shipping fees.
He also needs to be smart in terms of choosing a reliable fulfillment and delivery company. Shipping errors can lead to added costs, further constricting his cash flow. Worse, shipping errors — e.g. wrong address, undelivered products — can erode customer trust and even cause chargebacks.
What else should he do? Let me know your thoughts.