Shipping cost coverage rate – an introduction
Shipping is a fundamental aspect of e-commerce businesses, and understanding shipping costs, the income you make from shipping and the net position between the two, is critical in understanding unit economics and the success of the business. Shipping cost coverage rate, also known as shipping coverage, is a financial metric that measures the relationship between total shipping income and total shipping costs.
In this article, we'll explore the importance of shipping cost coverage rate and how it can help e-commerce businesses make informed decisions.
What is shipping cost coverage rate?
Shipping cost coverage rate is a metric that measures the amount of money an e-commerce business generates from shipping relative to the costs associated with shipping. The ratio is calculated by dividing the total shipping income by total shipping costs. The result is expressed as a percentage, and it gives decision-makers an understanding of how much shipping is costing or making them.
There’s a lot more to the dynamics to shipping ratio, as some businesses embed the cost of shipping into the price of the product and don’t charge shipping, whereas others charge a higher shipping fee but lower product price to entice customers in the first place.
Why is shipping cost coverage rate so important?
Shipping cost coverage rate is an important metric for e-commerce businesses because it’s often a key lever and impact to unit economics. By knowing the shipping cost coverage rate, decision-makers can identify areas where they need to make changes in order to improve unit economics and EBTIDA. For example, if the shipping cost coverage rate is low (or less than 100%), it may indicate that the business needs to find ways to reduce shipping costs or increase shipping revenue. If the shipping cost coverage rate is high (or more than 100%), it indicates you are making a margin on shipping.
It's important to consider the impact this may have, in either a high or low scenario. Is free shipping an important ‘sales lure’ with the cost of shipping built into pricing? Or, are you losing money on shipping and an incremental increase in shipping changes to customers would have no impact on sales volume?
What is a good shipping cost coverage rate?
There is no standard for what is considered a good shipping cost coverage rate, as it can vary greatly depending on the specific e-commerce sector and pricing strategy. A ratio above 100% indicates that the business is generating a profit from shipping – on the face of it this of course seems favourable, but as mentioned above, remember what you’re trying to achieve.
If, as a business you charge shipping with the intention to cover your shipping costs, this is an important metric to make sure you understand the impact to your unit economics.
What does shipping cost coverage rate look like?
How do you calculate shipping cost coverage rate?
The formula to calculate shipping cost coverage rate is:
Shipping cost coverage rate = Shipping income / Shipping costs x 100
The result is expressed as a %.
Shipping income: total amount of money the business generates from shipping fees charged to customers.
Shipping costs: total outbound shipping costs e.g. DHL, UPS, Royal Mail etc.
Shipping cost coverage rate. worked example
If you have shipping income of £40,000 and total shipping costs of £45,000, the shipping cost coverage rate would be calculated as follows:
Shipping cost coverage rate = £40,000 / £45,000 x 100 = 89%
This is effectively showing that you cover 89% of your shipping fees, from what you charge your customers. However, this can often be misleading as e-commerce businesses apply different shipping pricing strategies – some offer free shipping but embed the cost within the product.
Conclusion
Shipping cost coverage rate is an important metric for e-commerce businesses to track, as it provides insight into one of the levers in unit economics. By understanding the shipping cost coverage rate, e-commerce brands can identify areas where they need to make changes to improve unit economics and EBITDA. While there is no standard for what is considered a good shipping cost coverage rate, a ratio above 100% shows that the business is generating a profit from shipping.
