Why is Shipping & Handling so high?

We know many customers are upset about this because we are an Ebay Powerseller, and we get asked about it daily… we figured the best thing would be to write a guide and post it.  Hopefully this will explain the situation with S&H, and the problems that all Ebay sellers face which cause the high S&H numbers you see.

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Before we get started - if you find this guide helpful, please click the "Yes" button at the end of the page - each "Yes" moves this guide higher on the list and increases the odds that others will get a chance to read it.  Thanks.

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Ok, let's start.  First, you have to understand that S&H doesn’t just mean “postage”.  In general, S&H includes any additional costs incurred in getting your item to you.  If you were buying an entire pallet of equipment, this would include the cost of shipping the pallet to you on an 18-wheel semi truck.  But it also includes the labor of the person at the warehouse that packed the pallet and prepared it for shipping, and the materials used to secure your items to the pallet (this keeps the items from being damaged in shipping).  In my case, our company sells RAM memory for laptop computers… it doesn’t require much protective packaging, but it does still require some.  (We’ve had customers argue our S&H costs are high because you can send a plain 1 ounce letter for under a dollar – but a plain letter offers no protection.  We use padded envelopes to protect the items we ship – these weigh more and cost more to ship.  Yes we could send it cheaper… but do you really want us to?)

So far, we’ve discussed the following costs:

• Postage
• Labor
• Materials

In the case of our company (SBC Memory), we only sell SDRAM for laptops.  As we said, 90% of our packages come out to 1 ounce.  At the current USPS rates, First Class Mail postage for 1 ounce is $1.31.  The materials (envelope, label, and anti-static sleeve to protect the RAM) come to about $.45 for each package.  That brings the total to $1.76.

In the case of labor, we’re losing money very badly on the deal.  Right now we are a very small company, but due to our current situation we’ve had no choice but to hire someone (part time) to do the Shipping & Receiving for us.  We pay this person $200/wk, but some weeks we don’t ship many packages.  In the first quarter of 2008 we sent out 700 packages.  There were 13 weeks in the first quarter, and if you do the math you’ll see that our labor cost alone averaged out to $3.71 per package … added to postage and materials, this quarter it cost us $5.47 in S&H for every package we mailed out!

But as the saying goes… “Wait, there’s more!”

Across the entire industrialized world there are standardized accounting practices, referred to as Generally Accepted Accounting Practices (or GAAP).  According to these practices, when we buy an item, we have to buy the item and pay to have it shipped to us from the manufacturer.  That original price and the cost of the S&H to get it to us are combined and given the title COGS (Costs of Goods Sold).  That’s what it cost us to buy the goods.  But what about what it costs us to sell the products?

Ebay charges sellers a fee for every auction we list.  Ebay also charges us a commission on every item that eventually sells (items that are listed but don’t sell only pay the listing fee, no commission).  Also, Paypal charges a fee to transfer the money from the buyer to the seller.  There is one interesting point about how these fees are assessed: Ebay only bases its commission on the price the auction sold for – Ebay does NOT assess a commission on the S&H portion of the auction.  …But Paypal does!

This is fair, though.  It would not be right for Ebay to charge a commission on the S&H, since this is not money the seller is going to get to keep (Ebay wants a piece of the profits, which come from the sale price).  But from Paypal’s point of view, they are providing a service - transferring funds for you.  Just like a bank, they don’t care where the funds are going or what they’ll be used for.  This leaves room for unscrupulous sellers to take advantage.  Some sellers will sell their item for $1 and then charge $20 for S&H.  This is what Ebay calls “fee avoidance”.  A seller that does this is trying to avoid paying Ebay any commission.  However, there is a correct and reasonable application of this idea.

To use an example… we have one item that sells for about $30.  The Ebay commission on a sale of $30 comes to about $2.50.  Most buyers tend to think that this $2.50 should be included in the cost of the item.  But if that $2.50 is included in the cost of the item, then Ebay is going to charge yet another commission fee on that $2.50 – if that happens, then we face ‘double taxation’!  To avoid having this happen, we put the $2.50 in with our S&H fees.  Paypal still charges us a fee for that $2.50 (as they have every right to), but this way we can pay Ebay their $2.50 exactly instead of paying them $2.50 plus a sales commission on their $2.50.  We also put the costs of the Paypal transaction fee in with the S&H for the same reason - why should we pay Ebay a sales commission on the Paypal fee?  In the case of a $30 item the Paypal fee is $1.  So our grand total now comes to:

$1.31 Postage
$3.71 Labor
$0.45 Materials
$2.50 Ebay Fees
$1.00 Paypal Fees

It costs us a whopping $8.97 to sell a one ounce package!  And that’s not even including insurance!  Now, what if you want Priority Mail (at least $4 more) or Express Mail (at least $22 more) … also think about what it costs for more postage when you are buying items that weigh more than 1 ounce.  It adds up quick!

Now, I know that some of you reading this might be accounting majors.  You are probably shaking your finger and saying that Ebay and Paypal fees should be documented as Overhead, and grouped in with the sale cost of the item.  Normally we would agree – if Ebay used flat rate commission fees we would gladly do this.  Meaning, if Ebay simply charged $1 for every auction that successfully sold.  Then we would be charged $1 per sale, and that would be that.  But when we use percentages a $1 sale means $.10 commission, and a $2 sale means a $.20 commission, and a $30 sale means a $3 commission… there is no reason why we should pay a commission on both the $30 and also on the $3! ... Besides, we already pay a fee on both the $30 and the $3 (when they go through Paypal).

One thing we should mention is that our labor costs are excessive because our company is small.  We’re paying our assistant $200 in labor every week. That would be reasonable if we’d shipped 200 packages… each customer would only need to put $1 towards the labor cost.  But for now, we charge less than what it costs us and we take the loss just to keep the business running.  As our business grows eventually costs and profit will balance out.  But this is our worry, not yours, the buyer.  What’s most important for you is to look at the overall price of the item – that is, the price of the item and S&H.  If someone else is selling an item for $1 + $19 S&H, that's $20 (and Ebay fee avoidance).  If they're selling it for $20 with free shipping, then it's $20.  But if we're selling the same item for $10 + $8 S&H, then we're at $18, and our combined price is still cheaper than our competitor.

Obviously we mean business… so please don’t misunderstand the S&H number.  Consider it one part of the whole picture.  As you now know, it’s obviously more complex than it appears.  But now that you know, you're a more informed Ebayer, and can buy wisely!

And lastly, a small plug:

If you or someone you know has an older laptop PC that needs more RAM, please check out our auctions!  And don't forget to click the "Yes" button below!  Thanks :o)

Thanks,
~SBC Memory