What Explains High Shipping Costs? Root Causes and the Impact on Ecommerce

If it were possible to summarize in a few sentences the pain high shipping costs cause small businesses (and large ones), this X post gets really close.

In their 2023 State of Shipping report, ecommerce shipping solution Shippo backs up these concerns. In it they learned 36% of ecommerce businesses consider “cost of shipping” their biggest business challenge. No other challenge, including global supply chain delays, was cited more often.

High shipping costs have a significant impact on everything from your ecommerce marketing strategy to your bottom line. And unfortunately, there’s no sign of these costs reducing anytime soon. 

So as a head of ecommerce, once you understand why shipping costs have exploded, you’ll be in a better position to find the most effective ways to contain them. Here are the stakes and what you’re up against.

Consequences of high ecommerce shipping costs

These factors influence your shipping expenses: package dimensional weight, the destination address, and rates of major carriers, to name a few. When these costs go up, they slow business growth in three key ways.

#1: Price increases

When shipping costs shoot up, it’s a common retail practice to pass those increases on to your end customer. 

Maybe you simply build the increases into your pricing rather than adjust your customer-facing shipping policies. The danger here is losing customers to competitors with lower prices. In highly competitive industries like beauty, this danger intensifies.

#2: Loss of shipping-related incentives

High ecommerce shipping costs can derail your ability to offer free shipping, or even flat-rate shipping. These incentives are popular tactics for customer acquisition and retention.

The problem is the majority of online shoppers have been trained to expect shipping-related incentives. In the Shippo report mentioned earlier, the company found that 62% of consumers “won’t purchase without free shipping.” 

It’s especially difficult if you’ve always offered free shipping but suddenly can’t thanks to high shipping costs. You may have to explain the situation to your customers and offer new incentives to maintain conversion rates.

#3: Lower profit margins

Many ecommerce companies choose to “eat” higher shipping costs in order to avoid customer churn. This practice erodes profit margins, which are already thin for many online brands.

Why ecommerce shipping costs are so high

Today’s high shipping costs have roots in the post-pandemic economic climate, as well as in customer behaviors linked to ecommerce realities.

Logistics costs continue to rise.

When the pandemic began to ease, many fulfillment centers believed the massive shift to ecommerce would become the norm. They made capital investments in assets like warehouses, trucks, and shipping containers. Then reality set in.

Insider Intelligence estimates ecommerce sales only grew 6.5% from 2021 to 2022, down from the staggering 17% growth between 2020 and 2021. And while ecommerce will continue to grow at least through 2027, the growth rate won’t get close to pandemic levels.

Slowing growth aside, shipping companies still need to pay off their pandemic-era capital investments. Who ultimately pays for them? Typically it’s retail customers because many merchants pass on the higher fees charged by logistics companies to customers. 

But there are other reasons why logistics costs continue to rise.

Inflation

When inflation rises, the cost of goods needed by a shipping company to serve their customers rises as well. These goods include packaging, packing tape, bubble wrap, and the biggest culprit: fuel.

As of the end of February 2024, the inflation rate was approximately 3.2%, more than half the YoY rate of approximately 6%. This decrease is good news, but the 2024 rate is still higher than the 1.40% recorded at the beginning of 2021.

Higher wages for logistics personnel

When inflation boosts the cost of living, employees will often demand higher wages. Many logistics companies are paying up. A prime example is UPS. 

In late 2023, UPS agreed to raise the wages of part-time workers from $15.50 to at least $21 an hour. Full-time workers’ wages rose to an average of $49 an hour.

To cover higher labor costs, companies like UPS will increase their shipping rates. Sure enough, at the end of 2023, UPS announced rate increases ranging from 5.94% for Ground to 7.91% for Next Day Air.

Ecommerce returns create more shipping cycles.

Returns drive up shipping costs for ecommerce store owners in three ways:

• They force you to create a return label, which has a cost attached to it.
• You pay for the carrier to pick up the unwanted product.
• If the customer wants to exchange the product for another, the merchant pays to ship out the replacement.
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These costs add up. According to the National Retail Federation, 17.6% of online sales — with a value of $247 billion — were returned in 2023. Brick-and-mortar purchases saw a 10.02% return rate that year.

In many cases these costs negate the value of the product itself and erase a brand’s profit margins. Returns management provider goTRG CEO Sender Shamiss told CBS MoneyWatch, “[Accepting a return] can be as expensive as 75% of the value of the unit, or 100% or above.” 

Returns’ impact on profit has left many retailers no choice but to charge return shipping fees. 

And if a retailer makes the returns process too difficult, it’s likely the customer will switch brands all together. Now the retailer has to recoup the costs associated with acquiring that customer — another loss.

To stem the financial loss of returns, many retailers are simply refunding customers and letting them keep the unwanted products. goTRG learned that 59% of respondents to a late-2023 retail survey had adopted a “keep it” policy on some products. These companies are still losing money, but they’re betting they’ll keep more of their hard-won customers.

Customers (and brands) enjoy unboxing experiences.

It’s easy to understand why many brands invest in personalized unboxing experiences. YouTube estimates that videos with “unboxing” in the title received more than 25 billion views in 2023 alone. But the more elaborate the experience, the higher your shipping costs. Here’s why:

• Fillers like bubble wrap, tissue paper, and inserts add to the actual weight of the package, increasing shipping costs.
• Dropping but still stubborn inflation has driven up the cost of packing tape and the boxes themselves. 
• You’ll have to pay someone to assemble the box. If the assembly is complex, one person might not be enough to fulfill your orders in a timely manner.
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As much as customers desire them, a layered unboxing experience might not be the best investment for your brand. Would your customers respond better to free shipping? Take the higher packaging costs off the table, and you might be able to offer it. The only way to know for sure is to experiment.

Or you might be able to have the best of both worlds. Consider poly mailers, which are usually less expensive than corrugated shipping boxes. They’re good options if you routinely ship coffee, apparel, or other less-breakable items.

Poly mailers are also customizable, which gives you branding opportunities at lower shipping costs than boxes with fillers.

Package theft and transit damage are on the rise.

It’s difficult enough for an online business to manage high shipping costs on everyday orders. But throw in the cost of shipping replacements for damaged or stolen packages, and the drain on profit margins is even greater. 

Safewise estimates more than 119 million packages were stolen in 2023 alone, a 5% increase over 2022. Add into the mix packages that are damaged during transit, and you have a major headache for consumers and merchants alike.

When a customer complains about a stolen or damaged package, you have no choice but to replace it. Asking the customer to pay for another one is a non-option if you want to retain them.

Shipping protection can alleviate the financial burden of paying for replacements — without jeopardizing customer retention.

Sure, the customer pays a modest fee for shipping protection. But once shipping protection providers like Extend approve a claim — which usually only takes a few minutes of the customer’s time — the replacement process kicks off.

• If the package is lost or stolen, the customer may receive a gift card that covers the value of the product, shipping costs, and taxes.
• In the event of product damage, the merchant may send a gift card good for a full or partial refund.
• In some instances, the merchant will send a replacement package to the customer.
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Shipping protection covers the costs of the replacement and shipping it. And the customer is likely to credit you, the merchant, for making the process so easy. You keep the customer and safeguard profit margins.

Extend helps contain high shipping costs

High shipping costs are one of the biggest threats to an online store’s profit margins. It’s true you can’t control inflation or cargo ships, but you can control your handling of stolen goods or shipping-related package damage. That’s where shipping protection comes in.

With Extend, you’ll mitigate a huge driver of high shipping costs, freeing you up to spend that money on other marketing initiatives. You can increase profitability, and might even be able to offer free shipping more often.

Ready to offset your high shipping costs? Contact us here if you’d like a free demo of Extend Shipping Protection.