Budgeting for Peak Surcharges: How Ecommerce Brands Can Mitigate Rising Shipping Costs

Key takeaways for ecommerce brands:

1. DTC operators can reduce the impact of peak-season surcharges by negotiating rates early, forecasting demand accurately, and spreading out shipments over the holiday season.

2. Creating a well-structured budget that accounts for variable costs, like shipping, enables brands to manage their finances effectively and set realistic revenue targets for the holiday period.

3. By carefully tracking and managing per-unit costs, especially shipping expenses, ecommerce brands can adjust their pricing strategies to offset increased holiday costs, ensuring business profitability despite fluctuating delivery fees.

It's become standard procedure: every year, in early October, most major carriers announce delivery surcharges for the holiday season. One thing, though, has changed. “They won’t call it a ‘holiday surcharge’ now – it’s a ‘peak surcharge,’” said Dennis Moon, the COO of Roadie, a UPS delivery platform. “But it’s still pretty much the same thing.”

ֿThis year, for example, UPS will levy surcharges ranging from $0.25 to $2 per package for ground residential, air, and SurePost packages. FedEx is instituting new per-package delivery surcharges, including a $1-to-$2 fee for various express services. And USPS (U.S. Postal Service) prices will increase between 4.9%-6.4% depending on the service. 

As the holiday surcharge became a regular feature, ecommerce brands started preparing for it in various ways. Some launch holiday promotions sooner to distribute shipments more evenly throughout the season. Others try reducing delivery costs by motivating customers to combine orders. Plus, there's always the option of negotiating with carriers earlier in the year to lock in rates and avoid the extra fees during the peak period.

‍Avoiding the Squeeze of Last-Minute Fees

Locking in rates early can also help DTC brands evade another surcharge: last-minute fees. Typically resulting from last-minute changes in delivery schedules, these fees can be particularly costly. “Depending on the size of your company,” said Scott Tannen, founder and CEO of the bedding brand Boll & Branch, “that could be the difference between being profitable and not being profitable.”

Like many ecommerce founders, Tannen developed an adaptive approach during the COVID-19 pandemic, which turned shipping costs into “a moving target.” The biggest lesson he learned in the past few years was to constantly consider fulfillment costs when budgeting for the holiday period, “but that requires you to have a really, really accurate forecast.”

Making an accurate revenue forecast is the first step in preparing a detailed budget. Like ecommerce accounting and bookkeeping, ecommerce budgeting requires careful planning and attention to detail. In the context of the shipping costs during the holiday season, this means keeping delivery surcharges and last-minute fees in the foreground throughout the budgeting process.  

‍Structuring Your Ecommerce Budget for Peak Season

As mentioned, the process starts with forecasting your revenue for the budget period. The next steps are identifying and categorizing your expenses. The two main expense categories in ecommerce are fixed and variable costs. Defined as expenses that fluctuate in direct proportion to changes in the volume of production or sales, variable costs include:

• Advertising
• Credit card fees 
• Sales commission
• Promotions
• Utilities
• Shipping costs

Shipping, like other items on this list, should then be estimated as the percentage of revenue it will cost during the budget period. Now’s the time to determine your revenue target for this period; calculating your break-even point – the minimum amount of sales revenue required to cover your expenses – will help you understand your minimum sales targets.

Next is the allocation of funds for each category and item. This step is done based on revenue targets and expenses, allowing you to prioritize your spending. DTC operators should always ensure their budget includes a contingency fund to cover revenue shortfalls or unexpected expenses – like last-minute delivery fees – that require sudden attention. 

Factoring Shipping Costs into Pricing Strategies

In addition to allocating funds for contingencies, brands can also try to mitigate the costs of last-minute shipping fees and delivery surcharges. For instance, by verifying the correct rate has been applied – according to the package's weight and size – to each line item. “We’re always trying to get the cost down by going over every statement and asking about each charge,” said Judah Abraham, the founder and CEO of fragrance and beauty incubator Slate Brands.

However, being meticulous about each shipment can only take you so far. Abraham estimated his company's shipping expenses during the holiday season have steadily increased by 12% to 15% over the last two years. “To me, the rate fluctuations are just the way of the world now,” he said. As a result, Slate Brands now factors these increases into its pricing strategy.

The key to building a pricing strategy that enhances business profitability is understanding the true cost of sales. This means taking into account all your variable costs – including shipping expenses – on a per-unit (SKU) basis, which requires two things:

1. In-depth knowledge of ecommerce unit economics.
2. An ecommerce accounting software.

The second point is critical. An ecommerce accounting software not only provides accurate, detailed, and reconciled financials (i.e., P&L, balance sheet, and cash flow statement) – but also keeps track of key metrics such as shipping and fulfillment costs to help DTC founders better understand their unit economics.

In an era of heightened consumer demands and ever-tightening delivery timelines, holiday shipping increases can become a make-or-break factor for ecommerce brands. Those who take a data-driven approach to their financials – underpinned by ecommerce accounting know-how – will be the ones to preserve their hard-earned margins, and emerge from the peak season in a position of strength.