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The economics of small business: shipping costs

By on March 12, 2016 in RevereWareParts.com, Small business

free-shipping

Having been an Amazon Prime customer for quite some time, I am used to free shipping on most of what I order online, and find myself a bit annoyed when I order something where shipping is not free.  However, I also am very aware of what it costs a business to ship orders, both in postage and in handling, so I understand that these costs are real.

Large businesses like Amazon often make up for free shipping by charging more for the item; while it looks like a good deal, the customer is paying for some of it in higher prices.  Large shippers also have the benefit of being able to ship multiple orders to the same customer in a single box, so the cost of free shipping is spread out among the profit margin on many orders.  And often times, free shipping lures customers to buy more, so they can spread the cost of free shipping among the profit margin for the additional items they sell.

On the other hand, consider small businesses.  We occasionally get a comment from a customer complaining about our high shipping costs; for example, $4.25 in shipping on an order for a part that costs $2.99.

The bottom line is that for a business like ours, shipping an order for our cheapest part is the least economically viable thing we do.  It costs a certain amount for us to have an order of any size shipped; this is something we pay our fulfillment center and it doesn’t matter to them whether pick a single $2.99 item for an order or 5 items that cost $9.99; in each case, we pay the same handling fee.

Postage works similarly.  The cheapest USPS First Class Mail rate, for a 1 oz package is $2.54 (say for the aforementioned $2.99 part), and yet the cost to ship a 13 oz package (which might hold $30 worth of parts) is only $4.54, less than twice as much.  If you compare the two:

Order size Postage cost Order weight Cost per oz Cost per $
$2.99 $2.54 1 0z $2.54 $0.85
$30.00 $4.54 13 oz $0.35 $0.15

As you can see, with very small orders, the cost of postage is extremely high no matter how you measure it.

As you might also guess, there is no feasible way for us to offer free shipping on small orders (and most of our orders are for a single item); we would lose money on every order. At a certain order size, we are able to offer free shipping, and we do.  For us, this makes sense economically, right around $30, above which we offer free shipping.

So, when you consider our shipping costs, try to see the economics from our point of view.

Or, order our parts from Amazon.com and take advantage free Amazon prime shipping.  We sell almost all of our parts there too, and when we do, we also benefit from Amazon’s economies of scale.

Or, consider what other parts you might need and order more than one part at a time.  Shipping on additional parts you order will be much less relative to the overall shipping cost for the order (or free if you order more than $30 of parts).

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The economics of small business: why does that part cost so much?

By on March 6, 2016 in Interesting, Parts, RevereWareParts.com, Small business

We occasionally get a complaint from a customer about the cost of some of our parts.  A great example is the hardware set for our single screw handle.

Pan/skillet 1-screw handle hardware set (all sizes)

We charge $2.99 for this part.  Compare this to a standard machine screw, nut, and washer of approximately the same size which you could buy from any hardware store for perhaps 25 cents, or, if you bought a bunch of them together, pennies.

To understand why we charge what we do for a part like this, consider the difference between the standard 8/32 machine screw, washer, and nut you might buy from a hardware store, and our screw, lock washer, and barrel nut.  What hardware you buy from a hardware store is made by the billions.  The principle of economies of scale say that the more of something you make, the cheaper you can make it.

We suffer from the opposite of economies of scale. We make and sell small quantities of something that is not standard and that has to be made specially for our application.  In this case, the barrel nut is not something you can just order; the screw is of a non-standard length.  For each order, we pay quite a lot for the manufacturer to set up and make a run of these parts for us.

If we were to sell tens of thousands of these parts, the set up cost would be spread among many many parts, and be a small part of the cost.  But selling only hundreds or low thousands of these, it comes to dominate the cost of making the part.

So the next time you come across a part you need for a very niche application, to fix a rare appliance, or an old something-or-other, think about how many of these the seller is likely selling and whether it is something you can buy off-the-shelf at any hardware store, and try to understand that the economics of small business sometimes require that we sell at a certain price, or not sell at all.

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