3 Strategies for Reducing Shipping Costs
As you scale your DTC brand, you’re bound to find out that –
You spend a ton on shipping costs.
Next to COGS, shipping is the cost category that DTC brands spend the most money on.
What does this mean for you?
Some of your biggest margin improvement opportunities lie within your ability to improve shipping costs.
This week I’m going to give you 3 strategies for reducing shipping costs.
Implementing these will drive higher margins and healthier cash flow, which means more fuel for scaling your brand!
Strategy #1 – Shipping Goods via Cheaper Transit Methods
Strategy #1 is to ship your inbound goods via cheaper transit methods like rail and ocean. These transit methods can result in huge cost savings relative to trucking and air freight.
That being said, these cost savings need to be qualified by an important point:
These transit methods are cheaper, in large part, because they are slower.
Longer transit times means you must place bigger orders to avoid stock outs.
Placing bigger orders can mean a reduction in cash flow, since more cash is tied up in bigger orders that are in transit for longer.
The solution?
Get the right debt facility in place to finance your larger, slower-moving inventory levels.
If the debt’s cost of capital is less than the cost savings realized by lowering your shipping costs, utilizing debt to execute this strategy may result in an overall reduction in total costs, thus improving your overall profitability.
This is where a CFO’s support can really help.
A properly trained CFO can help you assess whether or not:
Debt is needed to execute a switch to cheaper, slower transit methods.
Taking on debt to execute this strategy will result in an increase in bottom-line profitability.
Strategy #2 – Shop the Market for Different Options
This strategy is straightforward and simple, but I cannot stress enough how important it is.
Freight forwarding, small parcel shipping, and freight shipping are highly competitive, commoditized marketings.
As a result, vendors in these markets are always fighting to maintain and increase market share.
Which means –
If you know how to negotiate, you’re in the driver’s seat!
You should revisit and shop the market for different shipping vendor options at least annually.
The more options you have, the more leverage you have.
The more leverage you have, the more likely you are to score a cost reduction.
Here’s a quick pro tip on this topic:
If your brand is growing quickly – pitch your shipping vendors on formulating your rates based on forecasted shipment volume, not historical shipment volume.
The higher volume oftentimes will result in even better shipping rates.
Strategy #3 – Reassess and Optimize Fulfillment Points
Every year you should reassess where your fulfillment centers are located and change your fulfillment points to optimize outbound shipping cost.
Outbound shipping cost is optimized when, on average, your fulfillment points are located as close to the end customer as possible.
Now keep in mind – this is a moving target.
You will never be 100% optimized.
It’s not possible.
But that’s not the point.
The point is to consistently reassess where your demand is geographically concentrated and make sure your fulfillment points are as close as possible to those concentrations.
This will drive down the average zone of your outbound shipping, which will drive down your average shipping cost per order.
The result?
Juicier margins!
Which means juicier cash balances!
Fulfillment network analyses are complicated, so I recommend soliciting the help of your 3PL.
Many 3PLs have the ability to analyze and recommend optimal inventory balancing across their fulfillment network.
Just remember – this is not something you can “set and forget.”
You should reanalyze it regularly to make sure you are accounting for shifts in demand concentration over time.
Summary
Reducing shipping costs is crucial for improving margins and cash flow.
Today I’ve offered 3 strategies for achieving this goal:
Shipping goods via cheaper transit methods such as rail and ocean.
Regularly shopping the market for different shipping vendor options.
Reassessing and optimizing fulfillment points.
By consistently implementing these strategies, your DTC brand can improve profits and cash flow –
The financial fuel needed for scaling!
I hope these tips were helpful.
Until, next time – scale on!
