How to Calculate Handling Fees on Orders
As a customer, I’m sure you dread seeing “shipping & handling fees” in a commercial invoice. Shipping fees can be calculated with certainty but what about handling fees? What exactly are these opaque costs that are levied on customers? And why do customers pay them at all? Let’s explore the mysterious world of handling fees and charges in this blog post.
We’ll firstly cover what is meant by handling fees and charges. This includes examining various types of handling fees. Next up we’ll see why sellers levy these fees for various reasons. Finally, we’ll run through a couple of examples to see how you can apply them in order, purchase, and inventory management app such as EMERGE App.
What is a Handling Fee?
As the name suggests, a handling fee is a charge levied on a customer to cover the seller’s fulfillment costs. As such it is typically added to the total cost of the products and shipping fees. Some businesses even lump handling and shipping fees together into a vague “shipping & handling” cost. Other add handling fees to the “shipping” cost.
Regardless of whether you add handling fees and charges alone, together with shipping costs or absorbed into shipping costs, the end result is the same. The seller is passing on the costs of fulfilling the customer’s order to the customer. These costs can include storage, packing and mailing costs. Time and labor costs are also factored in.
Why Do Businesses Add Handling Charges At All?
At this point in time, you might be getting into a huff about paying handling fees and charges yourself. Why should businesses pass on the cost of packing and delivering an order to you? You could very well take your business elsewhere to another seller that does not levy handling fees. Well, let’s briefly see why handling fees and charges are here to stay.
Let’s jump to the service industry for a while. Yes, that industry does not deal with physical products but provides services to businesses and consumers. And within the service industry, it’s very common to see a “service charge” added to whatever service you are purchasing. It’s also their way of recuperating administrative or processing costs from a customer.
Some examples might include a service fee added to concert tickets to cover the cost of providing security at the venue as well as mailing out the physical tickets to you. Another common one is the service charge added to meals and drinks at food & beverage establishments. This goes to cover the cost of providing fine glassware, serving and storing the wine, for example.
A big point to note here is that tips and service charges are not the same. Tips go directly to the employee providing the service. Service charges are collected by the business who may then share a portion of it with staff when team targets are met. Tips are discretionary but usually expected in certain countries such as the United States.
What Can Customers Do About Additional Fees and Charges?
As consumers, you can shift and bring your business elsewhere. However, it may not be easy if the product or service is not easily substituted or found elsewhere. Few or no other business may not provide the same product or level of service. So, there’s very little a customer can do in some cases but to simply pay the handling or service charge expected by the business.
Plus, additional fees and charges come in all sorts of disguises and names. It is common to see a “cake charge” in a restaurant. This is for customers who are bringing their own birthday or celebratory cakes. It is usually levied per cake or per person. The charge covers the business’s cost of provided napkins, plates and forks for the cake. And the opportunity cost of not selling a cake in the first place!
In this example, there’s not a lot you can do. Assuming that you’ve enquired about any cakage charge when making the reservation, you have two choices here. And ultimately your decision depends on which one is the most cost-effective. Firstly, you can pay for the cake charge per person. However, you might find that it’ll quickly add up. Secondly, you can order a cake through the restaurant. On the other hand, they might not have what you want.
There’s a final thing you could do, of course. And that’s to protest the cost of additional fees and charges in the first place. However, this would most likely be met with stone-cold silence. Remember, businesses levy these discretionary charges in the first place to recoup costs and expenses they may not otherwise cover through day-to-day dealings.
Types of Fees and Charges For Businesses
1. Handling Fee
The number one additional fee or charge levied by businesses is the dreaded “handling fee”. This is typical for B2C or B2B businesses that run on razor thin margins. You’re simply passing on the cost of fulfilling these orders to your customer. It wouldn’t be viable for you to absorb the cost of packing, preparing and shipping per order if you’re losing money on each order.
Your only other alternative as a business is to simply use cheap or minimal packaging at all. However, as you know, flimsy or poorly packed goods means damage, returns, and exchanges. Plus, a very angry and inconvenienced customer. So it’s best to pack items sensibly depending on whether they’re being delivered locally or internationally.
2. Shipping Fee
Number two on the list is self-explanatory, “shipping fee”. Most customers around the world are drunk on free shipping. In fact, we expect and demand it if we meet a certain MOQ or value for the order. However, small and medium-sized businesses cannot afford to absorb free shipping unless it is delivered nationally or if a minimum order value is met. Larger businesses clearly benefit here because of economies of scale.
3. Administrative Fee
Another fee that rates third in the list is the vaguely worded “administrative fee”. This is a business’s way of telling you how inconvenient and time-consuming it is to process your request or order using their office clerks. This is much disliked for the same reason as handling fees. Why should customers pay for something that could feasibly be automated or expedited using office technology?
How to Calculate Handling Fees
1. Calculating Handling Fees
Let’s start with handling fees. This is usually a combination of the human labor needed to pick and pack an order together with the cost of packing materials. Let’s say that you’re paying the minimum wage of $7.25 per hour in the States for your part-time warehouse staff. And you have a crew of 2 staff in your warehouse to receive and fulfill orders. So that’s $14.50 an hour to keep your warehouse running.
And from your historical sales records, you find that they pack an average of 10 orders an hour. This is roughly 6 minutes spent picking and packing a typical order. Some might be more, some might take less time. But that’s your hourly average. So that works out to be the labor cost of $1.45 per order.
Next up is the cost of packing materials itself. Cardboard boxes are getting more expensive because they’re recycled. And biodegradable wrap isn’t cheap either. On average a box is $1.50 per order and nice packing wrap is another $0.50 for the amount needed. This works out to be $2.00 for the packing materials alone!
In total, you’re looking at $1.45 for labor plus $2.00 for packing materials. Or a grand total of $3.45 per order. You would want to charge a rounded-up $3.50 per order as “handling fees”. Astute readers will note that this doesn’t include the cost of shipping or fulfilling the order itself. We’ll explore this in the next step.
2. Calculate Shipping and Handling Fees
Here’s we’ll calculate fees that are typically abbreviated as “S&H” in invoices. This is simply the cost of handling plus any shipping fees for the order. Shipping fees may include the cost of a national postal carrier, courier services or an in-house team. Let’s explore how much each shipping option will cost you.
For most businesses, it makes sense to offer free standard shipping once a pricing tier is met. Any costly or faster shipping method should be paid for by the customer. After all, you’re footing the shipping bill as goodwill and a perk for the order. You should not have to pay for more expensive forms of shipping if a basic option is included.
But for those orders that don’t meet a minimum order amount, say $60.00 or $100.0, you will need to levy a shipping charge. Let’s say that it costs $4.50 to send a typical box around the States. You’ll need to pass this postage cost to the customer as you’ve already included the cost of the box and packing materials in the handling charge.
But what if the customer wants a quicker method of shipping? You simply pass the cost of courier shipping to the customer. Let’s also say it costs $19.95 for 2-3 day delivery in the States. Or $39.95 for international orders that take 5-7 working days to deliver. You will need to add these to the invoice as these costs are too large for a business to absorb.
3. Another Way of Calculating Handling Fees
As your sales volume grows, you want another way to calculate handling fees per order. It can be overwhelming for you or a clerk sift through orders and apply the “correct” fee when you have hundreds of orders waiting to be fulfilled. In this case, it’s better to apply handling fees as a percentage of the order.
Back to our earlier minimum order example. Let’s say that you demand a minimum of $60.00 worth of orders before free shipping applies. We should use this as a price floor for your handling charges. This means handling fees cost $3.50 for orders of $60.00 and above. Anything else above this will attract a percentage charge for workflow efficiency.
From experience, you see that large orders of $120.00 typically take twice as long to pick, pack and confirm. And about twice as much packing materials are used to ship them. So that’s $1.45 x 2 for larger orders. And about $4.00 for packing materials being $3.00 per larger box and $1.00 for packing wrap and foam peanuts. This makes a total of $6.90 for handling fees alone.
Hence, applying a percentage formula, you want the handling fees to be about 5.75% for orders above $60.00 in value. It currently costs about 5.80% in handling fees to process orders of $60.00, so your percentage formula is about right and it should scale with the order value.
4. How Do I Add Shipping and Handling Fees?
I guess you’re wondering now, how do I automatically apply this formula to the orders waiting to be fulfilled? It’s easy in EMERGE App. You can define any additional charge as a fixed or percentage value.
A percentage is far more efficient for your workflow as it applies regardless of whether your order is $60.00 or $600.00. For a handling charge of 5.75%, you want to add it as a percentage charge in EMERGE App. And to use it you simply select it from the Additional Charges button in a sales order.
Some Shipping and Handling Scenarios
Now for some simple examples to illustrate what we’ve just covered with calculating shipping and handling costs per order.
1. Order With a Minimum Value
First up, a straight-forward order from a customer that meets your minimum order value of $60.00. Here, it’s simply just the percentage handling fee added to the invoice. 5.75% of $69.95 is $4.00.
Order $69.95 Handling fee $4.00 Total $73.45
2. Order Below Minimum Value
Secondly, a customer places an order with you that just doesn’t quite meet your minimum order for free shipping. Hence you need to add $4.50 for local shipping on top of your minimum $3.50 handling charge for packing the order. The handling fee needs to be added as a fixed additional charge in EMERGE App as a percentage of the order will fall below your minimum handling fee of $3.50.
Order $49.95 Handling fee $3.50 Shipping fee $4.50 Total $57.95
3. Large Orders
Next up, a large order that needs to be delivered with next-day shipping. Do be careful here that a larger order generally means a larger box and more packing materials. It doesn’t always need to be the case as some small items can be high value as well. But they will need extra protection packing material to avoid damage during shipping.
The handling fee, in this case, is 5.75% of $149.95, or $8.60.
Order $149.95 Handling fee $8.60 Shipping fee $24.95 Total $178.40
We’ve covered what is meant by shipping and handling fees that often pop up on invoices. And we explored why businesses levy these discretionary charges and the little that customers can do to avoid these charges. Finally, we illustrated how to calculate handling fees and apply them in different order scenarios.