On my overly cluttered desk is a small packet of about a hundred stickers. I had originally commissioned a data related logo and printed a bunch with the intention of probably selling a few as well as giving them away at events. Then COVID came along and killed the idea of events. So, I started looking into just what it would take to send these things to people and thus started a hilariously long journey into why I’m quite wary of working with physical goods distribution.
The up-front fixed costs costs were easy. There was an art commission fee to hire a designer to create the logo for a flat $400. If I had any artistic skills at all this would’ve just cost me time, but everyone can agree that would be a visual disaster. The world is better off this way.
The variable costs start off simply. The initial print run of 100 stickers came out to about $90 delivered to my door, so 90 cents a sticker. Doing a bigger run (200, 500, etc) would have brought the unit costs down quite a bit but luckily I didn’t do that or else I’d have even more stickers on my desk right now.
Next is figuring out the cost of shipping, and that’s where things get… complicated. My previous experience with shipping goods en masse comes from handling rewards from Kickstarter campaigns for a game company, so I knew up front that this would likely dwarf all other costs. Moving things around gets EXPENSIVE, even if you’re talking about a sticker that weighs roughly 1.5 grams without any envelopes and cards.
From my experience, shipping goods is where KS projects that have otherwise overcome all the hurdles of marketing and production often go to die. So today’s post is something of a journey into the misadventures surrounding getting stuff into people’s hands.
Let’s elaborate on that “Shipping is where KS projects go to die” comment
If you look into postal rates today in the US, retail 1st class letters up to 1 ounce in weight cost $0.60. We’ll talk about commercial rates later. Sending overseas, the same item is $1.40, a bit over double. The price for international also increases faster than domestic shipping when size or weight increases, but for stickers in low volume it’s not important.
If everyone buying things simply paid their own shipping costs with every order, then there wouldn’t be any problems. You’d just pass every cost onto the purchaser transparently and be done with it. There’s two non-obvious problems that make taking this route.
First, shipping calculation is a hard problem. Rates are changing constantly, there are multiple carriers with different tiers of service, rules vary, you need to keep track of weight and package dimensions for shipping in your inventory tracking to get accurate output. The fact that there are lots of vendors and software packages aimed at solving this problem for merchants is a clear indication that there’s a big market of people willing to pay to deal with it. For a small operation, like a single dude with a stack of stickers on their desk, it typically doesn’t make financial sense to use any of these options.
The other problem is that customers have very much gotten used to “free/flat fee shipping”. Many sellers feel that offering free shipping helps them compete, or use it to induce sales. When I worked in e-commerce, I’ve done analyses and tests to see that shipping incentives typically do affect customer behavior.
There’s also a customer relationship angle for brand relationships, especially niche brands like indie games. Why “punish” a fan of your products in Indonesia with a $35 shipping bill (plus any VAT or import duties that might be involved) compared to someone in the US paying $12? Due to cost of living and currency exchange rates, shipping costs on top of an already expensive item can become a deal-breaker.
So “simplifying” shipping fees is a potential sales strategy. There’s lots of ways to do this, but they boil down to the same form — the costs of shipping are shifted into the price of the item and everyone pays for shipping to everyone else in aggregate. The seller makes an estimate as to how much shipping will cost on average and increases the price/fees accordingly. If you dive deeper into the accounting, the people living closer to the seller, who would’ve had lower shipping fees, are partially subsidizing the shipping costs of people living much farther away. And if you get very few expensive international orders, it can actually generate a bit of extra revenue.
But the whole thing hangs upon one critical parameter: what’s the average price of shipping? This estimate has to be made early on in setting the price of the widget because the cost is now included in the price and people generally don’t like adjusting prices often. Unless you’ve done this before and have historic sales data, there no guidance as to what that value will be because it hinges on one very important factor — how much international shipping are you going to do?
For some of the Kickstarters I worked with, the ratio was very close to 50/50 - some were even majority international. If we return to our sticker situation from the beginning, a 50% international ratio would make the average cost of shipping $1, that would be a 66% increase over a purely domestic shipping campaign. Plus, remember how international rates increase faster as a function of weight and size than domestic ones? Past a certain easily-reached point, the average costs can become double or triple the domestic rate. I’ve seen many projects come to this realization far too late and have to desperately ask for more money to cover shipping costs after burning through what little operating margin they had.
Note for completeness: To make matters “more fun” not all destinations are considered equal and some cost more than others. Many people simplify the problem by just assuming everything is being sent to the most expensive tier of countries. There’s also interesting pricing strategies like using flat-rate packages (both domestic and international) if your stuff fits within certain size/weight parameters. There’s services where you can bulk ship items to a distribution center in another country (for example somewhere in the EU), and then take advantage of cheaper local shipping rates there. There’s of course many other interesting problems and solutions. This is a VERY complex space and people spend serious effort optimizing these strategies at scale.
But just because you manage to price out and stick your item into the mail, it’s not over.
Then there’s loss and damage
All sorts of fun things can continue to happen. Physical life is never this simple. Some percentage of items will get lost or damaged in transit and you’ll have to send a replacement or otherwise deal with issues.
Damage occurrence rate varies wildly and seems to depend on the individual country’s postal service. Some postal services are more prone to damage (or work stoppages) than others. There are also places where expensive items in packages can just “disappear” from the mail stream at various points. The postal system in the US is relatively trouble-free, so you wind up seeing this cost increase as the international ratio ticks up. Even if you have insurance on the package and can recover money damages, claims can take time or are a lot of hassle and you still are out a stock item. Unless you’re okay with disappointing customers, you have to maintain a bit of extra stock for these situations (10%ish is a good start).
Other times, packages get returned intact but it still costs money because they took a trip around the mail system. This is typically because someone made a mistake with their address, moved, or the mail carrier made an error. That customer will likely want their item sent to a new addressed and someone will have to pay shipping again. Another common problem is someone objecting to paying their country’s import duty on their purchase, so their package gets sent back and they demand a refund. Someone has to absorb the cost of the shipping too. Handling all this is up to your own policies.
But what about commercial rates?
While the retail 1st class letter rate is $0.60, there’s a better commercial pre-sorted rate of $0.56 to $0.45 available for commercial senders depending on a lot of specific details. The problem is that to even qualify for a better rate you need to first send enough mail — 200 pieces for the type we’re interested in. But you also need to sort the mail pieces yourself — essentially grouping mail by zip codes together and placing them into bins or bags for drop-off.
Obviously, our 100-sticker operation doesn’t qualify for any of this, nor are we sending all 100 at once. To bridge the gap, there are actual mailing services out there that can do the sorting as well as send your mail out under their account along with other customer’s mail. These services charge a fee, but will get you access to the cheaper commercial rates. With enough volume, it’s cost effective to do so, but it’s not immediately obvious whether our project would benefit from using one of these services.
Eventually, if you wind up sending enough things, you can get special discounted rates from the private carriers like UPS/FedEx that are significantly cheaper than retail. It’s enough that certain businesses can generate most of their profit off the difference in collected and paid shipping fees. The benefits of economies of scale are huge in this space, and is also why it is very hard for a small business to compete against the larger retailers in high-volume low-margin markets.
Back to sticker math
As mentioned, it cost about $90 to have 100 stickers mailed and delivered. We can find the smallest envelopes that fit in the mail stream, $8 for 100. So the unit cost of mailing a single sticker is $1 plus shipping cost. Let’s just assume, with no real justification, that shipping out stickers will average roughly $0.80 each send, and people will order 1 sticker at a time for simplicity’s sake. So a reasonable estimate of the average material cost of a single sticker is $1.80. This of course does not include any of the time and labor involved in buying stamps, stuffing envelopes, writing address labels (because we didn’t budget for print-out labels), nor multiple trips to the post office to drop off orders as they come in over time.
If we decide to give all the stickers away for free, it would cost us $180 in total to do so. If we sell every sticker for $5 each (which feels a bit high but not outlandish?), we stand to potentially earn $320 from the project, minus credit card processing fees and handling any lost items. There’s some extra profit involved if a customer orders multiples.
That’s a lot of work and not that much motivating upside!
Hence… the stickers sit on my desk until I find an occasion to give them away in person or something. There’ll probably be more joy overall this way.
Standing offer: If you created something and would like me to review or share it w/ the data community — my mailbox and Twitter DMs are open.
New thing: I’m also considering occasionally hosting guests posts written by other people. If you’re interested in writing something a data-related post to either show off work, share an experience, or need help coming up with a topic, please contact me.
About this newsletter
I’m Randy Au, Quantitative UX researcher, former data analyst, and general-purpose data and tech nerd. Counting Stuff is a weekly newsletter about the less-than-sexy aspects of data science, UX research and tech. With some excursions into other fun topics.
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