05 October, 2023

How to calculate handling fees on your orders

When ordering online, customers have a lot of expectations. They want faster delivery, secure packaging, live order status, and, most importantly, they expect to receive the correct order.

This is even more important now that shipping has become so expensive. According to the United Nations, container freight costs rose five times during the pandemic. While freight has stabilized some, the freight index is still roughly $400 more per container than it was in 2018.

In order to meet customer expectations without going broke, you’ll have to optimize your operations. Shipping fees cover transportation, but what about the cost of packaging items so they don’t break in transit? Or the cost of safely storing and maintaining inventory in your warehouses?

That’s where handling fees come in. In this article, we’ll break down handling fees, show you how to calculate them, and explain why they’re necessary.

What is a handling fee?

A handling fee is an amount you charge a customer in addition to the order subtotal and the shipping fees. These fees cover fulfillment expenses such as:

  • Warehouse storage: While this is a fixed cost, you can help cover some of your storage expenses with your handling fees. After all, it costs money to securely hold your inventory and make sure there is no quality deterioration.
  • Packaging: This includes boxes, tape, and protective material. It also includes other minor details you may add to make the brand stand out, such as branded tissue paper, gift wrap, and even stickers.
  • Labor: The time it takes for your warehouse team to fulfill an order.

Helpful tip: Handling fees are charged once per order, not per each product in the order.

Handling charges may differ depending on whether deliveries are domestic or international.

This is because international orders might have additional expenses such as insurance or extra packaging to preserve the products through a longer journey. USPS provides a good breakdown of how shipping internationally works, from packaging requirements for different countries to the packing sizes accepted, and what items can be shipped.

How to calculate handling fees

Calculating the handling fee is a pretty straightforward process. You just need a few numbers from your warehouse team and some basic math to figure it out.

[(Time in minutes/60) * Hourly labor rate] + Packaging materials = Handling fee

If you choose to recoup your warehouse storage as part of handling fees, set a rate per order and add that to the total in the formula above.

Handling fee calculation example

Let’s look at an example calculation and then break down the details of how it works.  For this example, let’s assume the following numbers.

  • 15 minutes to prepare and package the order.
  • $15 hourly rate for your warehouse worker.
  • $2 in packaging material costs.
  • $2 per order warehouse storage recoup (optional).

Your calculation for the handling fee would be:

[(15/60) * $15] + $2

[.25 * $15] + $2

$3.75 + $2

$5.75 handling fee

Optional warehouse storage recoup:

$5.75 + $2

$7.75 handling fee, including the storage recoup.

Step 1: Determine the average number of minutes it takes to prepare each item for shipping

First, you need to determine the time it takes for your employees to prepare a package for shipping. This includes the time needed to pick up the ordered items from the warehouse shelves and package them.

The more efficiently your warehouse team works, the lower this number will be. Your warehouse layout, inventory management system, number of items in the order, type of item handling required, and the type of packaging needed will also impact how much time it takes to pick and prepare an order for shipment.

Step 2: Divide the result by 60

Once you have determined the time to pull and pack the order, you need to divide that by 60 to convert the time from minutes to hours.

For our example, divide 15 minutes by 60 to get .25 hours.

Step 3: Multiply the result by the employee’s hourly rate

Next, we need to figure out how much that time costs. If you have one employee picking and packaging an order from start to finish, you can use that employee’s hourly rate. However, if orders are worked on by multiple people, you can take an average hourly rate for your warehouse team. For our example, we’re using $15 as the hourly labor cost.

Multiply that hourly rate by the time in hours to get your labor costs for picking and packing the order. In our example, that is $15 * .25 for a total of $3.75 in labor costs.

Step 4: Add packaging costs

Labor cost isn’t the only cost that needs to be considered. It’s a good idea to recoup your packaging materials cost as well. For small items, it might only be a small shipping box, bubble wrap, and some tape, but for larger items, you might need wood pallets, custom boxes, and foam padding.

For our example, the items are small and use simple materials, so we used $2 in packaging material. Add that cost to the labor cost to get a total handling fee. In our example, that’s $3.75 + $2 for a total handling fee of $5.75. If you choose to add a fee to recoup some storage costs, add that number ($2 in our example) to the $5.75 for a total of $7.75.

If your handling fees are high compared to competitors or you have had customer complaints, you may need to find ways to reduce your costs. For example, streamlining your processes or finding lower-cost suppliers of shipping materials.

Shipping costs

Shipping costs go hand in hand with your handling costs but are usually charged separately from handling fees. Shipping costs include the costs involved in moving the item rather than preparing it for shipping. Postage, fuel charges, and surcharges make up shipping costs.

The final cost of shipping depends on many factors, including the package weight, size, destination, and any special handling required. If you outsource your shipping to a carrier like FedEx, UPS, or USPS, they may charge additional fees for pickups and other services as well. Be sure to compare prices frequently to find the best shipping provider for your needs.

Setting shipping and handling fees

When setting prices that will leave room for profit, remember that high shipping and handling fees may be enough to convince customers to abandon their shopping carts. A 2022 Statista survey found high shipping costs were the leading reason shoppers abandoned their shopping carts, with 48% of people leaving after seeing the shipping price.

To avoid cart abandonment at checkout, some sellers roll their shipping and handling fees into the overall item price instead of adding it as a separate line item on the invoice. However, including these costs in the item price could make your products appear more expensive than your competitors.

If you list shipping and handling as a line item, make sure it’s clearly labeled on the invoice. Cin7 inventory management software offers various integrations that allow you to customize your invoices easily and add or remove shipping and handling fees as needed.

Benefits of charging handling fees

Charging for handling fees can be a good business move. There are a number of benefits you may see when implementing these in your company.

Fulfillment cost recovery

If you aren’t covering all of your costs, your business won’t be able to turn a profit. This includes the fulfillment costs that your inventory incurs.

If your handling fees don’t cover all of your fulfillment costs, you might need to compromise on quality by using cheaper packaging or making other concessions in quality. In the long run, this will hurt your business’ reputation.

At the very least, you need to raise prices enough to cover your expenses, or you can look for ways to cut costs, like shopping around for a new shipping supplies provider.

Of course, if you don’t charge a separate handling fee, you can always add in these costs to the final price of your products. While this is simpler, it doesn’t explain your costs as clearly as an itemized report would. Most companies find that adding the handling fee as a separate line item from the subtotal helps simplify pricing for single items.

Upsell and cross-sell opportunities

Handling fees apply to the entire order rather than individual items. This opens up opportunities to sell more and increase your overall profit margin.

Customers love free shipping — it can even be a deal breaker — but one that can make you money too. According to Shopify’s data, customers spend an average of $22 more when free shipping is offered.

You can set up a minimum order amount to make orders eligible for free shipping and handling. This way, you can encourage customers to spend a bit more to qualify.

Say a customer has a cart worth $30, but an order is only eligible for free shipping and handling once it totals $40 or more. Customers are more likely to spend an additional $10 to get that free shipping than they are to pay a shipping fee to have their $30 order shipped.

To encourage customers to spend more, use their order history to recommend specific products they might be interested in purchasing. They might buy something else and spend more to get free shipping, making the customer happy with perceived savings and raising your profit margin.

Final Thoughts: How to calculate handling fees on your orders

After calculating the shipping and handling fee, you can set up your invoice template with one of the integrations offered by Cin7 inventory management software, such as QuickBooks Online, which will automatically add the fee to each online sale.

Cin7 has several other features that streamline your order receiving and fulfillment process, such as printing pick lists or batch tracking. Cin7 will help you set your business for multichannel sales and long-term success.

Are you interested in trying out Cin7 for your business? Book a free demo with our experts now.

Frequently asked questions

Who pays the handling fees?

The handling fee can be paid for either by the consumer or the company. Keep in mind, however, that by paying the handling fee yourself, you’ll reduce your profit margin in the process.

Is the handling fee the same as the delivery fee?

No! The delivery fee covers the costs associated with getting the item to the customer. Things like freight or transportation and often mail are lumped in this fee as well. The handling fee, on the other hand, covers the wages and any materials used to ship the item.

Should I charge a handling fee for my online store?

In general, yes. Handling fees help you ensure you’re pricing your items at a price point that’s sustainable. Not charging a handling fee means you risk charging too little and not being able to cover the costs of your business.





Stop managing your inventory.
Start connecting it.

You might also like

What is Pull Strategy and Does it Benefit eCommerce?

Inventory is a delicate balancing act, and eCommerce doesn’t make things any easier. Carrying too much stock drives up your costs in warehousing and expiration of goods. Carrying too little loses you sales. Getting inventory just right is the Goldilocks tale of commerce, which is why so many strategies have emerged over the last 50 […]

Will Amazon New Zealand Be Next?

Amazon took significant steps recently to get up and running in Australia. Now, word on the street is the eCommerce giant has set its sights on New Zealand. It may not be a question of if but when the company launches Amazon New Zealand. Amazon Activates in Australia Amazon has now leased a distribution center […]

7 Advanced Technologies That are Redefining eCommerce

The global pandemic has changed our way of living, shopping and socializing. We are compelled to shop digitally for most things and mobile phones have made that much easier. Some online sellers have benefited from the global pandemic. Existing eCommerce businesses are looking forward to infusing their sites with the latest technologies and tools. Startups […]