How to calculate handling fees on your orders

Imagine this: You run an online store selling clothing and accessories. Because you don’t have a physical storefront, you may need to pay for warehouse management systems and storage space, branded packaging, and other expenses, which you can recoup through a handling fee. 

Handling fees can also help you optimize your operations for customer expectations like fast delivery, live order statuses, pristine packaging, and order accountability while still covering your upfront costs. 

In this article, we’ll break down handling fees, show you how to calculate them, and explain why they’re necessary. Read on to learn more about the costs associated with safe transit, high-quality packaging, inventory maintenance, and secure storage.

What is a handling fee?

A handling fee is an additional amount charged to a customer on top of the order subtotal and shipping fees. It covers order fulfillment expenses such as:

• Warehouse storage: The amount charged to securely hold your inventory and ensure product quality
• Packaging: The boxes, tape, fillers, and decorative materials like branded tissue paper, gift wrap, and stickers that make your brand stand out and protect products during delivery
• Labor: The time it takes for your warehouse team to fulfill an order

Handling fees are charged once per order, not per product, and may differ depending on whether deliveries are domestic or international. International orders might have additional expenses such as insurance or extra packaging to preserve the products throughout a longer journey.

How to calculate handling fees

Calculating the handling fee is a straightforward, three-step process. Follow the steps below and use our handling fee calculation example as a guide for determining the handling fees for your orders. 

Step 1: Determine the average time it takes to prepare for shipping

The first variable in the handling fee calculation process is the average time it takes an employee to prepare products and package them for shipping. The more efficient your warehouse team is at gathering and packaging ordered items, the lower this number will be.

Step 2: Divide the result by 60

Next, you’ll need to convert this time from minutes to hours by dividing your average preparation time (in minutes) by 60. This conversion step gives you a greater understanding of the value of your employee’s work, which is necessary for quantifying their labor when calculating handling costs.

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

After converting minutes to hours, multiply your average preparation time by your team’s hourly rate. The result is your handling fee. At this stage, you might also consider factoring in packaging costs and bundling them into the handling fee.

Handling fee calculation example

For this example, let’s assume it takes approximately 15 minutes to prepare an order. 

To convert minutes to hours, divide 15 by 60, which equals 0.25.

Assuming the hourly rate of your warehouse team is $15, multiply 0.25 by 15, which gives us a handling fee of $3.75. You should factor in packaging costs at this stage, which we’ll assume hover around $1.25. 

If your handling fees are high compared to competitors or you have had customer complaints, you may need to assess your fulfillment costs and streamline your process.

Shipping costs

Shipping costs include additional costs not associated with handling and packaging, including postage and fuel charges and other shipping-specific fees for options like expedited delivery. The cost of shipping depends on the package weight and location.

You should factor in these costs if you outsource your shipping to a carrier (e.g., FedEx or USPS). To find the ideal shipping provider for you and your customers’ needs, compare the prices and options of multiple carriers. You may also need to consider the costs of your company’s freight shipping fees when calculating your overall shipping and handling costs.

Setting shipping and handling fees

High shipping and handling fees may be enough to convince customers to abandon their shopping carts, even if your prices help keep your online business in the black.  If customers can see the shipping and handling fees at checkout, that may impact their perception of the product prices. 

While there’s no right or wrong way to include shipping and handling fees on an invoice, make sure each line item is clearly labeled. Use inventory management software to customize your invoices easily and add or remove shipping and handling fees as needed.

Benefits of charging handling fees

There are plenty of advantages to charging handling fees despite their potential impact on customer perception. These three benefits make them worthwhile.

1. Fulfillment cost recovery

A small business cannot sustain itself without covering costs. Unfulfilled business costs may require you to compromise product and fulfillment quality by using cheaper packaging and materials or making other concessions in quality. In the long run, this will hurt your business’s reputation.

Even in the service industry, which doesn’t deal with physical products, it’s common to see a “service charge” on services provided. These additional fees allow businesses to recuperate administrative, processing, or labor costs and prioritize quality.

2. Better pricing breakdown

Customers want simple pricing breakdowns — if they have to work to figure out the cost of items, they’re less likely to purchase. Without handling fees, you will need to add the costs of packaging and fulfillment to the final price of each product. 

By adding the handling fee as a line item separate from the subtotal, you can simplify the pricing for single items, positively impacting your reputation and brand trust.

3. Upsell and cross-sell products

When handling fees are applied to entire orders rather than individual items, businesses can sell more and increase their overall profit margins. Order minimums for free shipping and handling can encourage customers to increase the amount they purchase — especially because costly shipping can be a deal-breaker.

Use a customer’s order history to encourage them to meet shipping minimums. Recommend specific products or items they’ve previously viewed to upsell and cross-sell simultaneously. They might spend more to get free shipping, which can raise your profit margins.

Use Cin7 to fulfill your orders with ease

After calculating the handling fee, start incorporating it into your invoices. Use Cin7 and its integrations to create invoice templates designed to automatically add or remove handling fees for every online order. 

Cin7 has several other features that streamline order processing and fulfillment, such as pick-list printing and batch tracking. 

Interested in setting up your business for multichannel sales and long-term success? Book a free Cin7 demo with our experts now.

FAQ

Below, our experts provide answers to your common questions about shipping and handling fees.

Who pays the handling fee?

The customer pays the handling fee. These fees are included on an invoice in addition to the order subtotal and shipping expenses.

Is the handling fee the same as the delivery fee?

The handling fee is different from the delivery or shipping fee. These fees can appear as a single line item on an invoice but are calculated differently. Handling fees cover an order’s preparation costs, while delivery and shipping fees cover costs associated with a package’s delivery through a carrier.

Should I charge a handling fee for my online store?

Yes, you should charge a handling fee for your online store. Your time is valuable, and you should include the expenses associated with packaging materials in the cost of each order.

How much should a handling fee be?

A handling fee should be your warehouse team’s average preparation time (in hours)  multiplied by an employee’s hourly rate. For example, if your prep time takes 15 minutes and your hourly rate is $15, you can calculate the handling fee like this: 15 minutes/60 = 0.25; 0.25 x $15 per hour = $3.75 in handling fees.