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Determining ROI of Shipping Insurance

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Based on your analysis of your items’ value and risk factors—and assuming you have historical data on lost/damaged/stolen orders—it’s straightforward to develop a business case for adding supplemental insurance. You can perform this analysis for all of your shipments, for certain categories, or on item-by-item basis (assuming, of course, that any items you’re looking at are insurable and above the included insurance threshold of the carrier(s) you use).

The equation your business case needs to solve for is fairly simple; if:

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If the average cost to insure an item is less than what you spend replacing lost, stolen or damaged items … then you should include insurance to mitigate the risk.

For example, let’s say you sell high-end headphones with an average order value of $200, and ship 100 pair per month, of which one (1) pair never makes it to the customer’s door.

1/100 X 200 = 2, so if it costs less than $2 on average to insure an order, it makes business sense for you to buy the insurance. And, in fact, looking at ShippingEasy’s Shipsurance rates for this declared value, the cost of supplemental coverage is less than $2 for all domestic shipping scenarios.

This is the most basic way to do the business case for shipping insurance.

A more rigorous analysis

  • Look at potential packaging improvements (as mentioned in the previous Risk section) to reduce the incidence of theft or damage. Factor in the cost of putting branded boxes inside another box (or reboxing), and/or putting small expensive items like jewelry in bigger outer boxes to obfuscate the precious contents
  • If you have data on destination as well as number of lost/damaged/stolen shipments, determine if there are lower-risk destinations where insurance is not cost-justified; be sure to factor any additional operational costs necessary to support conditional inclusion of insurance based on address—and the cost of monitoring and maintaining this process.
  • As discussed in the previous Value section, you might be able to get by with a lower declared value, assuming you are willing to directly replace the product; in this case, don’t forget to include in your terms and conditions that in the case of loss there will be no refund, only replacement.
  • Determine whether some of the costs of supplemental insurance can be passed on to the customer by increasing either item prices or—if you charge for them—shipping and handling charges.
  • Consider letting the customer decide to add—and pay for—supplemental insurance; however, this brings with it the risk that customers who opt out will still hold you accountable, with all the negative implications that has on repeat purchasing and ratings/reviews.

 

Next: Which is the Best Shipping Insurance Provider?

 

This article is an excerpt from The eCommerce Seller’s Guide to Shipping Insurance

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