How to Recover Freight and Delivery Costs from B2B Customers

A supplier recovers freight by pricing delivery as its own line, set by what each order costs to deliver, and applying the same rule to customers in the same position. Free-freight offers and flat delivery charges recover less each time carrier rates rise, because the thresholds stay where they were set.

Where does freight recovery break down?

Five places where freight recovery can break down:

The free-freight threshold was set years ago and did not move when carrier rates rose.
One flat charge covers every order size and every delivery zone.
Freight sits inside the list price, so every discount cuts into it.
Sales staff waive the charge to win an order and nobody records the waiver.
Urgent and split deliveries are charged as standard deliveries.

Each one is a decision someone made. Pricing Insight's methodology treats freight and terms as one step between the list price and the pocket price, because a supplier cannot see what it keeps on an order until that step is measured.

What does a small order cost? A worked example

This example is hypothetical. The inputs are stated so you can replace them with your own.

An order is worth A$520 and earns a 22% gross margin, which is A$114.40 of gross profit. It costs A$45 to deliver. After delivery, the order earns A$69.40, or 13.3% of the order value. The 22% margin the price list implies has become 13.3%.

At a 22% gross margin, an order must reach about A$205 before its gross profit covers the A$45 delivery cost. A business that offers free delivery on orders above A$500 may never see that loss in its margin report if freight is booked in a different cost line.

What are the five changes that restore recovery?

Set the delivery charge by zone and order size, from the carrier cost you pay today.
Move the free-freight threshold, or tier it, so that it covers the cost of the orders it applies to.
Show freight as its own line on the invoice, so a discount on product does not reduce it.
Decide who may waive a charge, and record every waiver with a reason.
Review the charges whenever the carrier rate card changes.

Customers will respond differently. A customer with few alternatives and a regular order pattern will accept a change that a customer buying once a quarter will not. Set the change customer by customer, according to each customer's pricing power, and protect the accounts where the risk of loss outweighs the freight recovered.

How do you measure freight recovery?

Freight recovery rate is freight billed to customers divided by freight paid to carriers. Calculate it by customer segment and by order size. Compare the segments, and look first at the smallest orders and the longest delivery zones.

The paper The Price You Actually Keep sets out the whole margin waterfall, and How to Pass Through Cost Increases Without Losing Trade Customers covers recovering supplier cost increases.