Shipping markup: how to set one that covers your costs

A shipping markup is the amount you add on top of the postage price to cover everything else a parcel costs you: packaging, packing time, payment fees and the odd parcel that goes wrong. Because most of those costs are roughly the same on every parcel, the best markup is usually a fixed dollar amount, or a small percentage plus a fixed amount, rather than a single percentage. Work out your costs per parcel first, then test the markup on your smallest and heaviest parcels before you switch it on.

This guide shows how to turn your costs into a markup, with a worked example across three parcel sizes.

A markup is a price, not a profit

It's easy to add 20% to postage and think of that 20% as profit. It isn't. The markup is just the gap between what checkout charges and the postage price. Profit is what's left after every other cost of getting the parcel out the door.

If you haven't added up those other costs yet, start with our guide to working out your true shipping cost per order. The method below assumes you know two numbers:

• F, your fixed cost per parcel: packaging plus handling time
• f and r, the costs that scale with price: your payment fee rate on the shipping you charge, and an allowance for parcels you have to resend or refund

Markup isn't margin either

The second trap is mixing up markup and margin. A markup is measured against your cost; a margin is measured against the price the customer pays.

Margin % = markup % ÷ (1 + markup %)
Markup % needed = target margin % ÷ (1 − target margin %)

Markup on postage	Margin on what you charge
10%	9.1%
20%	16.7%
25%	20.0%
30%	23.1%
50%	33.3%

So a "25% markup" is a 20% margin on postage, before any packaging, handling or fees come out of it. If you're aiming for a 20% margin, 25% is the markup to use. If you set a 20% markup expecting a 20% margin, you'll fall short every time.

Three ways to mark up shipping

Markup type	How it works	Good at	Weak spot
Percentage	Postage × (1 + %)	Costs that grow with postage, like payment fees	Undercharges small parcels, overcharges heavy ones
Fixed amount	Postage + $X	Packaging and handling, which cost about the same per parcel	Doesn't cover fees and allowances that grow on expensive parcels
Percentage plus fixed	Postage × (1 + %) + $X	Both kinds of cost	Slightly more to set up and explain

The right choice depends on how wide your range of parcels is. If nearly everything you send is a similar satchel, any of the three can work. If you send small satchels and heavy boxes, the differences add up fast, as the example shows.

How to work out your markup

The break-even charge for any parcel is:

Break-even charge = (postage + F) × (1 + r) ÷ (1 − f)

The ÷ (1 − f) part covers the payment fee, which is charged on the shipping amount itself. Expand it and you get a percentage-plus-fixed markup straight away:

Break-even charge = postage × k + F × k
where k = (1 + r) ÷ (1 − f)

Then round both parts up a little to leave a buffer.

Worked example: three parcels, three markups

A made-up store sends a small satchel, a standard box and a heavy box. All figures are illustrative and exclude GST. Use your own costs and what you actually pay for postage.

Assumptions:

• Postage, say: satchel $9.00, standard box $14.00, heavy box $28.00
• F (packaging plus handling): $3.50 per parcel
• f (payment fees): 1.75% of the shipping charged
• r (reship and refund allowance): 3% of postage plus F

First, the cost of each parcel before payment fees:

Parcel	Postage + F	Allowance (3%)	Cost before fees
Satchel	$9.00 + $3.50 = $12.50	$0.38	$12.88
Standard box	$14.00 + $3.50 = $17.50	$0.53	$18.03
Heavy box	$28.00 + $3.50 = $31.50	$0.95	$32.45

Now the markup factor:

k = (1 + 0.03) ÷ (1 − 0.0175) = 1.03 ÷ 0.9825 = 1.048
F × k = $3.50 × 1.048 = $3.67

So break-even is about postage + 4.8% + $3.67. Rounding up gives a markup of 5% plus $4.00.

Here's how that compares with a flat 25% markup and a fixed $4.50 add-on. Profit = charge − payment fee − cost before fees.

Parcel	Markup	Charge	Fee (1.75%)	Profit
Satchel	25%	$11.25	$0.20	−$1.83
Satchel	+$4.50	$13.50	$0.24	$0.38
Satchel	5% + $4.00	$13.45	$0.24	$0.33
Standard box	25%	$17.50	$0.31	−$0.84
Standard box	+$4.50	$18.50	$0.32	$0.15
Standard box	5% + $4.00	$18.70	$0.33	$0.34
Heavy box	25%	$35.00	$0.61	$1.94
Heavy box	+$4.50	$32.50	$0.57	−$0.52
Heavy box	5% + $4.00	$33.40	$0.58	$0.37

Checking one row: the satchel at 25% charges $9.00 × 1.25 = $11.25. The fee is $11.25 × 1.75% = $0.20. Profit is $11.25 − $0.20 − $12.88 = −$1.83.

What the table shows:

• The 25% markup loses money on the parcels most stores send most often and makes it all back on heavy boxes, where a high shipping price is also most likely to put a customer off.
• The fixed $4.50 works well for small and standard parcels but slips into a loss on the heavy box, because the fee and allowance grow with postage.
• 5% plus $4.00 earns a steady 33 to 37 cents on every parcel. That's the point: the markup tracks the costs instead of guessing at them.

If your store sends 300 small satchels a month, the difference between the 25% markup and 5% plus $4.00 on those parcels alone is 300 × ($0.33 − (−$1.83)) = 300 × $2.16 = $648 a month.

Mistakes that quietly break a markup

Fixed costs that are per parcel, not per order. If a heavy order is split into two parcels, you pay for two lots of packaging and packing time. A fixed amount added once per order won't cover the second parcel. Check how your multi-parcel orders are charged.

Marking up the wrong postage figure. Your markup sits on top of whatever postage price checkout uses. If that figure differs from what your account is actually billed, the difference is part of your real margin, good or bad. Australia Post says prices depend on weight, dimensions, delivery zone and speed of service, and lists fees and surcharges that may apply on its business postage costs page.

Testing only the average parcel. A markup that works on your typical order can lose on your bulkiest parcels or most remote postcodes. Run the numbers for the smallest, typical, heaviest and most remote parcel. If you offer Express Post as well, run them for that service too: the gap between Parcel Post and Express Post grows with weight and distance, as our guide to Parcel Post vs Express Post shows.

Using a markup to fund free shipping. If some orders ship free, the markup on paid orders has to carry them too, and that's a separate calculation. Our guide to setting a free shipping threshold covers it.

Where minimum and maximum prices fit

Caps sit on top of the markup. A minimum price is a backstop for tiny parcels if you use a percentage markup, so nothing goes out below its fixed costs. A maximum price keeps heavy or remote quotes from scaring customers off, but every dollar it trims comes off your margin on that order. Treat a maximum as a deliberate subsidy and work out what it costs you; our guide to minimum and maximum shipping prices shows how to set both and cost a cap over a month.

Setting it up in a Shopify store

A markup on postage only works if checkout shows live postage in the first place, which on Shopify needs carrier-calculated shipping. Our guide to live Australia Post rates without Shopify Advanced explains which plans include it, and our guide to Australia Post rates at Shopify checkout compares live rates with flat and weight-based pricing.

TrkShp lets Australian Shopify stores add a percentage or a fixed amount per order on top of live domestic Australia Post rates, override the markup for a particular service, and set minimum and maximum prices. You can preview the services and prices checkout will return before you go live, which makes it easy to run your smallest and heaviest parcels through the markup you've chosen. The setup docs explain each setting. A preview is an estimate of what checkout will charge, not your Australia Post invoice, and a markup is not your profit, so keep comparing what customers paid with what you were billed.

Key takeaways

• A markup is the gap between checkout and postage; profit is what's left after packaging, handling, fees and allowances.
• A 25% markup is a 20% margin. Use margin ÷ (1 − margin) to find the markup you need.
• Break-even charge = (postage + fixed costs) × (1 + allowance) ÷ (1 − fee rate), which gives you a percentage-plus-fixed markup.
• In the illustrative example, 5% plus $4.00 earned 33 to 37 cents on every parcel, while a flat 25% lost $1.83 on a small satchel.
• Test the markup on your smallest, heaviest and most remote parcels, then review it whenever prices or packaging change.

For how shipping margin fits into the profit on a whole order, see our guide to shipping profitability. On GST, the ATO's GST guidance covers the basics, and your accountant can confirm how it applies to you.

Want to see what your markup does to real checkout quotes? Find out how TrkShp works.