Owning an ecommerce website means that you have to ship your items a lot. The Internet is an amazing platform for reaching people all around the globe. But you can only do that if you ship your items. Because of this nature of ecommerce marketing, you need to know how you’ll ship your items to your customer. One of the most common types of shipping is FOB Shipping.
What is FOB Shipping?
You’ll understand FOB shipping if you look at two types of scenarios.
In scenario one, you are ordering food from a restaurant using their delivery hotline. You call them and ask them to deliver some items and you pay for the items once they reach your door.
On the other hand, ordering an item online is entirely different. You cannot just call the seller and ask them to ship the items and pay it when it comes to your door. Although that may be available for some suppliers who have the cash-on-delivery option, that is not always the case. More often than not, the buyer pays for the item before it is shipped. This is what FOB shipping is all about.
FOB stands for ‘free on board’. This means that the product’s shipping fees are already paid for by the customer before it is even shipped out from the warehouse. This is in contrast to free shipping where the price of the item is paid and shipping is free. And it’s also different from cash on delivery where the price of the item is paid for once it is shipped. It is called ‘free on board’ because everything is already paid for. The only thing left is for the customer to receive the item.
But where did the term ‘free on board’ came from? Well, the concept came from the maritime industry. This pertains to who owns the item while it is shipped. Since the price of the item and the shipping is already paid for. The product is already owned by the buyer once it is shipped. This is in contrast to cash-on-delivery items where the product is owned by the seller until the buyer chooses to buy it.
In the maritime industry, this also translates to who is liable for the damages when it happens. If an item is tagged as ‘free on board’, it means that the buyer is liable for the damages to the goods. This means that if in some circumstance, the product is damaged. The seller loses nothing. The product is already paid for in full so the seller is no longer liable. Hence, the buyer will lose because they have paid for the item before even receiving it.
Origin and Destination in FOB Shipping
Origin and destination plays a major role in understanding FOB Shipping. When a product is tagged as FOB Origin, the seller’s ownership or liability of the product ends when it leaves the seller’s hands. This means that the buyer have to pay for the product, shoulder the price of the shipping and manage how the product will be shipped. The product is already owned by the buyer while in transit but the seller will not have a hand on how it is shipped. The buyer has to do everything himself. This can be tagged as follows: FOB Chicago, FOB Toronto and FOB Sydney. When you see this on the product, it means that its liability is immediately transferred once it leaves its origin.
Another type of FOB Shipping is called FOB Destination. In this type of FOB Shipping, Buyer’s ownership of the product only starts once it reaches the buyer’s hands. But the buyer still has to pay the shipping. Only this time, the seller arranges and pays for shipping on the buyer’s behalf right after the buyer paid for the item. This is the most common type of shipping in ecommerce. The buyer pays for an item and the shipping, the seller manages how the product is shipped and the buyer takes ownership of the product once it reaches his doorstep.
From here, you may be wondering why you hardly see FOB in ecommerce stores. Well, it seems that FOB is not for all types of products. There are only certain products where FOB can apply. These are often big items such as furniture and other large shipments. You cannot tag a small item as FOB. It just doesn’t work that way.
So this means that if you are selling an item online and it is not as large. That may not even be FOB. Sure, you may be using the FOB model where you ask the buyer to pay for an item and the shipping before it is shipped. But that can be hardly considered as FOB.
So if you cannot use FOB for small items, why should you use the term ‘FOB’? Well, it seems that FOB is a term that is more common for retailers and suppliers with continuous relationships. It is important to understand this so that you know what to pay, when to pay, who has the liability and what to expect when your products arrive. If you are operating an online store and you expect to grow in the future. You’ll surely have your hand in FOB. So if your supplier tags an item as ‘FOB Origin’ or ‘FOB Destination’, you’ll understand how it works.
Also, this is also very important in accounting. Accountants tend to record transactions when it is made and not when it is paid. With the knowledge of FOB, you’ll understand who owns the goods in any part of the shipping cycle and you’ll know what transactions have already gone through.
Also, it plays a major role in sales tax. Some states enforce a sales tax for items that are shipped by a seller. However, by simply implementing the concept of ‘FOB Origin’, the ownership is immediately transferred to the buyer and thus, the buyer no need to should any tax when the product is shipped. Of course, this will still depend on the state that you are operating in so be sure to check before you ship.
Why You Should Use FOB
You now know why sellers use FOB. But is it right for you? In this section, I’ll take you on a tour on the different types of shipping along with FOB and when you should choose it for your business.
Don’t be alarmed by all the acronyms. You have to learn all of these if you want to not only choose the right shipping type for your business. You also need to know the terms so that your seller or supplier can understand you. Here are some terms that you must know.
- Ex Works (EXW) - In this model, the buyer pays for the goods but doesn’t pay for the shipping. This may seem ideal because it cuts down on cost. The problem with this model is that the seller is not that motivated to ship the item. This means that there can be a considerable amount of delays when it comes to shipping the item as well as clearing customs in certain countries. In the event that the seller is not familiar with the rules in a particular country, deliveries can get delayed by up to two months. Yikes!
- Free on Board (FOB) - This is the model that we are talking about. But it is more than having the buyer pay for the shipping. It is also about allowing the seller to shoulder the responsibility of shipping the item and clearing it in customs if it has to go cross-country. This model is ideal for importers for they don’t need to think about the hassle of exporting the item and clearing it at customs. They just need to pay for the item and land transportation.
- Costs and Freight (CFR or CIF) - This model has an extra cost. Aside from the cost of the item and land shipping. You also need to pay for cross-country shipping, and clearing it at customs.
- Delivery at Place or Delivery, Duty Paid (DAP or DDP) - This model is similar to costs and freight with only one step further, delivery. This means that the seller has to shoulder everything from shipment to delivery. The price is often high but the shipment is guaranteed by the seller.
As you can see, these 4 types of shipping have their pros and cons. While some may seem safe, they are very expensive. This is the reason why FOB shipping is the most attractive choice out of the bunch. Here are some reasons why you should choose FOB.
FOB saves Money
DAP, DDP, CIF and CFR may seem attractive if you want to keep your supplies or products intact. This gives the liability to the seller and ensures that the products reaches you in good condition. But this can get very expensive. If you are a small ecommerce seller, this may not be a good choice for you as a buyer.
Alternatively, it is also not advisable to implement this as a seller. Unless you are familiar with the logistics of delivering your items, this can prove to be costly and difficult. Think about it. Not only do you need to sell the item. You also need to ship it and ensure that it reaches the buyer 100%. Such a responsibility can be so great for an online seller.
FOB saves Time
If you are buying from a supplier and you chose FOB, this means that the seller will deal with the shipping as long as you pay your share. This means that all you need to do is pay and that’s it. You no longer have to think about how your product will be shipped.
FOB saves the Hassle of Customs Clearance
This is what I am talking about when I said that FOB can save time. Every country has their own Customs Office. Some products may take time to leave this office especially if you are not familiar with the country’s rules. With FOB, you can have the seller do this for you. So you don’t even need to think about customs clearance.
FOB lowers Sales Tax
As mentioned above, FOB can lower sales tax if the item is declared as the property of the buyer once it leaves the seller’s hands. With this, it will no longer be tagged as a ‘product for sale’. Instead, it is a ‘product owned by the buyer’. With this, the sales tax can be lifted. But this is only if the state that you choose to ship it to allows this.
FOB is Beneficial for Both Buyers and Sellers
FOB is like the balance between the extremes. It is safe. It allows the buyer to wait for their products without the hassle of thinking about the logistics of its shipping and it allows the seller to get paid even before the item leaves their hands. In effect, it benefits both parties. The seller gets paid right away. He no longer needs to think about whether his buyer will pay for the item once it is shipped. The buyer only needs to ensure that the item is shipped. He no longer need to call customs on whether his item is on the way. The seller will take care of all of that.
Is FOB the way for you?
I hope this article has helped you understand what FOB shipping is. To recap, FOB stands for ‘free on board’. It is called as such because it started in the maritime industry where items are tagged as such if the buyer already owns it before it is shipped. There are two types of FOB shipping - FOB Origin and FOB Destination. And there are 4 types of shipping - Ex Works, Free on Board, Costs and Freight and Delivery at Place. All these differ based on who will pay for the shipping and who will take care of the logistics of the delivery.
So what do you think? Is FOB for you? Tell me about it in the comments below.