There's a huge difference between ordering a couch and ordering a pizza.
Hi, I'm Captain Obvious.
Here's a less-obvious statement: the difference between a couch and a pizza isn't just that you can eat one of them … It's the point at which these orders officially belong to you. You pay for your pizza when the pizza arrives, but you pay for most other product orders (like couches) long before the item reaches your doorstep.
These other orders, which cost more to sell and deliver, are what help define the term "FOB shipping point." Let's explain what FOB shipping point means and how it affects both the seller and the buyer.
FOB Shipping Point
FOB shipping point stands for "free on board" shipping point. This term describes product orders that are paid for at the product's origin, which is the seller's shipping point, as opposed to the product's destination. FOB shipping point charges the buyer for shipping costs as soon as the seller begins shipment.
How FOB Shipping Point Affects the Seller
FOB shipping point is very common in the ecommerce industry. When ordering a couch for domestic shipment, for example, U.S. customers typically agree to a sale at FOB shipping point (their options are different when ordering an international item).
A couch costs a great deal of money up front for the business to produce and transport, especially if the business is shipping the couch far away. Customers who order this item online can't easily assure the business they'll be prepared to pay for it once the couch is delivered to them -- so they pay up front.
FOB shipping point allows the business to collect payment from the sale as soon as the couch is assembled and loaded onto the truck -- protecting the business from a failed payment after the business already paid to transport the couch.
And because FOB shipping point holds the buyer responsible for freight costs (sometimes indicated by the term "FOB port"), the business can also save money in the event that the product is lost or damaged in transit. In these cases, it's up to the customer to file a claim for reimbursement.
How FOB Shipping Point Affects the Buyer
Although FOB shipping point requires the buyer to make a financial commitment before receiving the product, it can also allow the buyer to have a product sent to their home without needing to be there when the product is delivered.
When ordering a product online, customers submit their billing information to the seller before placing their order and leaving the seller's website. Once the seller begins shipping the item, the customer is billed for it. Depending on the product and the type of home it's being sent to, the customer might not even need to be present to accept the package from the deliverer -- the transaction has already taken place.
FOB Shipping Point vs. FOB Destination
Now, let's talk about pizza.
Food deliveries are just one type of product that frequently isn't a FOB shipping point sale. When customers order a pizza, it doesn't officially become theirs until they sign the receipt shown to them by the pizza delivery driver when he/she arrives at the customer's doorstep.
This is known as FOB destination. Rather than charging for the pizza upon its departure from the restaurant -- which would be a FOB shipping point sale -- the restaurant collects payment after the pizza is shipped and delivered to the customer. Customers are also not responsible for the pizza's shipping costs under the FOB destination sale model.
Pizza delivery is a great candidate for FOB destination, because delivery costs might simply be a delivery driver's normal paycheck. FOB destination also allows the pizza place to cook pizza and serve onsite customers more quickly, since the delivery staff is managing each transaction.
There are many businesses out there that could benefit from FOB destination sales over FOB shipping point sales. A business might use FOB destination if it finds its risk of product damage while in transit is low, and therefore the company can cover the shipping cost itself. Perhaps the business's brand is known for free shipping.
It's important to examine what your customer expects when they place an order. As long as the company's delivery system supports the business and your buyers' experience, you can focus more on the things that help you attract customers in the first place.
Originally published May 11, 2018 6:00:00 AM, updated May 15 2018