Markup and margin are not the same
Markup is calculated on cost: cost × (1 + markup). Margin is calculated on the selling price: cost ÷ (1 − margin). At an $8 carrier cost, a 20% markup produces $9.60, while a 20% margin produces $10.00.
The same percentage produces different prices because the base is different. A 20% markup is only a 16.7% margin on the customer price. Mixing the two labels is a common source of underpricing.
The brand subsidy
Brand subsidy = carrier cost − current customer charge. If the carrier costs $8 and the customer pays $7.50, the brand pays $0.50 per order. At 500 orders a month, that is $250.
The subsidy is not automatically bad. It may be a deliberate acquisition or conversion investment. The problem is not knowing it exists. Showing it per order and per month makes the decision explicit.
Worked example
Carrier cost $8, markup 20%, current charge $7.50, 500 orders. The markup recommendation is $9.60, profit per order is $1.60 and margin on the customer price is 16.7%.
The current charge leaves a $0.50 subsidy per order, or $250 per month. The customer covers 93.75% of the carrier cost. The margin-mode price at the same 20% would be $10.00.
Choosing a mode
Markup mode is easier to explain to a team: “we charge cost plus 20%.” Margin mode is easier to compare with product margins and contribution targets. Pick one and state it in your shipping policy.
The comparison table shows both prices and the current charge, so you can see the gap without changing the inputs. It also shows the customer's share of carrier cost.
Free shipping is a 100% subsidy
If the customer pays nothing, the brand subsidy equals the full carrier cost. That can still be profitable if the free-shipping threshold raises AOV enough to cover it. Use the free-shipping threshold calculator for that decision.
The right question is not “should shipping be free?” but “what does the subsidy buy, and is it cheaper than the margin it creates?”
Where the model stops
It uses one carrier cost per order. A real store has a zone and weight mix, surcharges and packaging costs. It also assumes customers do not change behavior when the shipping charge changes.
Use the result as a pricing baseline, then test it against actual label costs and conversion. For the cost build-up, use the shipping cost per order calculator. For dimensional weight, use the dimensional weight calculator.