How do online stores ship their products?

To touch on the broader point that you see competitors offering $5 shipping or less, I've been down to same road. I've finally come to the realization that one or more thing are going on. 1) They are paying less for the products than I am. 2) They are paying a LOT less for shipping than I am. (Extremely unlikely) 3) They have much less overhead/operating cost that me. (Unlikely) 4) They deal in a huge volume of orders. 5) They are willing to make $1 or $2 dollars or less on an order. 6) They are willing to lose money on an order. I honestly don't know the answer but there are a whole lot of times I can rule out 1, 2, and 3 pretty quickly.

I've played with so many approaches. It depends on weight you are shipping, cost of your product (that might get lost and you have to eat the cost) . . it depends. I sell $10-$20 items, each about 2 to 4 oz in weight and about 7" x 7" x 1.5" but also 4 and 7 inch diameter balls. For US Domestic I offer USPS first class package at flat rate of $3.95 or free if product sales >$20. It really helped with multiple product orders. We offer a Priority USPS too but it is rarely chosen. Mostly we ship free 5 out of 7. We can afford to eat the cost and reship the 4 packages a year that seem to get lost. That's on about 500+ orders / month. for some that sell very expensive goods they need better insurance and signatures. . . . than UPS or FedEx is better choice as accept the added cost. There is no universal answer. Note for International we still use USPS International first class package at $12.95 flat rate up to 10 items. Only lost one package in 2 years (knock on wood).

Cost of shipping and pricing shipping are two separate issues. Cost of shipping is as Jonathan describes. So with larger items, you need a larger margin, or to program into your store actual shipping rates, or sync your shipping services to your store to show rates in real-time. But you're competing with fixed price shipping and free shipping. How do your competitors offer this? A combination of negotiating with their carriers, and shifting the cost from a straight transactional relationship to an overall revenue vs cost of acquisition, cogs, etc... So your "store" may have some products with a 60% gross profit, others that have a 40% or even 30% gross profit. You absorb the higher shipping cost across all of your sales and treat it as a marketing cost, In other words, flat $5 shipping on orders over $75 is a marketing strategy, same with "free" shipping. Not every product has to carry it's own weight in that kind of business operation, but you do it if it helps your growth, your brand, and if the large / heavy items don't serve one of those purposes, you stop selling it. Also, you could use a fulfillment company, which may be able to help you get decent rates. Dimensional rates are a reality, but there are some regions, and some services, that have negotiated a favorable rate for a particular product / size / weight.

Regarding USPS discounts: You don't even need actual volume to get a discount. Set up an Endicia account and you'll immediately have commercial base pricing. Ship ~1,000 priority parcels per month and you'll have room to negotiate to commercial plus pricing. Past that, your USPS rep at 100,000 priority parcels per year can go to the national level to get you non-disclosed pricing (an NSA agreement) where the prices are tailored to your needs. You can also request special features like Sunday delivery on all of your packages. You can also negotiate on first class parcel at 1,000,000 first-class parcels per year. USPS does not tender a flat percentage discount "like" other carriers (the other carrier's discounts aren't a flat percentage discount like they advertise; though this is irrelevant). The three different tiers affect different services in different ways.