Shiny, it's a tough balance between staying competitive & not losing money in shipping. I've taken the middle-of-the-road approach, where I take a bit of a hit on single items/west-coast shipping, but most of my orders come out within a dollar of my listed shipping fees.
I use flat-rate shipping whenever possible, & buy light-weight corrugated & bubble mailers for the rest of my orders. Keep in mind that the size of the package doesn't affect the postage rate as much as the weight - aiming for the smallest box possible doesn't really save you anything. If you can get to the post office regularly, you can do metered 1st Class postage for all your orders - PayPal limits 1st Class to <13 ounces, but the post office itself does not. I don't have a car during the week, so it's just not an option for me.
I do take a fairly large hit on international orders - I don't get many, & I try to keep my shipping rates affordable. Not their fault the USPS did away with affordable overseas shipping