The Death of Free Shipping
My highschool economics teacher preached, “There Ain’t No Such Thing as a Free Lunch”.
This holds true for shipping costs. In fact, the costs of shipping are rising faster than inflation. I see our shipping rates rising much faster than increases in the cost of our products. So, if you’re offering free shipping or flat rate shipping, you’re getting hammered on your margins with no end in sight.
Eventually, the “free shipping” bubble is going to burst. It’s a mathematical impossibility for merchants to continue to absorb the radically increasing costs of shipping within their very thin profit margins.
On this very website, I read about Amazon’s eroding margins due largely to increased shipping costs. What’s their solution? Increased volume. Good luck with that. Their volume has been increasing every year and their margins continue to decrease every year. What’s that quote about the definition of insanity?
Something must give. Either merchants will bury the costs of shipping into the product itself or the quality of shipping will decrease dramatically. I’m already starting to see some of these effects. WalMart routinely ships product without any packaging. They simply slap a label on the outside of the product’s box. Many online shops with retail stores also highly promote their “ship-to-store” services as if this is some sort of convenience to the customer. I’m shopping online so I don’t have to go to a store! More insanity. But, the true motivation is obvious. They don’t want to pay the high costs to ship to the customer’s house.
What about free shipping when the customer purchases a certain amount of goods? That’s a decent proposition and indeed what we use on our website. But, it’s quite expensive to absorb those costs and I don’t see how this is a viable long-term promotion.
Imagine a $100 purchase that qualifies for free shipping. A typical merchant earns a $50 profit from which they must pay $10-$15 in shipping costs. So, your gross profit margin on that order is down to 35%. Ouch. You cannot run your business on margins that thin. It’s not sustainable.
Look forward a few years and that shipping cost is going to be $18-$20 or higher. UPS raises rates on us 5-7% (or more!) every year. Cardboard costs are increasing and the cost of oil (constantly jerked around by commodities traders) has quadrupled in the last 12 years. Have your products increased in cost by four times in that time span? We’re fighting a losing battle. You’ll be forced to increase that threshold from $99 to $125 and then $150 until that “Spend $X and get free shipping” will no longer be a realistic promotion to your shoppers.
Part of the problem lies within customers not realizing just how darned expensive it is to ship a box. Because of Amazon, we’ve all been trained to believe that shipping can often be free. I realize that customers hate paying for shipping. I hate paying sales tax, too. But, I do it because I don’t want to weave my own clothes. If they want goods delivered to their doorstep, customers will have to pay for shipping. I can’t see any alternative.
The catalog companies also share some of the blame in unrealistic customer expectations. For decades, they used “table rating” to determine shipping prices. If your order is $10-$20, pay $5 in shipping; if you order $20-$30, pay $8, etc. This was borne from necessity because they couldn’t ask the customer to perform complicated calculations. The catalog simply hoped that it all “worked out” in the end.
As you well know, there is no correlation between the cost of an item and how much it costs to ship. However, I still receive countless emails from customers complaining that the cost of shipping is nearly the cost of a product ($9 shipping for a $9.95 item). I jokingly reply, “I can raise the cost of the item if you’d like.”
Looking down the road, I fear that using “free shipping” as a major method to pull in customers will spell disaster for your company. Truly, what’s the point of processing an order if you can’t make any money on it? Don’t say volume! If the biggest (Amazon) can’t pull it off, us smaller guys can’t either.
Customers will soon need to accept that shipping is a real cost to the merchant (as opposed to sales tax). As merchants, looking 5-10 years ahead, we must work to differentiate ourselves from our competitors on other metrics that have nothing to do with free shipping. Because there’s nothing free about shipping.
Rick Watson says:
Smart comments. I really don't see consumer behavior changing (i.e. looking for free shipping).
Look for retailers to continue to buy shipping prices in item prices -- at the very least as a customer you know there aren't going to be games played as you go through checkout.
Saying that customers will need to accept this may not make it so ....
One trend enjoy following (mostly because I'm a geek) is 3-D printing. Not because it's realistic for anyone in the next 5-10 years (I don't think) but because 20 years from now how many of our products will we be downloading specs for and watching them build in our homes. It's a cool thought :)
Jamie Salvatori says:
Rick, it's definitely asking a lot for consumers to change behavior. However, I don't think they have much choice. Merchants will be forced to abandon free shipping at some point -- or hide the shipping cost in the item price -- but that won't "work" long term. You can't trick consumers for long. Yes, 3-D printing is amazing stuff. I thought nanotechnology was supposed to make all of that a reality, too.
John Lindberg says:
I am in the efulfillment business so I am especially concerned about the rising cost of shipping including trends like the coming restructuring of the USPS, ever increasing US energy costs and government induced inflation.
One suggestion for online merchants is to go back to basics: Some products lend themselves to direct marketing strategy because of their high profit margin PER SHIPPING POUND and others just plain don't work. Free shipping for a pound of diamonds is no problem, but for a pound of coal--you are just trying to do something that can't be done.
I know this sound too simple to be true, but the fact is that anyone pursuing a free shipping pricing model needs to begin by calculating the gross profit per shipping pound for every SKU they plan to sell and eliminate any product that can not carry its own weight. Once this painful step is made, the rest of the free shipping process can fall into place profitably.
John Lindberg - President
EFULFILLMENT SERVICE INC
Paraphrasing the opening comment "There ain't no such thing as free shipping." Never has been and never will be. Merchants that tout free shipping are simply including the cost of shipping in the product - or reducing margins.
We tried this in our eBay business - works for some products and not for others. There are a lot of problems with free shipping, i.e., shipping included in the price. Here are just a few of them:
1) Markdowns also discount your shipping or lower your margins even more 2) Returns - difficult to deduct the shipping cost from the purchase price to determine credit due 3) In some cases it is unfair to the buyer - if shipping is included in the price a seller has to include shipping for the greatest distance. Buyers living closer are over-charged
I could add to the list above but then the comment becomes a rant. What we are doing...
1) Price includes shipping when it makes sense, i.e., media mail (Books, DVDs) the shipping cost is the same regardless of distance 2) Price plus Shipping (Using a shipping calculator) this way the buyer pays the exact cost of the postage
My 2 Cents! Henry
Death of free shipping? Riiight. I'll believe that when i see it.
Gee golly, I keep reading about brand new - large start-ups offering free shipping on all sized orders, free return shipping and even rock bottom daily deals.
LL Bean's free shipping means that it takes 2-3 times longer to receive the same order.
We've all been amazoned all right, but it doesn't seem to be going away at all. Quite the opposite actually.
Sustainable? Insanity? No and yes.
We offer free shipping at $75 in a niche whereby competitors do it for even less with lower margin products. Our sales have fallen since the onset of this insane market but I'd rather do fewer sales and make money than jump off the cliff with the others.
We offer ship to store and home delivery. Home delivery works best because we can often add on to the order from our B&M store with a simple confirmation call. We actually make money on these orders - a novel concept.
Jamie Salvatori says:
@Jbbirdz - LL Bean manufactures their own goods and can therefore hide the cost of shipping within the price of the item itself. I would argue that there are more and more stipulations being added to the free shipping promise from most retailers. You cannot deny the simple fact that the cost of shipping is rising much faster than inflation. That's a recipe for disaster long-term no matter how you spin it.
@Jamie - I have family at LL... They haven't made their own stuff for a long time Jamie. Most of it is made overseas by sweatshops and the name added later. FWIW, I do agree that they can hide the costs. I brought up beans to illustrate how insane it has become and so much so that a stellar name like Beans would risk their good name to do free shipping with horrible shipping times attached.
It actually supports my point that this isn't going away my friend. I do wish that you were correct but I don't believe it.
Fed Ex & UPS rates were rising sky high prior to this madness. I do believe that the internet breeds insanity.
Jamie Salvatori says:
@Jbbirdz - You just proved my point. They are not operating with margins like a typical retailer who does not control the manufacturing aspect. LL Bean has removed a major step (they are their own distributor) and can therefore absorb the shipping costs. They are an exception that proves the rule. Most retailers do not have the ability to purchase something for $10 and sell it for $80. Rather, they must purchase something for $10 and sell it for $20. You cannot pay for shipping AND cover your overhead in that scenario. Keep in mind that the point of this article was to look ahead 3-5 years. The economics are going to eventually have their way.
Great read.... Managing an ecommerce business in Australia, we are finding more and more of our competitors are offering free shipping, and 'hiding' their shipping costs in their overall product price.
We have only run 'FREE' shipping for a few promotional campaigns and although we see a spike in sales, having to absorb the shipping cost from our margins is not the way forward for our business. ( i can assure you our margins are not the 50% markup that most retailers work on)
To help keep our shipping costs as low as possible we review the shipping company we use every year and look for a better deal. We find that the freight companies will bend over backwards to keep our business and other freight companies will offer us better services/pricing to try and get our business.
By doing this we haven't had to increase our freight prices for 2 years, freight costs aren't affecting our margins and our customers are getting a faster and more reliable service... win win
Amazon is eliminating that cost by putting a distribution center next to every customer. They already do same day delivery in 10 major US cities. Their local grocery delivery service in Seattle is a telling example of where they're going. Soon they'll be able to deliver same day to most of the US population, maybe through their own network, at very little cost.
We use a fulfillment partner that has dcs in 12 metros, keeping our distribution fast and cheap. Free shipping isn't going away, it's just getting more competitive.
I find it simply shocking that large companies can get away with such childish marketing tactics year after year. "Buyers want free shipping" is what arrogant ebay execs claim. Yeah, my child wants a cookie before dinner too, that doesn't mean they should have it. We're living in an age of greed and arrogance where corporate executives place money-money-money ahead of the truth. Next it will be a "free cookie" with every package.
When you get a package in the mail it will usually have the shipping amount stamped on it somewhere like $12.75, $8.90, $22.50 etc. or whatever it was, but it DOESN'T SAY FREE. It's been said that the best policy is always honesty and since "free" shipping isn't an honest statement, well, what does that tell you.
Ebay leads the way with excessive in-your-face childish, arrogant marketing tactics and fewer end-user control or options every year. They and other arrogant execs, are actually just playing on human limitations; i.e. that it's slightly faster for the end-user to just see "free shipping" rather than take the time to calculate (every time) the (same) end-result buying-cost.
Violeta Žiauberienė says:
free shipping sound really insane for me. then I should increase the price, so what is the point. Better find a courier company which offers good prices. So far I found Ecoparcel.eu, good prices.