Practical Ecommerce

Does Ecommerce Need a Cooperative Shipping Revolution?

If small and mid-sized online retailers cooperated, they may be able to develop a fast and reliable shipping network competitive with what Amazon, Walmart, and other industry-leading merchants can offer.

Online shoppers often expect free and fast shipping. Call it the Amazon Prime effect. To be competitive, mid-market and small retailers need to compete not just on products, customer service, and price, but also on the cost and speed of delivery.

Shoppers Want Fast and Free Delivery

Consider that in 2016 about 88 percent of American consumers surveyed believed free shipping was an important factor for shopping online, according to the Walker Sands “The Future of Retail 2016” report. This sentiment is up from about 80 percent of shoppers in 2014. That is an eight-percentage-point climb in just two years and it means that nearly nine of out ten shoppers may be looking for free delivery when they make an online purchase.

The same report found the number of shoppers motivated by one-day shipping had risen from 66 percent in 2014 to 69 percent in 2016, and the number of shoppers motivated by same-day shipping rose from 41 percent in 2014 to 49 percent in 2016. The Walker Sands report, therefore, seems to confirm that online shoppers want free and fast shipping.

UPS and comScore’s “Pulse of the Online Shopper” 2016 report supports this assertion. Specifically, the report found that one in three respondents buy from marketplace websites like Amazon or Walmart rather than from a small or mid-market retailers because they want fast delivery. Again, the speed and cost of delivery is a significant driver of online sales and store selection.

Fast and Free Delivery a Competitive Advantage

Amazon and other tier-one retailers have refined their ecommerce order processing and logistics so that they can use fast and free delivery as a competitive advantage. This refinement includes everything from mastering the picking and packing process with equipment and robots to optimizing packaging.

We can think about the relative shipping advantages of these large retailers at a higher level, categorizing the advantages into four areas.

  • Volume discount. Larger retailers probably pay less for each package shipped. They negotiate favorable shipping rates with package carriers.
  • Packing efficiency. Large retailers pack fast. Getting orders out the door quickly gives them a step up on delivery time. Some orders may be packed and shipped in one hour or less.
  • Infrastructure. Large retailers own some of their trucks, allowing them zone skip or even deliver the last mile. They also have superior sorting and warehouse equipment and software.
  • Facilities. Large retailers have many warehouses. One of their greatest advantages is that they can ship from a warehouse fulfillment center relatively near to the order’s destination. Amazon, as an example, has more than 100 fulfillment and sort centers in the United States.

Consider this last category of advantages — facilities — and imagine that you have an online business with a warehouse in Manchester, New Hampshire, ZIP code 03101.

Your store sells fitness equipment and apparel, including some popular yoga pants, which are also available on Amazon Prime. You want to be competitive, so you offer free, two-day shipping, too.

An order comes in from Scottsdale, Arizona, ZIP code 85054. To get your shipment, which weighs about two pounds, to Scottsdale in two days, you choose UPS 2nd Day Air for $38.31. Let’s hope you have some significant margin in those yoga pants.

Now imagine Amazon accepting the same order from a customer in Scottsdale. Amazon has several fulfillment centers in Arizona, including PHX7 at 800 North 75th Avenue, Phoenix, Arizona, 85043, which stocks the same yoga pants.

Amazon ships the identical package via ground for something like $5.00 or less. And the package will arrive in one day, not two.

That is a significant competitive advantage.

Revolutionary Cooperation

Package carriers like UPS deliver the product your customer orders. They are the last face, if you will, that customers see. So it is unlikely your customers would notice if a "partner" retailer fulfilled for you.

Package carriers like UPS deliver the product your customer orders. They are the last face, if you will, that customers see. So it is unlikely your customers would notice if a “partner” retailer fulfilled for you.

So now imagine your online fitness supply store, based in New Hampshire, gets an order for yoga pants from a shopper in Scottsdale, Arizona, but instead of wasting all of your margin on fast and free shipping, you work with another online fitness supply retailer which happens to have a fulfillment center in Scottsdale.

Your “partner” for this order, prints out a label with your store’s address and logo on it; packs up the yoga pants, which it also carries; and sends them to your customer at about the same rate Amazon is paying.

Your cooperative “partner” keeps half of the profit from the sale and your business keeps half, making a bit more than you would have if you had fulfilled the order yourself and paid a lot more for shipping.

This level of cooperation between independent retailers is, at present, unheard of, and for some businesses, the idea is beyond revolutionary. Nonetheless, it has the potential to overcome or negate at least one of the competitive advantages tier-one retailers possess around fulfillment, making mid-market or even small sellers much more competitive.

Requirements of Cooperative Shipping

Any sort of widespread cooperative shipping revolution would have several requirements.

Identical products. Cooperative shipping works only for retailers that carry identical products.

Trust and consequences. Retailers would need to trust each other to provide fast and professional fulfillment and not to steal each other’s customers. There would also need to be consequences for service or ethical failures, even if these were as mild as posting poor ratings of other retailers in the cooperative network.

Affiliation. Retailers may need to be affiliated or associated. For example, many brick-and-click retailers belong to buying groups, like Minnesota-based Mid-States Distributing. These groups could easily work together for ecommerce fulfillment.

Integration. Ecommerce operations would need to be integrated so that orders could be shared programmatically. Shipping software providers like ShipStation, ShipHawk, Shippo, Ordoro, or similar — which already facilitate orders and shipping from multiple warehouses — could easily facilitate the required integration for cooperative fulfillment.

A Shipping Revolution?

Would this sort of cooperative shipping arrangement — wherein mid-market and small retailers collaborate to create a network of retailers willing to fulfill for each — other really work? Maybe.

What is clear is that fast and free shipping continues to be important, and large retailers possess a competitive advantage in this area. It is also clear that online retailers which sell generally available products may be more impacted, if you will, and that these companies would be wise to take some steps to compete with large retailers on delivery speed and price.

Cooperation is one possible solution.

Armando Roggio

Armando Roggio

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  1. John Lindberg May 23, 2017 Reply

    We are a Michigan based efulfillment company and we see something like this with some of our west coast clients. They ship their west of the Mississippi orders themselves and have us ship their east of the Mississippi orders. The down side is they have to carry inventory at two locations, but the up side is just as you point out–faster delivery at lower cost because of shorter delivery distance.

    John Lindberg
    EFULFILLMENT SERVICE INC

  2. Amory Booker May 24, 2017 Reply

    Armando,
    Your article has a good premise but is flawed in so many ways. Companies that are pure e-commerce play who institute free shipping will discover that it is not sustainable. The fact that each order that comes in, and is offered free shipping, hurts your bottom line. Take for instance Amazon, which you mentioned in your article, Amazon lost $7.2 billion in 2016 because of free or discount shipping. Your article fails to mention that Amazon – e-commerce does not make a profit, period. Also, letting companies know, If you follow in their footsteps trying to offer free shipping and discount shipping. Your company also will not make a profit. People will soon see that items on Amazon are not the cheapest, they typically are higher because companies now know they have to factor in the shipping cost in their items. For you to write that fast and free shipping continues to be important. To whom? I will give you an example:

    On Amazon: They have a listing for Trendglas Jena Tea Time Cup with steel filter – Cost on Amazon: $85.86
    We sell the “Tea Time cup with steel filter for – $26.99 – Why do we sell it for $26.99? Because it’s the mfg. suggested retail cost. We are not trying to gouge our customers. So you tell me, would you rather way over pay for something on Amazon and get free shipping? Or shop around get better pricing and pay for the shipping?

    Please note, that there have been articles in Fast company, “Free shipping is a Lie” , Geekwire “The cost of convenience: Amazon’s shipping losses top $7B for first time”. The flaw in your article that states shipping a 2 lb package using UPS? Are you kidding? We used to use UPS, however, their prices were way to high for shipping. So we no longer offer shipping via UPS on USPS via Endicia. Shipping an item across country is a lot less using USPS.

    When you offer free shipping here’s what doesn’t get calculated and this probably would make Amazon’s loses even higher.

    1) Boxes – .05 to .20 cents each
    2) Labels – .03 cents
    3) Packing material – .08 to .20 cents a box
    4) Labor – ?
    5) Lastly – The actual cost of shipping – estimate on a 2 lb package ($8.00 to $10.00) USPS or $38.00 with your UPS claim.

    Look, Amazon only showed a profit because of Amazon Web Services, not with their Amazon storefront, and now that Google will be getting into the same game as AWS. They will lose market share on that as well, Why? Google has all the Analytics…All the analytics. The best. I typically don’t reply to articles I read but I have a lot of repeat customers, we typically on discount items that have been discontinued by the mfg.

    E-commerce companies must protect their brand. We have found that if you offer great customer services and quick response to customer needs. You will have loyal customers who don’t mind paying for their shipping. I get your article, I really do, but as I mentioned to you early on, it’s flawed. Companies like Coach, and Kenneth Cole – which will be closing all of their outlet stores, is doing so because they want to protect their brand. I think that I read a quote that stated on of the executive from Kenneth Cole – “We will no longer be participating in the race to the bottom.”

    keep writing and I will keep reading….

    Amory Booker
    President and CEO
    akadwelling.com

    • Armando Roggio May 24, 2017 Reply

      Amory, thank you for the comment and thank you for reading. I appreciate it.

      The $38 rate quote was from the UPS website for second-day air. I believe the price you quoted is for ground, which would take five to seven days, not the two days required.

      I know I am not going to change your mind. But I do believe – right now – that if you sell products which are available on other retail websites, like Amazon, you may need to offer free shipping in some form to remain competitive. I also think there are many strategies that can make free shipping viable, including cooperation.

      I have not always thought this way.

      In 2009, I wrote an article called “The Free Shipping Equation.” You can still find it on Practical Ecommerce, http://www.practicalecommerce.com/Ecommerce-Know-How-The-Free-Shipping-Equation.

      In that article, I tried to make the point that free shipping didn’t make a lot of financial sense. Check out this quote.

      “For high-margin items, offering free shipping is perhaps a reasonable marketing endeavor. But in price competitive categories, it makes no business sense to offer free or discounted shipping. In fact, in price competitive markets, you may want to consider adding a fee and making more profit.”

      In the past eight years, however, it is my opinion that ecommerce, customer expectations, and even the shipping industry have changed significantly. It is not longer possible to grow into and through the mid-market without some form of a free shipping offer let alone try to be a large retail without such a policy. This will only become truer in the near future.

      Consider Walmart’s recent ecommerce success. The company’s online sales grew 63 percent in 1Q17. Writing on The Motley Fool, Timothy Green rightly attributed Walmart’s recent ecommerce success to three factors including the Jet acquisition, adding more products to its online catalog, and offering free, two-day shipping with a purchase of $35 or more.

      Here is a quote from Green’s article.

      “Low prices alone aren’t enough. The free two-day shipping offer is critical to get customers to even consider shopping on Walmart.com, especially those used to shopping on Amazon by default. Based on Wal-Mart’s first-quarter results, free two-day shipping is doing exactly that.”

      Thank you again for reading and take care,

      A.

  3. Amory Booker May 25, 2017 Reply

    Armando,
    Thanks for your reply. It’s funny that you reference the 2009 article. That is the article that made me start reading your post on a regular basis. I believed at that time that you understood the value of charging for shipping. I am not sure I agree that it should be a profit center. However, I believe that it shouldn’t be a cost center as well, shipping cost should zero itself out.

    If you look at if from a business standpoint. If I ship 100 packages a day at $10 a shipment (USPS – my average delivery cost) – in a year, that’s $365,000 dollars. I don’t believe many e-commerce companies that are small to medium size can sustain their existence giving away that much money.

    If you check out Supply Chain digest they have points this out as well. They factor “out” Amazon’s Web Services and focus on merchandise sales only. The numbers don’t lie. No matter how you spin it or how many distribution centers you have, the cost reductions don’t add up. Labor cost at those distribution centers add up, electric bills at those locations add up, equipment and maintenance at those locations add up, Free shipping does not. Here is my take…If you are a brand, Apple, Microsoft, Gucci, and you sell only your products you can offer free shipping. You build the shipping cost in your pricing. People perceive that they are getting free shipping but they are not. That cost if factored in….I get that and will not argue with that strategy.

    I am not saying I never considered free shipping, I’ve had many discussions on this with my staff and have read many articles for and against free shipping. The numbers just don’t make sense. Amazon.com is a lost leader for their other businesses. If it wasn’t for Amazon web services, The Echo, FBA. Amazon.com as a company (merchandise) would still not show a profit. Period. This is a direct impact of their decision to continue to offer free / discount shipping.

    Lastly, the shipping estimate cost I gave was priority mail 2-day from USPS – Not ground

    link to article
    http://www.scdigest.com/firstthoughts/17-03-02.php?cid=12028

    • Armando Roggio May 25, 2017 Reply

      Amory.

      I wanted to show you that the UPS rate was accurate, so there is a link to screen capture below. I just took it from the UPS website (I really like their new website by the way). It shows a rate of $38.31 for a two-pound, second-day air package from Manchester, New Hampshire to a residential address in Scottsdale, Arizona.

      It has been my experience that UPS frequently discounts its rates, so it may be that you’re enjoying a significant discount because you have a successful business. For my articles, I always use the published rate.

      Here is the link, https://goo.gl/zaQ767 .

      A.