The (Ecommerce) Corner Office

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.

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