Free shipping is a tactic used by e-commerce retailers to successfully increase sales. There are 191 million online buyers in the US who want inexpensive shipping plus fast delivery. The option of free shipping has a significant influence on consumer’s online purchases, but who really pays for it?
Trucking companies raise prices annually, usually between 3% and 5% to cover their expenses. In e-commerce, most rate increases, including shipping expenses, are absorbed by the retailer (the shipper).
Because shipping costsare driven by weight, product packaging, and distance shipped, the size of items shipped has a substantial impact on the cost. Retailers with heavier or denser items (e.g., home furniture) are reluctant to offer free shipping for this reason; if they do offer free shipping, they make explicit exceptions around the heaviest or largest products wherever possible (or consider additional shipping surcharges).
Free shipping without a minimum purchase can get expensive for a business, as it encourages customers to buy cheap, convenient items online one at a time. A pack of toilet paper, for instance, could cost more to ship than to purchase. One way to help tame the high cost is to offer customers slow, but cheap shipping options.
Retailers often come up with a threshold to determine the price a customer must pay to receive free shipping. Many retailers are increasing this amount due to the growing cost of transportation. A free shipping offer does entice customers to buy more in order to qualify.
Free shipping might result in unexpected costs for shippers. While the cost of delivering the package itself is the key component associated with free shipping, retailers note challenges: would-be shoppers conditioned to wait for free shipping offers, increased labor and customer service costs associated with increased free shipping orders, and greater IT costs when free shipping offers must incorporate exclusions or product restrictions.
Many retailers have found creative ways to offer free shipping. Because most retailers want to drive sales without losing margin, some executives note that they found tactics like premium shipping clubs, flat-rate shipping, and incorporating shipping into the cost of the product are particularly effective in balancing free shipping service.
Retailers interviewed said that shipping costs ranged from 5% to 20% of their total revenue, so any free shipping offer forces them to absorb an extra expense. This is particularly painful for companies that have historically viewed shipping as a profit center or have thin margins to start with.
As consumer shipping expectations continue to increase, retailers must pay attention to demand and service. Shippers are always looking for new ways to lower transportation and delivery expenses – check out these blogs for tips from PLS Logistics:
- TMS Technology Enhances Customer Experience
- Lower Transportation Spend with Big Data
- How to Negotiate Lower LTL Transportation Rates