It’s fair to say that free shipping has become a hallmark of the e-commerce era. When we buy something online – whether it’s a new sweater or a mundane cleaning supply – we almost expect that it be delivered to our doorstep fast and for free. Otherwise, why would we pay more for something we could get in-store?
Amazon Prime: How It Has Revolutionized Free Shipping
A big driver of this market phenomenon has been Amazon’s premium membership scheme known as Prime, of which an estimated half of Amazon’s customers are reported to be members. The best-known – and perhaps most popular – perk of being a Prime member is free shipping. After all, when people order something on Amazon, it’s very often in lieu of making a trip to the shop, so they want it to come as quickly and seamlessly as possible.
In Amazon’s cases, when it comes to the practicality of free shipping it’s a matter of scale and fees. Many merchants pay fees to Amazon in order for the mega-retailer to fulfill their orders. This is more or less akin to paying “rent”, so that their stock can sit in an Amazon facility and be dispatched quickly and efficiently. Add that to the scale of transactions taking place on Amazon Prime – thanks to shoppers who are incentivized to use it more thanks to free shipping – and you start to see how this works. As the website MoneyTips notes, “shipping still incurs a net loss for Amazon that generally totals around 5% of net sales; for the first quarter of 2016, Amazon had $29.1 billion in sales and $1.5 billion in shipping costs, resulting in over a half a billion dollars in profit. With growing revenues, Amazon is able to absorb the shipping element and even work on expanding Prime’s offerings.”
There is no question that Amazon Prime’s free shipping is very popular with consumers. A 2016 survey from public relations firm Walker Sands found that “free shipping was the top factor that would make customers buy from e-commerce sites more frequently: 88% of respondents said free shipping was more persuasive than easy returns or same-day shipping.” However, the real question is the effect it’s had on other retailers now that this element of the online shopping process has become somewhat of an expectation. The short answer is that the free shipping expectation is a major pitfall for smaller retailers. As Fast Company wrote, “The biggest impact is felt by e-commerce businesses, particularly smaller ones, which face what some have called an emerging crisis: The cost of free shipping, in many cases, is unsustainable.”
Massive Scales: What Do Retailers Do Without Them?
The reason for this unsustainability is clear: most e-commerce retailers don’t operate anywhere near the same scale as Amazon, thus it’s much more expensive for them to ship goods to a consumer’s front door, free of charge. This is true even if the merchant is an online-only business, which doesn’t even have to pay for a brick and mortar storefront and other, more traditional forms of retail overhead costs. For retailers that have managed to hang on to the free shipping model, it’s become a loss leader.
For much of the golden era of free shipping, startups or online business have been funding the model with investment rounds or outside venture capital funding. This was seen as a way to woo customers and build a strong brand. But now that much of that money is drying up, what many consumers don’t realize is that because of the shoddy economics of so-called “free” shipping, many online retailers are folding the cost of shipping into their items. Another popular tactic is to set a minimum spend on items that qualify for free shipping.
To Ship Freely Or Not?
So what’s the verdict on free shipping? As consumers we should remember that sometimes paying a fee to have your purchase conveniently delivered to your front door is not too much to ask. You can choose a day, time and you know the item is in stock. If you had to take public transportation or your car, you would have to pay for transport or parking to access the store. What about the retailers? We suggest it’s all about perspective: make the fees worth it by providing great service and offering convenience which is hard to resist.
So, to everyone, enjoy the free shipping perks when available, but if not, it might just be worth it!