The Truth About "Free" Shipping - And Why We Don't Offer It
The Allure and Expense of Amazon's Free Shipping
Let's face it. There's nothing better than "FREE", right?
Especially when it comes to getting our online purchases sent to us for zero dollars.
At a glance, it seems like a straightforward loss-leading tactic. Offering free shipping encourages people to buy more, and more often. But a deeper dive reveals a complex interplay of costs, benefits, and long-term strategies.
In this article, we will peel back the layers of the free shipping policy being offered by online retailers, like Amazon, to understand its financial implications - both the glaring and the subtle, and explore whether this celebrated practice is a boon or a burden for the e-commerce titan.
The Evolution of Amazon's Free Shipping Initiative
Amazon's journey into the world of free shipping began as an ambitious strategy to differentiate itself in a cluttered online marketplace.
When the company was founded in 1994, it primarily sold books and faced stiff competition from brick-and-mortar stores and other emerging e-commerce sites.
The allure of a vast online catalog was its primary draw, but Amazon recognized early on that removing the barrier of shipping fees could set it apart from competitors.
In the early 2000s, Amazon introduced the "Free Super Saver Shipping" on orders over a specific threshold, turning the act of online shopping into an even more appealing prospect for customers who were still transitioning from traditional retail. This not only incentivized larger purchases but also signaled to consumers that Amazon was committed to providing unmatched value.
Then, in 2005, came a game-changer: Amazon Prime.
For an annual fee, members received benefits including free two-day shipping, irrespective of the order value.
This program revolutionized online shopping, driving customer loyalty, and setting a new benchmark for e-commerce platforms worldwide.
The success of Prime saw its membership numbers skyrocket, with subscribers often buying more frequently due to the perceived value of the subscription.
But it wasn't just about the customer.
For Amazon, free shipping was also a tactic to apply pressure on competitors, many of whom struggled to match this offering without sacrificing their profit margins.
Over time, as Amazon expanded its inventory, network, and capabilities, it was able to continuously adjust its free shipping thresholds and conditions to find the right balance between customer appeal and cost-effectiveness.
However, as we delve deeper into the numbers and the nuances, it becomes evident that while Amazon's free shipping has been a massive driver for its growth and customer loyalty, it's not without its challenges and implications.
Understanding the Financial Footprint of Free Shipping
At its core, shipping is a service, and like all services, it comes with associated costs.
For Amazon, the offer of free shipping means absorbing these costs in hopes of reaping other rewards. But what are these costs, and how significant can they be? Let's dissect the primary expenses.
Packaging: The first step in getting an item to a customer is ensuring it's securely packaged. Whether it's books, electronics, or perishables, each product type demands different packaging materials and techniques.
Over the years, Amazon has innovated with its packaging to reduce waste and cost, but it remains a significant expense, especially considering the sheer volume of shipments.
Warehouse Handling: Amazon's fulfillment centers are marvels of modern logistics. Robots and workers move in harmony, picking, packing, and dispatching products.
While highly efficient, these operations have overheads – from equipment maintenance to salaries. Every item passing through incurs costs related to these overheads.
Freight: Before reaching the customer, products often have to travel vast distances, sometimes between countries. This intercity or international transportation, whether by road, sea, or air, represents the freight cost.
Bulk shipping can reduce per-item costs, but with Amazon's diverse inventory, optimizing this is a constant challenge.
Last Mile Delivery: Arguably the most challenging part of the shipping process is the "last mile" – getting the product from a local distribution point to the customer's doorstep.
This segment often faces the highest variability in costs due to factors like fuel prices, local regulations, and the unpredictability of individual deliveries (e.g., re-deliveries, delays).
With Amazon pushing for even faster delivery times, such as same-day or two-hour windows in some areas, the complexity and cost of last-mile delivery have surged.
Now, when you juxtapose these shipping costs against the average order value, a tension emerges.
For high-value orders, the proportion of shipping costs might be justifiable. But for low-value orders, especially single, low-cost items, the shipping costs can sometimes even surpass the product's price.
It's in these cases that the term "free shipping" becomes a misnomer for Amazon, as the company effectively pays more to ship the product than what the customer pays for the item itself.
This financial conundrum begs the question: How does Amazon strike a balance, and what strategies are in place to offset these costs?
Offsetting The Cost of Shipping
It's easy to wonder how Amazon manages to sustain its free shipping model without sinking into financial instability.
While the costs are undeniable, the company has strategically baked in ways to offset them, ensuring it doesn't bear the brunt of free shipping. Here's how...
Amazon Prime Subscriptions: As of September 2021, Amazon Prime's membership exceeded 200 million globally. Each member pays an annual or monthly fee, which generates significant revenue.
While Prime offers various benefits, from streaming to exclusive deals, one of the BIG draws remains the free and expedited shipping.
The Prime membership fees help defray a considerable chunk of the shipping costs.
Encouraging Bulk Purchases and Add-on Items: Ever noticed Amazon's suggestions to "add more items" to qualify for free shipping or the showcase of "frequently bought together" products? These are tactics to increase the average order value.
When customers buy more in a single order, it consolidates shipping, reducing per-item costs and making the free shipping offer more financially viable.
Third-party Seller Fees: Amazon's Marketplace is bustling with third-party sellers who pay various fees, from referral to fulfillment charges. This is especially the case if they use Amazon's "Fulfillment by Amazon" (FBA) service. The fees collected from these sellers provide an additional revenue stream, helping to counteract some of Amazon's shipping expenses.
Other Services & Verticals: Amazon isn't just an e-commerce platform. Amazon Web Services (AWS), its cloud-computing arm, for instance, has been a significant profit generator. Similarly, its advertising platform allows brands to pay for prominent visibility. The revenue from these high-margin ventures can be used to support the store's free-shipping policy.
Increasing Product Prices: While not always transparent to the customer, there's evidence to suggest that Amazon, at times, incorporates a portion of the shipping cost into the product's price. This subtle markup means that customers, indirectly, still contribute to the shipping costs.
Limiting Free Shipping: Not all products on Amazon come with free shipping. The company has made calculated decisions about which items qualify, often based on factors like weight, price, and warehouse location. By restricting the offering, Amazon ensures that it isn’t hemorrhaging money on items that are particularly costly to ship.
In 2020, Amazon reported spending over $61 billion on shipping, which was a significant increase from previous years. These figures include sortation, delivery center, and transportation costs.
That's a lot of money. And no doubt it's worth the expense to them. But is it reasonable to expect the same "free" shipping option from small, independent retailers?
Unrealistic Expectations
Expecting the same free shipping from small, independent retailers as from large online retailers like Amazon is unreasonable for several reasons:
- Lower Shipping Costs: Large retailers like Amazon operate on a massive scale, allowing them to negotiate lower shipping rates with carriers. Small retailers don't have the same volume of shipments, which means they pay higher rates for shipping.
- Revenue Offsets: Big players have a greater capacity to absorb the costs associated with free shipping, either through their other high-margin services or simply due to their larger financial buffers. Small businesses typically operate with tighter margins and may not be able to bear this additional cost without impacting their sustainability.
- Logistical Infrastructure: Amazon and similar companies have sophisticated logistical networks, including warehouses, fulfillment centers, and optimized delivery systems, enabling them to efficiently manage and reduce shipping costs. Small retailers usually lack this infrastructure, making shipping more expensive and complex for them.
- Price of Products: To offset shipping costs, larger retailers may slightly increase the price of their products or have a wider array of products to distribute the shipping costs across. Small retailers often have a more limited selection, making it harder to implement such strategies without significantly raising prices.
- Customization and Personal Touch: Small, independent retailers often provide more personalized, niche products or services. This customization can add value but also increases operational costs, leaving less room for absorbing shipping fees.
- Local Focus vs. Global Reach: Many small retailers focus on local or regional markets, and while this can reduce some logistics costs, it doesn't benefit from the global economies of scale that companies like Amazon exploit with their widespread, international customer base.
- Competitive Edge: Free shipping is a competitive strategy often used to lure customers away from smaller competitors. Small businesses have to find alternative ways to compete, such as superior customer service, unique products, or community engagement, which might not allow the financial leeway for free shipping.
- Customer Expectations and Education: There's a need for customer education regarding the true cost of shipping and how small businesses operate differently than large e-commerce giants. This understanding can foster more realistic expectations and appreciation for the challenges small retailers face.
While free shipping is a powerful marketing tool and customer attractant for large online retailers, expecting the same from small, independent retailers overlooks the significant differences in scale, logistics, financial capacity, and business models.
Don't get me wrong.
I'm not anti-Amazon. My wife and I buy products from them often. But I'm also a big supporter of local businesses, and will often look for a local supplier first before buying from Amazon.
I wrote this article to show that free shipping is not free. There are real costs involved. Costs that large retailers like Walmart, Amazon, and others can afford to absorb, and offset through their sheer size and dominant market positions.
And while I enjoy free shipping as much as the next person, I just can't make that offer on this store.
I thank you for your understanding.
Curtis Penner, co-owner
Giftacular