Free shipping has become a necessary evil for most internet retailers. Customers have grown accustomed to expecting free shipping at many retail sites, either as a bonus for buying a certain amount of items or as an automatic feature of the site. Instead of being a perk that is offered by select sites, it is now a standard for online retail; free shipping determines whether a consumer uses a particular site to shop and whether to complete the purchase in the carts.
Research carried out by the US’s National Retail Federation shows that 75% of consumers surveyed expect delivery to be free, even on orders under $50. Those who are born between 1946 and 1964, also called the baby boomers, belong to the generation which demand free shipping the most, with 88% expecting it to be part of the retail services. Shipping costs are considered even before consumers get to the checkout page, with 65% of consumers reporting that they look up free shipping thresholds before they start browsing online stores.
The retailers’ scourge of free shipping
Free shipping began with the advent of online shopping as a way to acclimatise consumers with the idea of online shopping and sending across the message that online shopping would be not more expensive than physical visits. This was intended to be a strategy to lead with a loss by offering free shipping and then retract the benefits when consumers become hooked on online shopping.
While the strategy has worked insofar that consumers are increasingly making their purchases online, they have also taken free shipping as the norm for online shopping. While offering free shipping to consumers is very costly for retailers, the cost of yielding loyalty and market share to competitors if they choose not to do so may prove to be even more costly. Retailers have reported that they often lose online customers at the end of the transaction, i.e., when the shipping costs get added to the final bill.
Smaller mom-and-pop retailers face the same pressure of offering free shipping to their customers and this severely cuts into their profitability. Etsy, the crafts marketplace, has implemented a new search algorithm which gives priority to sellers who guarantee free shipping. Those who charge for shipping, even if it were a few dollars, were removed from the top searches.
Given that smaller merchants do not have the economies of scale to offer cheaper shipping than the bigger retailers like Amazon, many of them are finding it difficult to subsidize the cost of shipping for their customers or to compete with the giants. Shipping fees may cost the mom-and-pop retail industry to go bankrupt.
Even though Etsy was set up to induce consumers to buy artisanal goods instead of mass-produced products, Etsy has now commented that it felt like it had no choice but to meet buyers’ expectations that shipping would be provided for free. Now, they are asking the merchants to raise their prices to compensate for and to disguise shipping fees.
Amazon seeks to recoup its shipping costs by offering the Prime membership. This is marketed as a means to get fast, free shipping but consumers pay up to US$99 per year for this free shipping. Nevertheless, this mental trick allows consumers to feel like they are paying for membership while they do not have to pay for shipping fees at each transaction. Consumers do not consider that they have paid for the shipping fees upfront.
In fact, the Prime membership has benefited Amazon a lot more than it has cost them. Those who are Prime members tend to spend more on Amazon.com compared to other consumers and similar retailers. It is like an inducement for customers to become more enmeshed with the Amazon network; eventually customers start buying Amazon music memberships, get an Amazon Fresh grocery delivery services, etc.
Watch this YouTube video to understand the environmental cost of free shipping
Questions for further personal evaluation:
- How important is it for you to have free shipping on your online shopping orders? Which would appeal to you more, a coupon code or free shipping (assuming it is valued the same)? Why?
- How do you think smaller mom-and-pop retailers can compete in an e-commerce space where consumer demand free shipping?
Useful vocabulary:
- ‘apotheosis’: culmination or climax; the highest point in the development of something
- ‘behemoth’: a huge or monstrous creature; something enormous, like a big and powerful organisation
Here are more related articles for further reading:
- The Atlantic: The pain of paying or why shoppers hate to pay for certain services
“Free shipping is enticing, says Ravi Dhar, the director of Yale’s Center for Customer Insights, because shoppers irrationally hate to pay for certain services—even those that they value immensely, such as speedy and reliable delivery. This demonstrates the economic principle known as “pain of paying,” a psychological discomfort that keeps people from completing purchases. Certain factors seem to sharpen the pain. Using cash rather than credit cards typically hurts more, because paper money must be physically relinquished. Higher charges for convenience, such as the jacked-up price for a soda in a hotel minibar or closer parking at a sporting event, usually rankle too. Printer ink and hotel Wi-Fi torment because they’re a means to an end that consumers feel they’ve already paid to reach. You bought the printer—of course you need to print things. You booked the hotel—of course you need to check your email during your stay. (Hotels, with their inherently captive audiences, are veritable houses of pain.) Paying for shipping is a two-for-one pain deal: Not only are you confronted with the actual cost of your convenience, but you’re being asked to pay “extra” for a store to fork over items you’re already laying out for.”
- The Verge: Etsy sellers upset with the platform for pushing them to offer free shipping
“A good portion of the listings on the first page of search results already feature free shipping, and buyers can turn on the ‘free shipping’ toggle to find items they won’t have to pay extra shipping for. The new policy, when it goes into effect at the end of this month, would show a majority of items with free shipping on the search results, in the most visible top rows. Etsy also says it’ll prioritize these items in its ads, through email marketing, social media, and TV.
“Most of us are tiny businesses – we’re not Amazon or eBay, we can’t compete with “the rest of e-commerce” and it won’t make sense for all of us to absorb our shipping costs into the overall price,” Fuller says. “But Etsy will penalise us for that.””