Do retailers need to further commit to free delivery?
Photo: Fedex

Do retailers need to further commit to free delivery?

While often cited as a conversion necessity, the wide majority of retailers only offer free shipping occasionally for promotional campaigns, according to a study from parcelLab.

The logistics platform from July to October 2020 studied the order, shipping, delivery and returns processes of 52 of the National Retail Federation’s top 100 U.S. e-commerce retailers that regularly shipped products to customers.

Of the 52, only four — or eight percent — generally offered free shipping with no minimum purchase required. Sixty-two percent offered free shipping above an order value of $35. The remaining 30 percent did not offer free shipping at all, adding an average of $4.25 to each purchase for shipping costs.

Free returns were more common. Slightly more than a majority of retailers analyzed offered returns for free or had a “no need to return” policy. Of the 43 percent of retailers that charged for returns, 59 percent charged more than $10.

ParcelLab said requiring free shipping minimums or always charging for shipping or returns could “increase the chances of a customer opting not to shop with the retailer in the future due to these additional, inadvertent costs.” Not doing so also puts retailers at a competitive disadvantage to the free shipping promise of Amazon Prime.

Yet the reason many retailers set minimum thresholds for free shipping or charge is to offset escalating logistic costs. A Gartner study from December found retailers with more than 50 percent of revenue from the online channel have logistics costs as a percentage of sales that are almost double those of their store-focused counterparts.

Logistic costs have remained elevated during the crisis as carriers have steadily applied surcharges to offset the strain of unprecedented online shipping volume. In mid-January, FedEx Corp. announced plans to add a surcharge for its large customers (over 30,000 weekly average packages) “until further notice.” The move heightened concerns that shipping charges that traditionally arrive during peak selling periods may become a regular occurrence.

BrainTrust

"To absorb ballooning shipping costs, retailers need to optimize the effectiveness of their e-commerce strategy. "

Lisa Goller

B2B Content Strategist


"“Free delivery” will become part of the price of the product. This will be like getting a basket of bread before a meal. It’s just what you do."

Liz Crawford

VP Planning, TPN Retail


"Job One for retailers is to navigate away from siloed systems and toward the cloud, where costs can be better analyzed and more efficient practices adopted."

Cathy Hotka

Principal, Cathy Hotka & Associates


Discussion Questions

DISCUSSION QUESTIONS: Should retailers be looking at free shipping more as an online margin killer or as a shopping cart abandonment saver? Do retailers have viable options for absorbing the inherent costs of free shipping?

Poll

35 Comments
Oldest
Newest Most Voted
Inline Feedbacks
View all comments
Mark Ryski
Noble Member
3 years ago

Free shipping is a margin killer, and part of the online race that Amazon and Walmart are driving as they battle for supremacy. Most other retailers are in a difficult spot with shipping and logistics costs. As noted, shipping costs are significantly impacting margins that are unsustainable for most retailers and while Amazon and Walmart can compete in the free shipping world, most other retailers can’t and shouldn’t.

Gene Detroyer
Noble Member
Reply to  Mark Ryski
3 years ago

Free shipping and free returns are not “margin killers.” They are simply costs of business like any other cost the retailer experiences.

Ryan Mathews
Trusted Member
Reply to  Gene Detroyer
3 years ago

Gene, at the risk of becoming a target myself, I agree. Now retailers don’t like the idea, of course, but once you offer any free service to a consumer they are going to: a.) expect that you will continue to provide it; and b.) assume it will be free forever. But it’s actually worse than that. I always tell my clients that their “competition” is anyone selling anything to anyone they might ever want to sell something to themselves. So if I can get a book or whatever overnight from Amazon, why do I have to wait three weeks for a car part? Talk about your margin killers! Overnight delivery and excess standing inventory. The phrase “margin killer” assumes retailers aren’t smart enough to change their supply chain, operational, and pricing models to defray the cost associated with “free” delivery. I don’t sell them that short.

Gene Detroyer
Noble Member
Reply to  Ryan Mathews
3 years ago

“The phrase “margin killer” assumes retailers aren’t smart enough to change their supply chain, operational, and pricing models to defray the cost associated with “free” delivery. I don’t sell them that “short.” Exactly. They aren’t shooting themselves in the foot.

Craig Sundstrom
Craig Sundstrom
Noble Member
Reply to  Gene Detroyer
3 years ago

And yet, every day one finds well functioning businesses that offer neither.

Neil Saunders
Famed Member
3 years ago

The answer to this depends on the category and the underlying economics and strategy of the business. There is no one-size-fits-all solution. However it is generally true that retailers already subsidize the costs of delivery for consumers. So extending free delivery might be a great way to build sales and market share, but it is unhelpful for margins and profitability. I think one of the best ways forward is to have a range of delivery options, including store collection, with a range of price points based on the economics of each service. That way the consumer has choice, while the retailer is able to manage margins.

Suresh Chaganti
Suresh Chaganti
Member
3 years ago

Every business will have a loss leader strategy. For online businesses free shipping is the one. Unfortunately for the online businesses, the loss leader components expanded to BOPAC, BOPIS and other elements of convenience that customers will not pay for, or competitive forces will not allow. That means the margins will be under sustained pressure. Free shipping will be a necessary evil for these businesses. It requires constant calibration and experimentation and customer understanding to make sure that free shipping is offered to the correct customers, on products and orders where it will make a difference.

Gary Sankary
Noble Member
3 years ago

Free shipping has become an expectation from the consumer’s point of view. Retailers not named Walmart or Amazon will need to consider how to offer this service and maintain margins if they want to be competitive in the digital market. They’ll need to look into creative ways to capture margin elsewhere in their value chain.

Lisa Goller
Trusted Member
3 years ago

Retailers should look at free shipping as a consumer expectation. Yes free shipping erodes online margins, which is a real pickle unless you have a handy cash cow. Yet consumers are one click away from choosing a rival.

To absorb ballooning shipping costs, retailers need to optimize the effectiveness of their e-commerce strategy. Data insights can help them source in-demand assortments, price competitively and find incremental ways to refine the online experience.

Gene Detroyer
Noble Member
3 years ago

The online retailer should eliminate anything that gets in the way of the customer pushing the buy button. That includes free delivery fees and free return fees.

Amazon provides free delivery and free returns. But I assure you it is not a “margin killer.” I am paying for it overtly with my Prime membership or covertly in the price. But assuredly I, the customer, am paying for it.

I am sure someone will say that Amazon can operate on smaller margins. This is true. However if I accept a 10 percent lesser margin and increase my sales 10 percent, I make a boatload more money.

Ryan Mathews
Trusted Member
Reply to  Gene Detroyer
3 years ago

Gene, I totally agree. See my comment on your earlier comment.

Jeff Sward
Noble Member
3 years ago

How about we call this what it really is? It’s “no charge shipping.” It’s not free. In fact it’s damned expensive under certain transaction thresholds. Sure it’s a customer desire and expectation, but if the retailer isn’t really careful about how it’s applied, they will create a perpetual money losing model — all in the name of protecting market share. No charge shipping isn’t going anywhere any time soon, so it’s a function of how the retailer employs that tactic among all other competitive weapons.

Richard J. George, Ph.D.
Active Member
3 years ago

Both free shipping and returns are real costs. The issue is who absorbs them: the company and/or customer. The economics can be developed where both parties win (share) by requiring minimum purchase levels, which would enhance basket size. Here is a terrific opportunity to employ analytics to determine feasibility and profitability.

Gene Detroyer
Noble Member
Reply to  Richard J. George, Ph.D.
3 years ago

The cost of labor is a real cost. The cost of rent is a real cost. The cost of infrastructure is a real cost. And, like free delivery and free returns, the customer is paying for it all … or alternatively, the retailer goes out of business.

Cathy Hotka
Trusted Member
3 years ago

At last week’s VP IT Council meeting, participants talked about the difficulties of absorbing the $5 cost of shipping a $3 item. Job One for retailers is to navigate away from siloed systems and toward the cloud, where costs can be better analyzed and more efficient practices adopted.

Craig Sundstrom
Craig Sundstrom
Noble Member
Reply to  Cathy Hotka
3 years ago

I can’t disagree, but when the numbers are really as stark as you illustrate — and I suspect many times they are — no amount of “analysis” is going to save you.

Jeff Weidauer
Jeff Weidauer
Member
3 years ago

Like it or not, free shipping is a customer expectation. It’s up to the retailer to find a way to offer it and remain profitable. There are options to make up the margin, but they require new thinking – what’s worked in the past won’t work now.

Brandon Rael
Active Member
3 years ago

Removing friction from the shopping, including a more seamless shipping and product returns process, is all part of providing an outstanding customer experience. Once perceived as a margin killer, for better or for worse, free shipping has become the normal customer expectation.

The answer to the question is that it depends. It depends on the product, the forecasted margin, and the competitive landscape. Very few companies are in Walmart, Amazon, and Target’s universe, where they have vertically integrated much of their supply chain and have the ability to offer free shipping via annual memberships and other partnerships.

There are costs of doing business that have to be considered when offering free shipping. Larger companies could absorb these costs as economies of scale kick in. They could also leverage their physical retail locations as fulfillment centers via BOPIS, curbside, and same-day delivery.

Dave Bruno
Active Member
3 years ago

Yet another argument for ensuring the store is a vital and highly promoted part of the fulfillment mix for store-based retailers. BOPIS is of course the ideal outcome, but not always possible or practical for the shopper. Endless aisle and ship from store can help offset the logistics costs as well, but do have labor cost implications to the stores. NO easy answers here, I’m afraid, but encouraging options that minimize costs and, in the case of BOPIS anyway, encourage add-on sales, are for sure a strong way to help offset the pain of “free” shipping.

Liz Crawford
Member
3 years ago

“Free delivery” will become part of the price of the product. This will be like getting a basket of bread before a meal. It’s just what you do.

David Adelman
3 years ago

Free shipping and free returns are not sustainable; just like the race to the bottom, all retailers have experienced competing on the lowest price.

Many small retailers will perish trying to keep up with the Amazon and Walmart of the world. It’s been proven that consumers will pay up to 20% more for a product when they receive great service.

This means aligning yourself with your customer through all channels from the start until long after the sale.

The last factor to consider with the free shipping/return model is the cost to our environment. Sustainability and being responsible is paramount today for any business.

Trevor Sumner
Member
Reply to  David Adelman
3 years ago

It also depends whether you believe shipping costs will lower with automation, micro-fulfillment, and new delivery methods like drones. Skate to where the puck is going. However near-term data is that costs are increasing, not decreasing as we covered in This Week In Retail.

Shep Hyken
Active Member
3 years ago

Free shipping is not really free shipping. It’s just that the retailer is not adding a shipping fee. It’s baked into the retail price of the product. Does it impact margin? Of course. It’s a cost. Does free shipping favor higher volume retailers? Yes. Higher volume and slimmer margins can be more profitable than lower volume and higher margins. It’s all numbers. Does shipping impact cart abandonment numbers. Absolutely. If there are two retailers that charge the same for their merchandise, and one has free shipping and the other charges, we know who the consumer will choose — unless there is a value proposition that is so obvious it makes the cost of the shipping irrelevant. And, that is where retailers need to focus. Create value outside of low prices and free shipping.

David Mascitto
3 years ago

Shopping cart abandonment due to shipping fees is a symptom of a much larger problem: customers are buying the price of the item. Unless a retailer is able to differentiate the product, the shopping or the brand experience from mass merchandisers like Amazon and Walmart, it will be a race to the bottom on pricing to compete, a race they will ultimately lose.

Peter Charness
Trusted Member
3 years ago

Perhaps the longer term difference will be between free shipping (part of cogs), and “fast” shipping a paid service if you want your item even sooner than free. Even though I pay for Amazon “free” with my prime membership, there are plenty of opportunities to also pay for fast.

Craig Sundstrom
Craig Sundstrom
Noble Member
3 years ago

Further commit, or should they BE committed? From something retailers have little or no control over — stock manipulation — to something they do … or do they? That depends: for those who have followed the siren call of lowest cost, the answer is often “no,” at least to the extent that a (often well funded) competitor puts up that four letter word. Those who have broken free (pardon the pun) and offer a more differentiated shopping experience, have some chance at avoiding the rabbit hole.

Ananda Chakravarty
Active Member
3 years ago

Most retailers are not vertically integrated enough to drive free online shipping. The commitment makes sense for those who can absorb the cost of delivery, through higher product prices, club costs, added fees or other mechanisms. However, few retailers have the flexibility to sink their margins that dramatically. There is just not enough room (without the added value to add free shipping, especially smaller, lower cost items). The cons against it primarily fall into the “so what” bucket.

For any retailer embracing free shipping, there will always be an Amazon or a Walmart (for >$35) offering it. It is neither a differentiator nor a unique strategy to grow. For retailers seeking growth, finding other ways to drive value will be the route. Unfortunately, free shipping as a strategic move makes little sense right now and gives zero advantages driving customers to price as a differentiator. Few retailers will survive for long in that battle.

Rachelle King
Rachelle King
Active Member
3 years ago

Even Amazon has struggled with logistics costs. It’s tough to say it’s par-for-the-course in this accelerated digital commerce world, but it really is something retailers will need to contend with. Many online shoppers simply refuse to pay for shipping. If retailers don’t want to deal with cart abandonment, then free shipping has to be an option.

Going further, some retailers that insist shoppers spend just one more penny to get to the $35 threshold might even be rewarded with more loyalty by giving up on that penny and offering a grace premium if you come within a penny of free delivery.

Supply chain and logistics are infamous profit eaters in some industries. To stay ahead in this game, retailers will need to ensure they have the most optimized systems, processes and technology possible. Demand for free shipping is not going away anytime soon.

Trevor Sumner
Member
Reply to  Rachelle King
3 years ago

It will be interesting to see the effect of local fulfillment on shipping costs. Will Walmart or Target eek out an advantage?

dbrewster90254
3 years ago

Included aka “free” shipping is Amazon’s great deception. Shoppers pay a shipping fee in the form of their Prime membership and other retailers have to compete without the benefit of that subsidy. As an alternative, free shipping offers could come with loyalty vs. a threshold — only provided to returning customers.

Trevor Sumner
Member
Reply to  dbrewster90254
3 years ago

The value of Prime and giving up data. We are seeing this with the launch of so many retail loyalty programs in the last year.

A Non-Agency
3 years ago

We will see a trend to offset the expectation of free delivery through the blooming age of micro-fulfillment centers. Free shipping will return to an incentive vs. expected for marketplace brands and retailers as shipping rates increase with logistic challenges continuing.

John McIndoe
John McIndoe
3 years ago

Each retailer should set its shipping and return policies based on its go-to-market strategy and the wants/needs of its customers. A specialty retailer that doesn’t compete with Amazon and wants to maintain a high-touch customer experience should consider waiving shipping and return charges as part of that quality experience. A mass retailer aggressively competing with Amazon should identify and evaluate the wants/needs of its high-value customers and weigh those against Amazon Prime’s free shipping policy. If the retailer’s go-to-market strategy is based on rock-bottom pricing, then it may have to charge for shipping and/or returns to achieve healthy margins. Shipping and return policies are a part of the brand experience as much as product assortment and pricing.

KARIN JESKE
3 years ago

I’ve worked with a variety of mostly online/direct fashion/home furnishings retailers that offer free delivery. It is simply a different pricing approach that I believe creates a better customer experience vs. surprising them with added fees at checkout. The average shipping cost is added to the product cost and both are marked up. The margin % = (selling price – (product cost + shipping cost) / selling price). With the right product assortment, particularly one that has some exclusivity, it certainly is possible to be competitively priced, offer free delivery, and still be very profitable. If you’re trying to make this work with low end commodity products, there is no way you’re going to beat Amazon.

Trevor Sumner
Member
3 years ago

The answer is both yes and no. Convenience matters to consumers but, as Mark Ryski points out, there is a reason why Walmart and Amazon are pushing free delivery and turnaround times that others can’t beat, it’s a point of competitive differentiation. Jeff Bezos famously said, “Your margin is my opportunity.” They are eroding margins so others can’t compete. Amazon now delivers more packages than FedEx. Scale matters and the costs of shipping are unsustainable in many low margin categories like grocery. Here is a post we did discussing the conundrum of e-commerce growth and margins, with great data from Neil Saunders (see his comment as well) and others.