How much is free shipping really costing retailers?
Through a special arrangement, what follows is an excerpt of an article from Retail Dive, an e-newsletter and website providing a 60-second bird’s eye view of the latest retail news and trends.
E-commerce retailers have lured shoppers with shipping deals that have now become an expectation. To be sure, shipping costs are being paid for by consumers—even if it’s not a line item in their online shopping cart.
But the last several years have seen extreme price pressures that are making it difficult for retailers to pass on those shipping costs to shoppers in their entirety. That’s why many have come to regard some level of absorption of shipping costs as a "marketing expense."
"Free shipping helps us rationalize buying something online instead of going to a store," writes Anna Kegler on e-commerce analytics platform RJMetrics’s blog.
The trouble with retailers’ current attitude toward shipping is that they’re not accurately calculating how much their policies are costing them, Jeremy Bodenhamer, CEO of logistics automation company ShipHawk, told Retail Dive. Especially with the shift by FedEx and UPS to dimensional pricing (charging by package size in addition to weight), shipping costs have risen just as the wiggle room to charge for shipping has narrowed.
Source: Retail Dive
In some cases, he says, even for retailers that have negotiated rates with carriers, they don’t actually know the price of shipping until the goods reach the customer. That makes it hard to know what to charge for shipping, what minimums to set, or, even if the decision is to do without minimums or charge any fees, what the cost of this new type of "marketing" actually is.
The omnichannel approach to retail is also complicating logistics, with many retailers employing stores as mini-warehouses.
Companies can leverage technology to ensure that the smallest (or, more accurately, the least expensive) packaging is used for items, and can choose the best carrier for the job depending on where orders are originating and where they are going.
"In many cases we do this as the order’s being placed," Mr. Bodenhamer says. "The system will then calculate and come back with all the details for that order in real time, starting with the optimal box. We have complex packing and assembly algorithms to figure out the packed weight and dimensions, that this or that is the final size that the carrier should be picking up."
"When the retailer figures out these unknowns and finally knows what these costs are consistently, ahead of time, they can then make that decision about free or subsidized shipping. Then it’s a rational decision."
- How much is free shipping really costing retailers? – Retail Dive
- Free Shipping Is Going to Cost You More – The Wall Street Journal (sub. required)
Does it make sense to view free or subsidized shipping for online orders as a marketing expense? Can online retail absorb the current level of free shipping expectations in the long run?