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Why “Free Shipping” Offered For Online Shopping Is A Lie

Here’s the Economics and Psychology behind “free shipping” offered by online retailers.


Free shipping for online shopping is a popular concept. Whether you’re shopping at ASOS or Zalora, once you meet the minimum spend, you are entitled to free shipping. Insanely fast and free shipping is one of Amazon’s differentiating points. Popularised by early internet startups, free shipping has grown to the point that it is now an expectation from consumers, a necessity for any e-commerce company that has hopes of remaining competitive in today’s marketplace.

Why Do Companies Offer Free Shipping?

Reduce Barriers to Purchases

Unexpected costs is a major reason people don’t complete their online orders. Customers are usually not pleased when they are presented with “additional” shipping costs at the checkout page, even though mentally, they understand that it is necessary. This negative feeling like they are being “conned” at the point of purchase is something online retailers want to avoid in order to ensure customers complete their purchase.

Increase Order Size

After you shop for the cool items you want online, only to realise you’re just a couple of dollars away from qualifying for free shipping. Sure, you can pay for the shipping, but won’t you rather add on another item or two? Having an appropriately-set free shipping threshold can motivate customers to spend more. It is also more cost-effective for retailers to process and ship larger orders rather than filling many smaller purchases.

For example, online retailers in Singapore such as Zalora offer free delivery for orders above $40 as well as 30 days free return.

Who Pays for “Free”?

Source

In Economics, we know that “free shipping” is not actually free. In fact, shipping is really expensive. According to data compiled by GeekWire from the company’s earnings reports, Amazon’s net shipping costs for the third quarter of 2016 was around $1.75 billion. So, who pays for it?

For some retailers, not having to maintain a physical store and pay someone to unpack the goods, arrange them on shelves and have cashiers serving customers already give them profitable enough margins that they can offer free shipping. It is fantastic when they can do it, and it’s the dream that e-commerce promised.

However, sometimes the math doesn’t work out and the cost of free shipping needs to be passed on in other ways. If you look carefully, some e-commerce sites do a slight mark up on prices, or deliberately cut their customer service, or impose strict purchase or return conditions. As an informed consumer, it would be wise to read the fine print and ask around others for their experiences before buying.

The Free Shipping Arms Race

Ever bought something online and wondered how the heck the company was able to make any money from your purchase after factoring in free shipping? They don’t.

With investors flooding cash into e-commerce companies, companies with big cash reserves are able to strategically absorb the economic blow of free shipping in the hopes of quickly gaining market share, though without any real evidence that this would pay off in the long term once the warchest is depleted and they can no longer “subsidise” customers’ purchases.

In a way, such companies with investor backing, like Alibaba and Amazon, “spoils the market” by pressuring the industry to offer free shipping. Unlike these companies though, they can afford not to be profitable in the near term.

The size of large e-commerce companies is another advantage over the smaller players when it comes to shipping: economies of scale. They can secure very favourable shipping rates by guaranteeing their courier partners a certain number of shipments. With their massive resources, these companies have begun to own and operate their own logistics and shipment infrastructure.

The implication of this arms race aren’t often felt by us consumers, who have come to expect free shipping. And its actually very nice for us to be “courted” by these competing e-commerce websites to be their customers. The one facing the “pinch” are the smaller e-commerce businesses, for whom the cost of free shipping, might turn out to be unsustainable.

Will the Dream of Free Shipping Last?

Thousands of retailers now offer it in one form or another. As customers, we have come to expect free shipping as a norm and it does look like it is here to stay. For online businesses to continue to grow and be viable, they need to seriously look at their numbers.

Ultimately, someone has to pay the cost of shipping. Whether it is the customers (accepting the tradeoff of higher prices or lower service standard), investors (who pump in money to allow the business to gain market share), or companies themselves (to write-off the shipping costs as a loss leader).

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