Share this article

print logo

The high cost of free shipping

Katie Cipollone offers free shipping on all online orders from her Etsy shop, CipShopBflo.

Cipollone doesn't feel like she has a choice. With consumers today used to free shipping offers from Amazon and other large retailers, her small business has to keep up with the big companies or risk losing customers.

So if she sells a Buffalo-themed tea towel from her City of Tonawanda home business, she pays $4 to have it delivered to the customer's door, plus her own labor and the cost of packing supplies. If it's something larger or heavier, such as coasters, and the customer is far away, her shipping cost could soar to $10 or more. Sometimes, shipping costs as much as the product itself.

But there's no such thing as free shipping.

The cost of packaging all those online purchases, and transporting them from the retailer to the customer has to be paid by someone. Yet customers have come to expect free shipping as an inalienable right, rather than a paid service.

So now, wine glasses that Cipollone used to sell for $10 plus $3 in shipping, now sell for $13.

Despite the higher prices, though, Cipollone still ends up paying at least part of most shipping fees.

"I don't think many people realize how expensive shipping can be," she said. "Anything that is over a pound is at least $7 to ship, even with discounted shipping rates, which adds up since all the items I sell are around $20 or less."

Studies show that most shoppers won't pull the trigger on an online purchase without it, and will choose an item with free shipping over an identical item – even if it ends up costing more overall. And consumers cite surprise shipping costs as the No. 1 reason they abandon purchases in their virtual shopping carts.

Editors' Picks

This holiday season, free shipping will be a bigger factor than ever for shoppers and retailers. Three-quarters of shoppers expect free shipping when shopping online – even on relatively small orders, according to the National Retail Federation.

Retailers are investing heavily in fast, free shipping, which will pay off for consumers, but put pressure on stores. Big retailers like Best Buy, Target and Walmart are expanding their free shipping offers during the holiday season. Amazon is building a fleet of new distribution centers so it can offer one-day delivery in more markets.

Small merchants don't have the same resources to swallow shipping costs, which makes it hard for them to compete. It got even harder when Etsy changed its algorithm to put shops with free shipping at the top of its search results. That's why Cipollone made the switch six months ago, after having charged extra for shipping since 2017.

Still, she understands why the change was necessary.

"Even as a small, local business, I tend to cringe when I see a shipping charge because I'm spoiled by Amazon Prime like everyone else," Cipollone said.

She ships through the U.S. Postal Service and gets discounted rates because she weighs items at home and buys her labels through Etsy. Etsy offers slightly lower prices than what it would cost the average person to drop a package at the post office.

Through it all, Cipollone noticed something surprising: Despite the final cost to the consumer remaining the same as when she charged separately for shipping, customers are more willing to buy when costs are rolled into the item price and shipping is "free." Items sell faster and customers place larger orders, Cipollone said.

It could be that her shop is more visible under the new Etsy algorithm, but she sells one or two more items per week now that she offers free shipping.

Studies have consistently found that customers will choose free shipping over paid shipping, even if their cost is the same or higher. Consumers would rather have a $6.99 shipping fee waived than a $10 discount, even though it's costing them $3.01 more, according to research by David Bell, a marketing professor at Wharton School of Business at the University of Pennsylvania.

Charles Lindsey, a marketing professor at the University at Buffalo School of Management, attributes it to "the importance and the draw of free."

"It’s psychologically tantamount to showing someone a shiny object," he said.

The act and expense of shipping only becomes real to the customer when it's their dime at stake. Paying for shipping brings to mind the idea of paying to process and ship back a return. Even if there is no restocking fee, the initial shipping fee is nonrefundable.

"Free shipping poses less financial risk," Lindsey said.

If the option is to spend an extra $5 to meet a free shipping threshold, or pay $5 for shipping, it's more attractive to consumers to go back and look for another item to buy. They would rather have something to show for their money, other than the convenience of a purchase showing up on their doorstep – something most consumers don't even acknowledge as a service anymore.

More and more, covering shipping fees is the cost of doing business. And it's a cost some are finding unsustainable.

Corporate retailers with deeper pockets are better able to shoulder the costs of offering free shipping as a sort of loss leader, but even they have found it difficult.

In 2018, Amazon spent a record $27.7 billion on shipping costs. At the same time, millions of Amazon customers paid just $119 for the Amazon Prime memberships that grant them free, unlimited shipping.

Amazon, which has continuously raised the bar on free shipping, has a reason for making the push: Prime members spend an average of $1,400 per year, compared to nonmembers' $600 per year, according to data firm Consumer Intelligence Research Partners. Multiply that by the more than 100 million Prime members Amazon claims to have around the world.

But the e-commerce juggernaut is still figuring out how to make the math work. Its focus lately has been on building its own logistics and shipping infrastructure, which includes a package-sorting facility in Lancaster and a $25 million warehouse and distribution center planned for River Road in the Town of Tonawanda.

The chains have scrambled to keep up. Walmart in particular has invested tremendous resources into improving its online capability, and the push has paid off for the big box, with online sales soaring 41% in the third quarter. In a bid to meet Amazon's two-day and next-day shipping, Walmart offers free next-day shipping on many items this year. Target offers free two-day shipping through Dec. 21. Best Buy offers free next-day shipping on thousands of items, too.

Consumers' desire for free shipping isn't likely to go anywhere soon – especially now that consumers have become so hooked on it, experts said.

"The word 'free' is a charged term," Lindsey said. "Something that is free is perceived as the ultimate firm-consumer relationship sweetener or enhancer."

Ready, set, shop: 5 things to expect this holiday shopping season

Story topics:

There are no comments - be the first to comment