Shipping Wars: Free shipping isn’t really free

You may have seen the YouTube video preview (http://youtu.be/98BIu9dpwHU) posted by Amazon Prime Air eight months ago: It’s had more than 15 million views. The 1-minute, 20-second video tracks an Amazon order beginning with a customer clicking the “Prime Air 30-Minute Delivery” button online and ends with a drone gently placing a package at the customers doorstep (presumably within 30 minutes).

Of course, the video is just a “preview of coming attractions.” Amazon isn’t currently making deliveries via drone. The FAA disallows commercial use of drones (although some companies ignore the rule). But, once safety and privacy issues are worked out and insurance companies get a handle on underwriting such an enterprise, we can expect to see drones delivering packages nationwide.

Amazon isn’t saying what the cost to the consumer will be for 30-minute delivery. The unanswered question is: Will consumers pay the price? All indications are that most consumers aren’t willing to pay for super-fast delivery; at least not directly. Consumers’ No. 1 objection to buying online is delivery charges.

The British company Advantec, in its report titled “Free Delivery and its Effects on E-commerce Conversion Rates” tells of a split test in which a product being offered for £10 with a delivery charge of £3 was offered alongside an identical product being offered at £14 with free delivery. The test ran for one month. The results left no doubt about consumers’ preferences: They overwhelmingly bought the product with the “free” shipping offer even though it cost £1 more. Consumers expect to see several prices for the same product. “Free shipping” increases a product’s value proposition and is very attractive to online buyers. Most consumers dislike shipping charges so much that they will pay more for a product just to avoid paying them.

Welcome to the era of The Shipping Wars, where it’s no longer enough to offer a quality product at a competitive price. Now, consumers consider the cost of delivery when they consider a product’s value.

Unfortunately, delivery costs aren’t something that small merchants have a lot of control over. Discounts on bulk shipments of wholesale products for resale can be negotiated, but the discounts available to small merchants for shipping sold products one-at-a-time to consumers are inconsequential.

A recent survey conducted by comScore on behalf of UPS showed that 93 percent of consumers took action to reduce or avoid shipping charges when purchasing online. More than half of all consumers placed additional items in their shopping carts to push their purchase amount over the “free shipping” threshold. Other shipping-charge avoidance tactics include:

• Choosing slower shipping times (50%)
• Having purchases shipped to a local branch store for pickup (35%)
• Searching for coupons online (47%)
• Joining a loyalty program, such as Amazon Prime (31%)
• Waiting for a free shipping promotion before making a particular purchase (30%).

This article originally appeared in Antique Trader magazine
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Regarding shipping charges, the “upshot” of the survey is that the cost of delivery trumps delivery speed. Consumers are willing to wait a little longer to receive their purchase if it saves them money.

If low-cost delivery is good, then no-cost (“free”) delivery is better. As we know, “free” shipping isn’t really free. Someone has to pay for it, and if the “someone” happens to be the merchant, the delivery cost is certainly rolled into an item’s price. Another cost that merchants must consider is that as online sales increase, so will merchandise returns. Will merchants pay the shipping costs associated with returns, or will they require the buyer to do so? Every return of a “free shipping” sale costs a merchant the amount of the sale plus twice the delivery cost.

Large online sellers have been aware of consumers’ attitudes toward shipping fees for some time and have taken steps to reduce or disguise their shipping charges. Such steps have included offers to include:

• Free shipping above a particular purchase threshold
• Free shipping for a limited time
• Free shipping on returns
• Free shipping combined with a purchase threshold for a limited time
• Free shipping as part of a customer loyalty program
• Free shipping for local store pickup.

The Advantec report suggests a merchant shipping tactic that I take issue with: “Taking the lost profit margin on the chin, in the knowledge that increased sales will compensate for the lost margin.” To keep gross profits level, sales have to increase a lot to compensate for lowered margins. As an early mentor once told me, “You can’t lose a nickel apiece and make it up in volume.” “Taking it on the chin” for shipping charges is just bad business.

EBay encourages its sellers to offer free shipping by rewarding them with higher search results placement (supposedly, some sellers say that isn’t necessarily true). As The Shipping Wars continue, more and more merchants will jump onto the “free shipping” bandwagon. The result? Prices for online merchandise will begin to rise. The advantages of buying online – price and convenience – will be reduced to convenience only. That’s where Amazon Prime Air re-enters the picture. What could be more convenient than ordering something online and having it delivered to your doorstep 30 minutes later?

When shipping costs begin to drive the prices of online merchandise up, bricks-and-mortar merchants should stand up and cheer. Consumers will be able to buy goods at a local Mom-and-Pop for less than they might buy it for online. When a buyer in California pays more than a buyer in Ohio for an item shipped from Maryland (due to differences in shipping rates), the California buyer will be more inclined to drive down to Main Street to make the purchase.

We’re not far from the time when consumers will rediscover bricks-and-mortar retail stores, where they can get what they want when they want it at a price that’s less than the amount online merchants are selling it for.

Let The Shipping Wars come, for they will be resolved in favor of merchants who don’t have to ship: Your local bricks-and-mortar retailers.