Free Shipping in an Era of Rising Shipping Costs

... you do free shipping... UPS doesn't!

[jsinger]

We've offered flat rate shipping for a decade... actually two tiers, then free over about $100 like many web sellers. Our products lend themselves to that scheme because they weigh roughly the same per dollar. We don't sell feather pillows and barbell sets.

We get many telephone orders and it's easy to say "shipping is a flat $9." That worked great years ago... even made a buck or two on average on each shipment. (sigh, yearning for 2002 again!)

I believe that web sellers should always strive for simplicity. Flat rate shipping is simple. But I also believe in turning a profit.

The landscape is changing as carrier rates rise and the expected free shipping level is fairly fixed around $100. Free shipping is starting to strangle us, even in an era of near-zero inflation.

A few competitors are going to "free with $129" or the like, and those tend to use a lot of coupon promotions.

Does this worry you? What are you doing to pass rising shipping costs (up about 5% this year) to the buyer?

[dickbaker]

I'm reviewing the shipping costs. I got an unpleasant surprise the other day when a customer ordered a 15 pound product that I advertise as having free shipping. The customer was in Alaska. In the past that's not been a problem, but the shipping was so high that I wound up making $2 on a $125 sale. UPS radically changed the price to Alaska, I guess.

So, I've added $25 to the cost the item if shipping UPS to Alaska or Hawaii. For the lower 48 states it's still free.

[jsinger]

Nothing much has changed with regard to Alaska.

We'd never think of shipping to Alaska or Hawaii by UPS. U.S. Postal Service is much cheaper. (but still costly)

Your costly revelation is a perfect example of what I'm worried about: I wonder whether e-commerce marketing people and shipping people communicate with each other.

Ten years ago (exactly this month) we learned the pitfalls of ignoring costs in the Dot Com age.

[lorax]

In the model I use - shipping included - the costs are covered - always. We only ship to the lower 48 US States and we use Los Angeles, CA to calculate the shipping rate (nearly worse case scenario). Some of our items can be shipped out in USPS Priority Flat which saves on costs. Our items are low volume, small quantity if not one of a kind so I feel we can justify the shipping costs for now but I am thinking about doing something slightly different.

My latest line of thinking is to keep the shipping as it is but encourage the buyer to call us and get a better shipping rate. This way, they could order if they don't care or it's after business hours or they call and we get a chance to make their acquaintance, probably give them a lower shipping fee, and give them better service. Also allows me to judge the buyer for fraud.

[dpd1]

I've never done free shipping. There's no way I could do that. But we sell mainly large dimensional items, so people don't really expect free. I've never once had anybody request free shipping, even on large orders. But what worries me is all this talk about some people wanting to turn the PO service upside down. If they change the int. service in any major way, I would basically be up the creek. Normally I would just brush it off as the usual nonsense in DC. But considering all the insanity lately, I wouldn't put anything past them at this point.

[olimits7]

I offer free standard shipping but most of my products don't weigh a lot, however, on my site I have also set a maximum weight for free shipping this way I don't get killed on the few products that weigh over 10 lbs.

olimits7

[MrHard]

Started doing the exact shipping on some new heavy items to increase margins, but only because many competitors won't carry them.

If they did free shipping would be standard and there would be no changing it unless everybody did which of course never happens.

[ItsAllBallBearings]

In a word...maddening

That's how i feel each month when i look at exec level report on shipping. USPS rates have effectively tripled in the last 4 years given all the package requirements.

All i can say is "F" Zappos for making the customer think free shipping is a right and not a privilege.

[lpiracing]

We implemented free shipping up to 40lbs. We just had to in this market. Shipping heavy items across country gets a bit insane.

[jsinger]

All i can say is "F" Zappos for making the customer think free shipping is a right...

Agreed!

Just got a piddling order from a customer who demanded the merchandise immediately 300 miles away. She mentioned that Zappos gives free next day air.

Shoes go up 2% annually, shipping goes up 5%. We'll see how long Z can stick with that business plan. Has "Dot Com Bubble" written all over it.

[jpman]

Can never think of FREE. Shipping cost is usually more than product costs since we ship abroad.

[dpd1]

The problem is that nobody knows what goes on behind closed doors with these companies. They could be getting propped up by the parent company and being used as a tax shelter, for all anybody knows.

[ssgumby]

Has Dot Com Bubble written all over it

Are you kidding me? Zappos is the king of success. Shipping shoes does not cost much, they get HUGE discounts from UPS. Shoes have mega markups. That company knows what they are doing. How can you possibly say "we'll see how long Z can stick with that busines plan". They've been in it for over 10 years already and now are partnered up with Amazon. If that is a bad business plan, i'd love to have the same plan and retire nicely in 10 years.

"Zappos.com is an online commerce success story and the leading Web shoe retailer in the United States.
The company is now expanding its offerings to include accessories, clothing, luggage, eyewear, jewelry, housewares and electronics. Started in San Francisco in 1999, the company made almost no money that year but had gross merchandise sales of US$1.6 million the second year, an indication of the growth that was to come. A commitment to providing an unprecedented level of customer service that includes free shipping both ways and a 365-day return policy has put Zappos.com on track to have US$1 billion in gross merchandise sales during 2008."

[jsinger]

Shoes are heavy, costly to ship. And with cheap shoe imports from Asia, shipping costs are very high in relation to product cost. You didn't see old retailers like 100-year-old Sears or Penney's shipping them free. Z gets huge discounts from UPS. Penney's probably gets larger ones.

Zappos didn't turn a significant profit until a few years ago. It was all about volume.

King of success? Network Solutions was once sold to Verisign for $21 billion. Recently it was resold for about $800 Million. Quaker Oats paid nearly $2 billion for Snapple. Sold it two years later for $300 million. Boston Market was "successful" if you measure success by the 1,000 locations they briefly had, before collapsing.

The NASDAQ listed hundreds of "kings of success" a decade ago. Almost all are out of business or reduced to slivers. Bet every one of those $100-million market cap firms could list "great customer service" and other things to justify its "unique" value.

Zappos' problem is every business school in the country is using them as a case study. They don't own a patent on what they do. Whatever gave them an edge is being tested by everyone these days, including shoe companies that hadn't heard of Z even four years ago.

Aside from the obvious costs, unrestricted free shipping has a major drawback that's rarely talked about; it encourages smaller orders. Charging a fixed amount, say $5, encourages customers to aggregate orders.

Shoes have been sold by mail since the 1870s at least. I'm not aware of any cataloger routinely employing free shipping before the web. Perhaps Zappos has invented some enduring plan for success or perhaps they're smarter than anyone else in retailing, but I doubt it.

[ssgumby]

jsinger, again from all your posts you seem like you were badly bitten by the "dot com era" and you are still bitter.

First, I have inside knowledge that at one time JC Penney was UPS biggest account, now UPS biggest account is Zappos and they do get better discounts.

Making profit is not everyones top priority and measure of success. First, most ventures take 3-5 years to break even due to startup costs. Zappos for their first 8 could have made profit but continues to invest in growth and remain at break-even. Personally that is a great goal in my mind, keeps taxes low and allows one to grow their business for possible future profits. In 2007 they turned a profit.

Again for me success isnt necessarily creating a company to live for 100 years. Zappos is strong after 10 years and growing. Recently selling itself to Amazon and "cashing out" was most likely the intention all along for Mr Hsieh.

I know of another company who ships heavy items (30-60 lbs) and its always free shipping. They are wildly successful and profitable after being up for 5 years. They get their products at low cost, mark them up to cover shipping. Selling qty 1 of item A covers the shipping ... if one orders qty 2, shipping does not go up linearly so its more profit. Trust me free shipping can work and does, you have to have a handled on how your price your products.

[mattb]

Zappos has close to a 40% return rate that they refund back to customers (not exchanging for new merchandise). I don't think most companies would consider that successful. Zappos also laid off employees last year. Also not an indicator of a success story.

Amazon only paid $40 mil in cash for the company. The rest was stock.

[jsinger]

jsinger, again from all your posts you seem like you were badly bitten by the "dot com era" and you are still bitter.

I never owned internet stock. I observed the madness of that period as one might watch a predictable train wreck... gruesome but entertaining to see from a safe distance. My money has been in bank CD's and municipal bonds for years.... some conservative funds and ETFs, and very few individual securities, mainly for tax reasons (disclaimer: I own UPS stock)

Bitten by the Dot Com era? Weren't we all, even if indirectly? I had to compete with some of those greedy ego trip kids, at least until they collapsed!

Now I have to compete with Zappos in terms of expected free shipping.

[jsinger]

Zappos has close to a 40% return rate that they refund back to customers

Yes, I started to write about Z's return policy but wanted to stick with the original subject, shipping costs.

I'm guessing that Z is very dependent on the "kindness" of their shoe manufacturer suppliers who may eat a lot of costs, but only until a better deal comes along.

Wonder how many families buy shoes, wear them for a few weeks and return them for full credit. What worked in '05 could be a disaster in 2011.

[mattb]

Back to shipping costs... We are seeing LTL rates much lower than in the last several years. All of the carriers have excess capacity and I think are pushing prices down due to the financial troubles at Yellow / Roadway. Also, ocean container costs have dropped slightly. Again, too much capacity.

As for small package shipping, implement rate shop software and let UPS / FedEx duke it out. Whenever the reps come in asking where their volume went we say that the computer is picking the competition based on price.

[jsinger]

Good post, mattb. We don't use truck carriers much but I was reading that many big rigs are parked due to excess capacity. For most here (in the U.S.) shipping options are UPS, FedEX and the post office.

We use UPS 95% and maybe post office 5%. A trace of Fedex. What shipping software do you use? We should play them against each other.

[mattb]

Harvey Soft for rate shopping. We were primarily UPS but now most goes FedEx. They seem to be hungry for market share. Just make sure when you implement the rate shop that you insist that they give you the best rate up front. They both want to play games with rebates if your shipping volume reaches x. The rate shop software can't handle this scenario.

[ItsAllBallBearings]

Wow, sorry that my little zappos rant derailed this thread for a bit.

bottom line, free shipping will be expected of all merchants unless you ship inordinately heavy items (i.e. furniture). If we're not already at that point, we will be soon.

The costs will have to be made up for in other areas. Just like the airlines now charge for oxygen (hyperbole, i think...havent been on AA in a while), we'll have to adpot new pricing models that unfortunately back load $$$ to the orders

[dpd1]

So making no profit for 8 years is considered a success now days huh? Wow. News to me.

I don't know... I think a lot of people are assuming people expect free shipping. I don't see that being the case. Yeah, if you offer it, of course they'll take it. That doesn't mean they expect it every single time they buy something. That's like saying people who go to OSH on no sales tax day, will expect everybody else to sell stuff with no sales tax.

[lawman]

The way I usually buy fungible items is by final cost. As often as not, it's cheaper to buy an item and pay shipping from one source than to buy the same item with free shipping from another source.

Shoes are one of those items I cannot imagine buying online

[jecasc]

The problem is that the big players can afford free shipping, since they get big discounts.

We ship about 10,000 parcels/year and pay less than 50% of what Joe Average pays for shipping a parcel. So I wonder what do companies pay with 100,000 or 1,000,000 parcels/year?

Not much I guess.

[jsinger]

Are you sure you get about a 50% discount for shipping just 10,000 packages annually? That seems like a big discount unless they are hundredweight or expedited or international where larger discounts are given.

We get a much smaller discount. Our average package is UPS ground and about 3 lbs. I've polled people in our buying group and their discounts are in line with ours.

What carrier do you use?

[pageoneresults]

What are you doing to pass rising shipping costs (up about 5% this year) to the buyer?

I had one client who was doing the free shipping option, they've stopped on my advice and their own research which showed that the profit was being eaten into by the shipping costs.

We've since switched to category discounts and other promotional efforts. On top of that, stuff that used to go FedEx or UPS is now shipping via USPS Flat Rate Boxes. Personally, I think the Flat Rate Box has put a major dent in the others profits. I've heard more than a handful of folks discussing the changes they've made and are now using Flat Rate Boxes.

On a side note, we have physical inventory in storage facilities. We're finding more and more local customers who don't mind coming by the facility to will call their items and save on shipping costs. We've also found that while they are there, a little upselling never hurts and they typically walk away with more than they originally had in mind.

I have this thing about local. There's more business within a 25 mile radius than most can shake a stick at. Unless you live in the boonies somewhere. ;)

Personally? I have faith in the USPS Flat Rate Box program. We've not had any complaints and the savings have been noticeable.

If I look back at all the purchases I've made online, I think a majority of them shipped FedEx or UPS 3 Day at an extra cost which was my choice. Most of the Free Shipping options are less than satisfactory from my perspective. You usually get put at the end of the list when you choose Free Shipping. Stuff like "please allow 7-10 business days" for delivery may not work in some instances. I know the routine too. Offer the free shipping but make it so unattractive that the consumer will typically select the next available option.

[httpwebwitch]

A little sleight of hand and advanced maths can make your shipping woes disappear.

imagine: $10 item that costs $5 to ship.

Make it a $15 item with free shipping. ka-Zing! you're done!

Or better yet, it's a $20 item, on sale $3 off this week, plus a $2 instant redeemable coupon - and free shipping.

Great tactic, if you can get away with it. You absorb the shipping costs into the product price, and the customer believes they've just got a great deal. Swiiish! Nothing but net!

[netmeg]

Yep, that's one of our tricks for some clients - absorb the shipping in the item cost.

Other clients use free shipping for order up to a certain weight, or over a certain dollar amount. None of my current clients offers all free shipping all the time, although some will do Free Shipping Weekends or such like.

One client has had some success pitting carriers against each other - UPS vs Fed Ex vs DHL.

I'm also mulling around the "Amazon Prime" model for one client where there are a number of repeat orders. Have customers pay a yearly fee for free two or three day shipping.

Free shipping is really really powerful - I know my Amazon Prime account has completely changed the way I shop online. My mom buys lawn equipment from Amazon now. Like it or not, I think it's here to stay. Ignore it at your peril.

Wish I could come up with a good solution for shipping to Canada, but at this point, there doesn't seem to be one. One client who does a lot of Canadian business ended up renting office space in Windsor and driving across the bridge once a week to ship from there (we're in the Detroit area).

[choster]

Zappo's isn't every business. They sell shoes, so they don't have much of a choice whether or not to offer free shipping.

• Shoe fit is extremely subjective. There is a much stronger preference for customers to buy brick-and-mortar where they can try on different sizes and styles at one time, as opposed to other consumables, even other clothing.
  
• There is, if anything, an over-abundance of offline shopping options for shoes. Of the 200 or stores in the mall near my workplace, no fewer than 33 sell shoes (about 25— more than 1 in 10— are dedicated shoe stores, even higher if you exclude kiosks and newsstands). Unlike, say, televisions, you can probably see as much variety as you can handle in an hour of offline shoe shopping as you could online.
  

So Z's has to overcome at least two barriers that you don't see with any of the things I typically buy online— electronics, books, software, travel, auto parts/accessories, ethnic foods, scuba gear, golf balls. I would agree that if your main business is selling shoes online, you're facing an uphill battle, but if you're selling any of those other things I buy, your model is going to be a little different.