The Myth of Free Shipping: How It Really Costs Retailers Money

We love free shipping.

It’s practically synonymous with online retail nowadays.

And shoppers don’t just desire the option at checkout; they expect it. 

66% want free shipping on all orders while 88% expect it when their order exceeds a certain amount. 

At this point, free shipping isn’t just a nice perk – it’s essential for retailers to provide.

So it makes sense that e-commerce businesses offer it. But unfortunately, free shipping isn’t free.

There is a cost, and it’s always paid by someone. 

While shipping costs can be hidden from consumers, businesses have to consider how this popular feature affects their bottom line. 

Because it does. 

No matter the size of your retail business, you’re probably losing some amount of money on free shipping.

And if it isn’t implemented correctly, you could end up losing more.

Free Shipping Will Cost You

Shipping is an incredibly vital role in the online shopping experience. Without it, there is no ecommerce.

It’s so important that 61% of shoppers say they are “somewhat likely” to cancel their order if free shipping isn’t offered, according to Invesp.

Because free shipping affects consumer shopping habits so much, incorporating it has become practically standard.

If you’re a new e-commerce business, what better way to attract more customers? Using free shipping should sell more goods and increase profits, right?

Well, not exactly.

The reality is, money for free shipping has to come from somewhere. And if the customer doesn’t pay for it, that leaves the retailer footing the bill. 

Retailers need to carefully consider how free shipping will impact their bottom line. Because this offer comes at a cost. 

Free shipping is only profitable if orders are priced high enough to cover the cost of shipping.

And if retailers don’t have a way to offset the amount of shipping, they’ll be left absorbing the costs and paying for shipping out of their own margins.

Factor in Logistics

There is one area that free shipping wreaks havoc on: logistics.

Increased logistics expenses create chaos for retailers trying to make a profit. Consider how often shipping rates change. This is especially true given supply chain issues the last 2 years.

Global freight container prices rose to record-breaking numbers. A Finnish strike decimated the production of shipping labels. A boom in e-commerce led to massive online orders and returns.  

All of these events factor into logistics and shipping costs.

To offset this, retailers who ship large volumes of packages will negotiate a lower rate with carriers. 

These volume-based discounts mean the more you ship, the better the discount rate. 

Think about it.

As a retailer, you are giving a carrier substantial business. As your company grows, so does the amount of packages needing to be shipped. More business means the carrier is then more willing to give you a better shipping rate. 

But as costs soar, carriers will have to increase their rates with retailers. Thus increasing money spent on shipping.

To not risk losing out on free shipping, retailers will have to find ways to include it without losing money. 

How Retailers Offset Charges for Free Shipping

As a retailer, losing money isn’t something you want to happen, ever.

So if you want to lessen the risk of lost revenue with free shipping, you’ll need to figure out how to cover the costs.

There are tactics that can help. 

But deciding which ones to choose will depend on the size of your company and what works best for your margins.

Increase Product Prices – This option passes the cost of free shipping onto the customer. The cost of shipping is baked into the product price, so the customer pays for not only the item they purchase but also the shipping. To do this, you’ll need to calculate the necessary markup to cover the cost. And don’t worry, this isn’t some well kept secret hidden under lock and key. Sites like Shipbob have written articles on how to offer free shipping as an online store

Minimum Spending Threshold (MST) – Implementing a minimum spending threshold (MST) incentivizes customers to pay more by still building the shipping cost into the product price. This method guarantees customers will spend a specific dollar amount on orders for free shipping availability. You will have to calculate the right number to offset your business’ logistics costs by increasing the average order value (AOV).

Who is Free Shipping Sustainable For?

Sometimes free shipping isn’t the best option for your business.

Maybe you don’t have the margins to include it yet or ended up paying more of the costs.

Or you’re a brand selling large, heavy goods, which makes offering free shipping even harder.

However, in today’s e-commerce world, free shipping has become the norm. And necessary for any business to compete. 

Online retailers add free shipping to their business simply because they have to.  

But it’s not a suitable option for every business.

So who does free shipping actually help in the long run?

Big Corporations

These are the Amazons, Walmarts, and Targets of the world.

So it makes sense that free shipping works best for them. But how do they implement free shipping without losing out?

Economies of scale. 

Huge name brands generate mass amounts of sales and revenue. 

Therefore they have the means to scale free shipping in a way that smaller, e-commerce companies can’t.

However, because they are shipping on such a massive scope, they lose a substantial amount of money.

Let’s look at Amazon as an example. 

Amazon’s shipping costs were $76.7 billion in 2021. This included:

  • Sortation
  • Delivery centers
  • Transportation costs

That number is gargantuan. But Amazon still, not only operates, but generates money by offsetting costs through their growing revenue. 

Sales at Amazon soared from $280 billion in 2019 to $469 billion in 2021. And that’s before and during the pandemic! 

To give free shipping perks, some of these companies have customers sign up for exclusive memberships. This is another example of free shipping through a minimum spending threshold.

Again, Amazon leads the charge. 

Their Prime members pay a subscription fee to reap the benefits of the program, including the 2-day, free shipping. 

For members who order less, they lose money in the long run. For members who frequently order, Prime is worth the subscription fee. 

Either way, Amazon still wins out. 

In fact, Prime members will often spend more when shopping, which offsets the losses Amazon incurs from all the shipping costs.

Prime isn’t Amazon’s only strategy to pay shipping fees. 

Their FBA program also helps compensate for free shipping. While sellers have their own stores, they will still pay fees for:

  • Handling
  • Packing
  • Inventory
  • Returns

And as you can imagine, free shipping moves a lot of products. So over time, seller’s costs increase to absorb the rise in sales.

Amazon really sustains their business by making both their consumers and merchants foot the bill for shipping.

Small E-Commerce Businesses

Unfortunately, smaller online businesses and 3rd party sellers don’t have the luxury of scale to compete. 

For them, offering free shipping to customers could mean hemorrhaging money. Remember, smaller retailers don’t have the save revenue as bigger companies to cushion the blow. 

Yes, they’ll provide free shipping to compete, but it’s not sustainable. Free shipping looks enticing on a webpage and can drive more customers to visit and shop. 

Some small businesses aren’t able to offer free shipping at all and still end up suffering.

Take the example of Ann Miceli, an Etsy seller who discussed her struggles with free shipping in a 2020 Atlantic publication

Ann lost 40% of her revenue in just a few months when Etsy’s new algorithm gave priority to sellers who guaranteed free shipping in 2019. 

Because buyer expectations had changed, Miceli was advised to raise her prices to cover shipping fees.

She realized her competitors were “simply eating the costs” associated with free shipping, and she couldn’t afford to.

This is the story for many 3rd party sellers. They fear raising the cost of products to compensate shipping fees will dissatisfy customers. 

Ecommerce platforms, like Shopify, try to stem the cost of shipping by offering perks to their merchants. Rates through UPS or FedEx can be discounted by amassing large quantities to ship.

However, small businesses are in the hole because of the pandemic. Brick and mortar storefronts closed during lockdowns, 34% permanently as of April 2021. 

Now rising inflation is making the situation worse.

A Rise in Inflation Affecting Shipping

We know shipping isn’t free. Now let’s add inflation into the equation.

Inflation has skyrocketed in the last several years. Consumer prices are up 8.6% between May 2021 and 2022. That’s the largest 12 month increase since December 1981!

Thanks in part to pandemic shutdowns, supply chain issues, and more, fear of a recession is on the horizon. 

Why does this matter with free shipping?

If costs are rising, the cost of shipping items also rises. 

The cost of shipping 20-foot and 40-foot containers sharply increased during Covid. While prices have gone down from peak pandemic times, freight rates are still well above pre-pandemic prices:

  • March 2020 – $1,525
  • September 2021 – $10,361
  • June 2022 – $7,066

Clearly repercussions are still lasting. Some experts estimate high freight rates on consumer prices will continue well into 2023. 

Weight and size also factor into shipping rates. The larger and heavier a product is to ship, the more it costs. 

So free shipping on a new desk will eat at margins much more than shipping a t-shirt. 

That is, if the retailer even offers it for those items. Furniture stores, like West Elm, don’t offer free shipping at all, only flat and standard rates.

So if you’re willing to offer fast and free shipping, be prepared to dump out your wallet (that is, if you haven’t already).

Gas Prices Making Shipping Worse

Gas prices have exploded over the last year. Thanks in large part to the ongoing tug-of-war of supply and demand. 

A lower supply of crude oil combined with increased demand has raised prices. 

Those packages shipping across the country for “free” are now costing an arm and a leg.

Currently, the national average is sitting at $4.30 (as of mid-July 2022). A month prior it was over $5, and in some parts of the country, well over $6 per gallon.  

When the cost of fuel goes up, so do freight rates, making shipping and logistics a harder affair. 

To combat costs, trucks and ocean freights will try to offset rising costs with surcharges. This especially affects shipping time or temperature sensitive products. 

Not to mention any delays will become a huge problem for retailers that promote fast and free shipping. Slow shipping means unhappy customers. 

Fluctuating costs will always affect the movement of goods and, ultimately, product prices. 

Retailers considering free shipping or who already offer it must always be prepared to account for these instabilities.

Wrapping Things Up

There’s no going back now that free shipping is an option.

As e-commerce continues to boom YoY, it will incorporate more as part of the buying process.

But retailers, both big and small, have to consider how to offer free shipping without losing more money in the process.   

And with inflation on the rise, increased costs will only continue to affect their bottom lines. 

That leaves us with a burning question: how will retailers be able to provide free shipping?