The Price of Free Shipping: Impact on the E-commerce and Logistics Industry

Reading Time: 10 minutes

Shipping, in a commercial context, is often defined as the dispatching of small items, which can then be sent directly to the recipient using the local postal service.

However, shipping practices have evolved significantly, particularly in e-commerce when geographical boundaries for online stores (or E-commerce storefronts) became irrelevant and customers are no longer limited to their home countries when they do online shopping.

Ever heard of “snail mail?” Often, public postal services are quite slow when it comes to shipping small packages or letters, hence the comparison to the gastropod. Understandably so because postal services often handle huge volumes of letters, parcels, small boxes, and other items that go through the post office on a daily basis. This led to private shipping companies, which often promise customers of service that is a lot faster and a lot more efficient than the public postal system.

Shipping is also differentiated from “delivery,” which is the estimated date that your online item or items are sent to your doorstep from the distribution center of your favorite online store. This is why most online sellers will say that the delivery date of your item will be different from the shipping date. In many cases, the delivery date will be adjusted, particularly for items that will come from abroad.

Another major difference between shipping and delivery is that items for delivery are mostly items that might still need inspection or further processing once they reach the distribution area. Most of these items, if shipped from abroad, still need to be sorted before being delivered to the customer’s doorstep.

Importance of Shipping

Now that we have differentiated “shipping” and “delivery,” let us take a look at the importance of shipping when it comes to e-commerce and the supply chain.

At first glance, shipping seems to be a very complicated and costly process. Thankfully, today’s e-commerce companies make the process a breeze, particularly for online customers. E-commerce businesses now carry the burden of taking care of the shipping part of online selling, allowing customers to just sit back and wait for their items.

There is a caveat though: fast shipping comes with a price. Often, customers need to pay a premium or a shipping fee. In many cases, that premium is higher when customers opt to go for fast or “rush” shipping.

Thus, it came as a relief when online companies began shouldering the cost of shipping and offering “free” shipping.

However, many will say there is no such thing as “free” shipping: it is simply the online company shouldering the cost of shipping. In many cases, the price of “free” shipping is already incorporated into the price of the item that you ordered.

If you are an E-commerce store, you may have to deal with the question of whether you will offer free shipping or not, or whether you are going to include the shipping fee in the price of the items that you are selling.

In essence, either the e-commerce company pays for it, or the customer/recipient pays for the shipping fee.

Free Shipping

So what are the advantages of free shipping? Aside from making online selling more attractive to customers (as they say, mention the word “free” and your product becomes instantly desirable), there are a lot of advantages when it comes to free shipping. Let’s take a look at these advantages. 

Advantages of free shipping

  1. Minimize shopping cart abandonment

By now, most of us are familiar with shopping carts. You select an item, place them in a shopping cart, then “check out” once you’re done with your shopping. Shopping carts are very useful if you are making multiple purchases.

Many customers actually make use of shopping carts to give themselves time to think about their purchases.

However, many customers also abandon their shopping carts, or do not check out or pay for all of the items they placed in the shopping cart. This phenomenon is called “shopping cart abandonment” and is actually one of the very good metrics used for e-commerce.

Shopping cart abandonment thus results in a “lower conversion rate” and will directly affect an online store’s sales and revenues.

So what is the main reason why customers abandon their shopping carts? High shipping costs. It would seem that once customers are made aware of the high shipping costs, the tendency is for them to simply abandon the shopping cart.

Free shipping allows an online store to avoid or minimize these scenarios.

  1. Easy decision-making for customers

As mentioned, offering free shipping almost always results in a positive response for customers when they are buying or looking to buy an item online. Thus, by offering free shipping, e-commerce companies make it easier for customers to decide, because they see shipping as an additional cost.

In fact, more than 60 percent of online customers say cost is the most important factor when it comes to shipping. Simply put, eliminating shipping costs makes the shopping experience better for customers.

For E-commerce companies, faster shipping drives even more value. Another study says more customers are likely to purchase if they see a two-day (or even slightly longer) shipping period.

  1. Free shipping equals more customers

Customers are often drawn to the same online store if they have a good shopping experience. Customer retention is a primary consideration for online stores.

Data indicates that seven out of 10 customers are unlikely to buy from a store (or a brand) again if they are not happy with the shipping and delivery.

However, it is said that winning over new customers is an even bigger challenge. More customers will likely be drawn to an E-commerce storefront if a “free shipping” sticker is plastered to the items you’re selling.

Disadvantages of free shipping

We’ve taken a look at the advantages of free shipping, and to balance things, let us now take a look at the disadvantages of offering free shipping.

  1. Free shipping equals a higher price

We mentioned that “free shipping” is not really “free.” E-commerce companies thus will have to find ways to offset or compensate. Most of the time, E-commerce companies simply factor in the shipping expenses. The bottom line is thus affected.  

In some cases, the shipping cost might be too high, and thus, free shipping might not be an option. In this case, E-commerce companies have to find the right balance. Should they offer free shipping, but charge higher? Will an E-commerce company be willing to offer free shipping in exchange for a smaller profit margin?

  1. Adjustments need to be made as shipping rates fluctuate

Offering free shipping means the E-commerce store may have to bear the cost of fluctuating shipping rates. For example, postage costs are said to increase regularly. Thus, adjustments would again have to be made, particularly if shipping rates suddenly shoot up.

An E-commerce company may have no choice but to do price adjustments on online products. This scenario, like the first one, often leads to a negative effect on the E-commerce firm’s profit. Basically, shipping costs might eat up a significant chunk of the profits. 

  1. ‘Economy’ or ‘budget’ shipping may not cut it

Although it is technically not categorized as “free shipping,” some online sellers also offer “economy” or “budget” shipping. In “economy” shipping, customers may opt to pay for a shipping promotion or package that is cheaper than the usual shipping charges. In essence, an E-commerce company is passing on a portion (not the whole) shipping costs to the customers.

However, “economy” shipping is — as expected — slower than the usual shipping speed. This might not be appealing to customers, so an online seller may have to put in some time studying how to really take advantage of a good “economy” shipping scheme.

Will a company be willing to share the shipping cost with customers, but compromise the shipping speed? In most cases, it might be more prudent for an online seller to just shoulder the whole shipping fee than disappoint or frustrate the customer. The lesson here is that many customers might not go for free shipping provided that shipping is fast and efficient.

Impact of shipping on E-commerce and Logistics 

Shipping is an integral part of the fulfillment process for E-commerce companies. It is also an important segment of the whole supply chain and logistics.

Shipping has gone beyond the usual: A ship or vessel drops the items, items get picked for sorting, packaging, etc., rinse and repeat.

Currently, artificial intelligence is being used to make shipping even more efficient, such that shipping ports now have fully-digital systems and make use of data. There are now AI-enabled self-driving trucks and “smart” ports. Big data is used, as data from smart devices found in the supply chain are constantly analyzed by machine-learning algorithms or computer programs.

The keyword here is “streamlining” as free shipping might show that an e-commerce company truly understands what customers want and make the shopping experience practically painless, as far as the customer is concerned.

Should you offer free shipping?

Free shipping is now seen as a necessity and a sure-fire way to retain customers. as well as attract new ones.

When we look at industry data, it would seem that free shipping should now be a basic service when it comes to E-commerce. It is also undeniable that free shipping impacts E-commerce and the logistics industry.

Let’s take a look at a few industry data and trends:

  1. A majority of customers (9 out of 10) prefer free shipping instead of a discount. Discounts will always be one of the best ways to improve customer experience, but it seems free shipping is even better.
  2. It is said that free shipping is relatively new, particularly in E-commerce. But most customers (about 75%) now actually expect free shipping. This is true even on orders that are not that very high or pricey. Thus, customers are likely to return again and again to the same seller if that seller offers free shipping and delivery.
  3. Another study says more than 50 percent of customers tend to increase their orders to avail of free shipping. Free shipping can also increase the value of a customer’s order or orders by a whopping 30 percent.
  4. Free shipping allows an E-commerce company to gain a tactical advantage over the competition. Anecdotal reports from various online companies say free shipping can be the difference between thriving and failing in E-commerce.
  5. Free shipping is a lot more attractive than discounts. It seems that customers are willing to forego substantial discounts in favor of free shipping.  

However, there is a price to pay when it comes to free shipping. E-commerce companies may find themselves asking a few questions such as: “Will I raise my prices? By how much? Can I shoulder the shipping fees?” “Is it worth it to offer free shipping to get more customers?”

The expenses behind shipping will include postage services, transportation, warehousing, fulfillment, delivery, etc. 

E-commerce companies might also have to contend with omnichannel shipping, where the customer has the option to place an order and receive such an order from any source that the customer prefers. Expectedly, this entails another layer of costs.

If we consider the Philippine e-commerce market, for instance, free shipping does not seem to have that big an impact on online customers. The more popular online platforms do offer free shipping, but in most cases, these are quite “limited.” Sometimes, these limitations are geographical in nature. There might be “free shipping” and “free delivery” in a certain metropolis, but not so in other places.

So what is the verdict here? It seems that e-commerce companies still need a thorough study of their respective markets and try to determine if free shipping is truly worth it.

In the Philippines at least, it seems customers are willing to pay more (including shipping and delivery fees), as long as product quality is high and delivery is fast.

The Price of Free Shipping: Impact on the E-commerce and Logistics Industry

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