Who Pays for Free Shipping?

“Free Shipping” is something you see advertised just about everywhere and something that seems more and more common each day. This has created a very competitive market, especially when smaller e-commerce merchandisers and traditional brick-and-mortar retailers have to compete with large corporations such as Amazon.com, Inc. But when it comes to “free shipping” who actually pays for free shipping?

With the increasing popularity of e-tailing (the selling of retail goods on the Internet), companies like Amazon.com, Inc. have set the bar high from the start. But even they have been unable to absorb their costs of shipping; in fact, in 2005 they launched Amazon Prime which is a membership qualified subscribers can purchase for $99 a year for “free” two-day shipping on a wide range of items. This program has allowed the company to bear some of the company’s logistics expenses. You can even say that Amazon’s retail operation wouldn’t be profitable at all without the revenues accrued from Amazon Prime.

There are other companies that model their business in this manner. Take Costco for example; they depend heavily on membership fees in order to turn a profit on retail sales. More recently, we have seen an increase of other companies who are attempting to duplicate the idea on the e-tailing side and are adapting this model as well. In such a competitive market, failure to match the “free shipping” option might keep costs down, but it could also mean lost business at the expense of these larger corporations.

It may be too soon to determine how many separate fees consumers will be willing to pay, but ultimately if the consumers are willing to pay multiple fees for multiple companies for the sake of free shipping, they will certainly be absorbing the majority of the shipping fee costs themselves.

At the same time, smaller online merchants who lack the volume and distribution infrastructure must find ways to manage their logistics costs and streamline their distribution networks because the option for Prime-like programs aren’t available for everyone. This means other retailers must determine their own strengths and adjust accordingly. How does this affect transportation and logistics? Merchandisers may be forced to cut back on promotional pricing programs (or at least deploy them strategically), as transportation and logistics costs rise. It could also mean a sweeping re-organization of distribution centers (and a change in the way they operate). Also, legacy systems will have to give way to modern day material handling equipment and implement transportation management software that is specifically designed to handle high volumes of merchandise in small lots.

Nonetheless, companies will have to provide visibility throughout the supply chain to allow the development of strategic decisions that can drive lower operating costs and improve service. This includes visibility to inventory, both while in transit and at rest. This is especially important for the smaller companies who need to equip themselves with an even higher level of business intelligence in order to compete with larger rivals.

When it comes to “free shipping”, the question of who pays is yet to be determined. But, what we do know that in this constantly changing and competitive market, the goal is always to provide top quality service that meets the consumers needs while saving on costs wherever possible, from the shipping process to the packaging process. Merging all these aspects together will support these critical processes, from inventory to shipment optimization. Creative optimization strategies combined with the right process, software and service partners can mean the difference between success and failure. Find out how Millennium Logistics Management can help you through this process by contacting them today!