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Are You Competing Effectively with Free Shipping?
The “Amazon Effect” has led to most e-commerce consumers expecting free and fast delivery; often within one to two business days. There’s a price to pay for that, which ultimately falls on the retailer. It’s a concept that plagues large online retailers but can be even more detrimental for small to medium-sized companies, especially those with a strong e-commerce presence.
Carriers continue to increase their shipping rates annually, (not to mention their indiscriminate and random assessments of new fees and surcharges throughout the year), and Amazon continually sets precedents, raising the bar by offering faster shipping, almost always for free. With the ongoing development of local and regional distribution centers, delivery in hours rather than days will soon become the norm. These game-changers have led to most e-tailers following suit at the risk of losing sales. Many have decided that joining Amazon is a necessity in order to remain relevant, often parting with a large portion of profits, yet while opening the door to Amazon and replicating their own inventory in that marketplace, they become their own direct competitor.
Shipping small parcel packages, especially to arrive in one to two business days is not cheap. In fact, Amazon reported $61.1 billion in shipping costs for 2020 (up from $37.9 billion in 2019). With Amazon offering free shipping to an estimated 150 million prime members, assuming that each member pays $119 per year (students and others receive a discount), less than $18B should have been recouped in membership fees in 2020. With Amazon’s 2020 revenue exceeding $386 billion (retail accounting for the largest share) and net income exceeding $21 billion, it’s clear that Amazon builds sufficient margin into the product while taking a sizable loss on the shipping. Now that’s a model e-tailers would like to replicate!
Businesses have a difficult time keeping up with heavyweights, partially due to volume. The amount of product a small business moves in a year could be the smallest fraction of what Amazon ships from one distribution center in a day. All shipment characteristics being equal, it’s basic economics – the more that’s shipped, the less it should cost.
With shipping costs on the continuous rise, and the assumption that shippers will spend more than Amazon per shipment, how do shippers remain competitive? Perhaps one place to start is by taking a lesson from Amazon – thinking outside the box (and we don’t just mean converting from boxes to polybags).
1. One should start by assessing if free shipping is necessary:
a. B2B recipients are typically more accustomed to paying for shipping than B2C recipients. For B2B, even passthrough shipping costs are often common, or an amount that’s consistent with the industry, as well as past practices (for repeat clients).
b. The more specialized or customized the item, the more common it is to pay for shipping.
c. A minimum spend threshold to meet free shipping requirements is common. The additional margin from additional purchases to meet that threshold often helps to offset a greater portion of the shipping cost.
d. Keeping an eye on if or what the competition charges also doesn’t hurt.
2. When free shipping is not a viable option, flat-fee or other predictable methods to apply shipping costs tend to be successful. Getting sticker-shock at the end of the check-out process is likely to increase the abandoned cart rate and limit future visits. People view shipping as an added cost and tend to be much less receptive to it than if the base product costs more. Note that the consumer should not be financially burdened based on their proximity to your DC, although your cost may be higher due to the distance.
3. Improving packaging to reduce package sizes:
a. The unboxing experience replaces the in-store experience for many consumers, so it should be reflective of the brand, as long as it’s not cost-prohibitive.
b. Polybags, paks, and envelopes may be viable options, as it reduces the dimensional weight.
c. If boxes are necessary, can some be eliminated or can custom boxes for common shipment types be considered?
4. For multi-location brick and mortar companies, the ship from store model can provide faster delivery times at lower shipping costs. There can be implementation and system challenges, such as, creating space in already cramped backrooms, training employees on shipping methods, carrying packaging supplies in-store locations, etc., but these challenges can be offset by utilizing regional or local carriers for the deliveries, which provide same-day or next-day deliveries at lower costs. BOPIS and curbside delivery are services that complement these solutions.
5. Assess the various delivery options and carriers. UPS and FedEx offer premium services that may not be necessary, depending on geography and the package characteristics. In other cases, more affordable USPS-integrated services can be utilized. Also consider offering next-day, 2-day, and 3-day options at a premium cost. There are consumers that are not looking for the cheapest alternative, but rather faster delivery options.
6. Consider options that enhance the purchasing process. This may include a loyalty program with rewards based on a number of purchases or money spent, giveaways, and other alternatives.
There is not a one-size-fits-all solution to meet the expectations of the online consumer. The environment is fluid and it’s important to have options available while being able to adapt to the changing environment. Amazon, Target, Walmart, and others are already servicing clients with same-day delivery and convenient pick-up options while improving the supply chain to offer more SKUs in a timely manner. These solutions are free or come at a low cost.
The average consumers’ online shopping habit jumped approximately 5 years ahead, due to restrictions associated with COVID-19. The consumer is becoming accustomed to receiving packages from someone in a private vehicle, just as they have been from someone in a brown truck. It is more critical than ever to identify how one can maintain a competitive advantage, based on service, cost, and time.
Thomas Andersen is a Partner and Executive Vice President for LJM Group, working closely with clients to manage parcel cost optimization initiatives. LJM Group has been helping shippers save time and improve profitability with expert FedEx, UPS & DHL Express parcel contract analysis & rate negotiations, parcel invoice auditing, data & analytics, as well as shipping consulting services focused on cost management since 1998. Please visit our website at www.myLJM.com. To speak with Thomas, please call 631.844.9500 or email email@example.com.