“Free” Shipping is the New Norm for e-Commerce, But at What Cost?

In today’s marketplace, customers expect free shipping, so much so that nearly half of online shoppers claim they will typically back out of a purchase if it fails to qualify for free shipping (47%). In fact, most consumers even expect free delivery for orders under $50. And, while the average shopper is still content with a 2-day delivery, new expectations for faster shipping continue to be developing quickly; 24% of shoppers now expect free same-day delivery. The growing success of Amazon Prime and Prime Now will further fuel this trend.

The above figures are based on a recent survey conducted in the U.S. (NRF Consumer View, Winter 2017-2018), but this expectation is not solely American, for 55% of consumers in Germany also feel standard delivery (3 to 5 days) should be free. So, when Forrester asked retailers about “your top consumer-facing initiatives and priorities for your digital business in 2018?” (The state of retailing online 2018), it obtained a clear top line message: faster shipping.

Now, free and fast shipping doesn’t come cheap. Can we be customer-obsessed and offer free shipping while still keeping our business profitable? To make an informed decision,your organization needs to assess 1) your competitive situation, 2) your gross margin, and 3) the net cost of delivery.

First of all, assess how your delivery service offering scores compared to your competition. When the market leader already offers free shipping, there may be no choice but to follow their lead. Additionally, you will need to consider specific conditions: Do you offer free shipping for standard delivery of 3-5 days or for same day delivery as well? Who will pay the return cost? Also, ensuring your execution is cost efficient remains vital: Do you use the right packaging so you are not transporting air or excess weight? Do you pay appropriate parcel rates? Have you considered diversifying your parcel services portfolio?

Secondly, assess your gross margin. A healthy gross margin helps when you consider offering higher service levels at no additional costs to the consumer. Now, we have witnessed some cases where the gross margin of the online business is simply not known. Assuming the gross margin of the online business is the same as the in-store business is, of course, not accurate. While the price is often similar — a study conducted by MIT found that in most cases (72%) the online and in-store prices were identical — the costs are always very different. Costs related to the physical stores and the sales people are only linked to the offline world, but customer acquisition and marketing costs are typically higher for the online business. Creating true margin transparency is a crucial step before making any decision to offering some aspect of free shipping.

The third element you should evaluate is the net cost of delivery, which consists of warehousing, transport (often parcel), and return costs minus any surcharges paid. Those costs are obviously known for the “as is” service – although it should be verified whether they are allocated correctly. However, to make an informed decision on offering free shipping, clarify what the different costs will be when changing the service level. Think of different lead times (e.g., standard lead time, next day, same days, 2 hours), different delivery models (e.g., home delivery, store pickup, collection point), and simulate the net costs when applying a policy relating to different order value thresholds (e.g., free shipping when shopping cart exceeds $50).

With the above parameters assessed and with multiple scenarios at hand, you are well-equipped to make an informed decision how to properly approach free shipping. For additional help evaluating the costs of “free” shipping as it pertains to your organization, seek the knowledge and advice of experts who are well-equipped to support your organizations with specific services and expertise on parcel spend optimization, cost-to-serve assessment, and packaging optimization.

Pieter Bauwens is a European-based Principal within the Supply Chain Design practice at Chainalytics. His focus is on the Cost-to-Serve and Portfolio Profitability and Complexity offerings to support the expanding growth of the European practice. Pieter’s 20+ years of experience includes roles at Heineken, S&V Management Consultants, and Director of Strategy and Operations at PwC Belgium prior to joining Chainalytics.

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