Free Shipping Has Its Costs for Merchants, Supply Chains and Consumers

Nothing’s really free in life, as the old saying goes.

And that applies to free shipping, too.

PYMNTS Intelligence data as recent as Tuesday (Oct. 31) shows that roughly half of consumers value free shipping so much that they’d place it at the top of key considerations when deciding which merchant to place their orders with.

But somewhere, at some point along the commerce continuum, the costs of shipping are passed along.

Amazon’s a good reference here.

Amazon Prime memberships in 2014 were only $79, and now the price tag stands at around $139.

Amazon’s shipping costs, as detailed in its latest earnings results, were $21.8 billion worldwide, up 9%. For the merchants, the fees tied to “Fulfillment by Amazon” include inventory and logistics management. Third-party seller services-related revenues stood at a bit more than $34 billion in the most recent quarter, up 20%.

Pulling the Levers

But as we noted, merchants seeking to serve and satisfy the wishes of their end consumers have only a few levers they can pull. A survey conducted by shipping services provider Shippo found that 47% of merchants allocate over 10% of an order’s total value to cover shipping expenses.

As noted in the recent “Subscription Commerce Readiness Report,”  42% of consumers, with subscriptions in place, say they would cancel those subscriptions if free shipping were to be discontinued. Free shipping is the most valuable feature, with 39% of consumers shopping for a subscription plan naming it as their top requirement. Top performing merchants — 93% of them — as measured across metrics like consumer loyalty and spend, offer free shipping.

Among those levers is the ability to raise the prices of goods they sell and that get delivered to consumers’ doorsteps.

We noted earlier this year that merchants are also increasing the prices of their products to cover the cost of free shipping, or even eliminating free shipping. Reducing shipping costs is merchants’ No. 1 goal, and retailers aim to cut their shipping costs by as much as 25%, even as 75% of eCommerce firms are offering free shipping.

Several retailers, including Macy’s, Saks Fifth Avenue, Neiman Marcus and Abercrombie & Fitch, have in recent months raised the minimum spending threshold for free shipping.

Macy’s, for example, increase its threshold to $49 from $25 for customers who are not part of their rewards program, while maintaining a lower limit for rewards members. Abercrombie & Fitch raised its to $99 from $75.

Saks Fifth Avenue, which had no minimum order, introduced a threshold of $100 for free delivery to nonmembers of its rewards program. Neiman Marcus, which offered free shipping on all orders, now provides the service for orders of at least $50.