Amazon has no doubt set the bar high for online retailers trying to compete with their “free shipping” business model. The e-commerce giant has gobbled up an increasingly large slice of the online retail pie, leaving smaller e-commerce merchandisers, along with traditional brick-and-mortar retailers, scrambling to keep up. Failure to match the free-shipping option might keep costs down, but it could also mean lost business for your company.
Even Amazon could not continue absorbing the cost of shipping forever. In 2005, it launched Amazon Prime, which for a modest yearly fee, qualified subscribers for “free” two-day shipping on a wide variety of items. This yearly subscription defrays at least some of the company’s logistics expense. The Prime program is essentially an e-commerce version of membership in a Costco type membership store, which depends heavily on the fee in order to turn a profit on retail sales. Unfortunately, the option of a Prime-like program is not feasible to many smaller online merchants, who lack the volume and distribution infrastructure to make it work.
When it comes to “free” shipping, the question of who pays is yet to be fully resolved. As transportation and logistics costs rise, merchandisers could be forced to cut back on promotional pricing programs, or at the very least deploy them more judiciously. It is more likely that the consumer ultimately winds up having to share more of the cost.
There Is No Such Thing as “Free Shipping”
E-commerce retailers have lured shoppers with shipping deals that have now become an expectation. In a Harris Poll of 2,241 American adults, 66% said shipping costs are their “biggest online shopping pet peeve”, 81% said free shipping would make them more likely to shop online, and 70% said free returns would be an enticement.
It is a fact that shipping costs are being paid for, whether consumers know it or not. Customers ultimately pay for this perk, even if it is not specified in their online shopping cart. The cost is lumped in with the final price of the goods they buy. However, in the last several years, online retailers have seen extreme price pressures that are making it difficult to pass on those shipping costs to shoppers in their entirety. That is why many have come to regard some level of absorption of shipping costs as a “marketing expense.”
Amazon has shifted consumer behavior and mindsets. Consumers now expect shipping to be free and fast. In fact, Amazon recently announced that it would be offering free one-day shipping on certain items to its Prime customers, an increase from the free two-day shipping it currently offers and the new offering would not require a minimum purchase.
Of course, this is not truly free shipping since consumers pay $119 per year for free shipping (an increase of $20 over last year) and the other benefits Prime membership brings. Rather than getting truly free shipping, Amazon Prime consumers are paying in advance for shipping they believe they will need, to the tune of roughly $10 per month. For most, the membership likely pays for itself.
A recent study finds that eighty-eight percent of Amazon Prime members order monthly or more often, versus 56% of non-members. Forty-eight percent of Prime members shop on the site once a week or more often. So most are getting strong value from that $10 monthly fee and re-enforces the finding that 76% say they are very likely to keep their membership.
Shipping Rates and Abandoned Carts
The real challenge when figuring out your shipping strategy is determining a solution that has the lowest impact on your margins as possible yet remains attractive to your customers. This is something you are going to want to get right. Studies have shown that shipping and handling fees are the number one factor driving shopping cart abandonment.
Shopping cart abandonment is one of the biggest challenges for an online retailer to overcome. Almost 70% of all online shopping carts are abandoned — the customer places items in their cart, but never completes the order. There are many reasons a customer might abandon their cart, but one particular factor stands out above the others: shipping!
How does shipping fees lead to cart abandonment? It actually contributes to this problem in multiple ways. In fact, the majority of abandoned carts are due to surprise shipping costs. Another significant portion of customers abandon their carts because their purchase amount does not reach the minimum amount to qualify for free shipping.
What 3PLs Can Do
Each day, thousands of shippers depend on support from experienced third party logistics companies to help them manage their supply chain operations. With complete supply chain solutions, 3PL’s are increasingly providing value to shippers from manufacturing companies to retailers of brick-and-mortar and e-Commerce platforms. While most shippers understand the value of 3PL companies – they may not be too familiar with their cost savings capability.
Third-party logistics companies work with hundreds of companies just like yours – each of them with parcel, LTL, FTL, and international shipping requirements. The 3PL company of today establishes strong relationships with carriers ranging from parcel to LTL. They are provided with exceptional rates by these carriers and pass the savings along to their clients. When you are paying less per shipment – your company will save money on shipping with each load.
- Reduced Payroll
When most shippers review their monthly P & L statements, a major monthly expense is payroll. From paying shipping and receiving employees, to those in accounts payable and shipping customer service, the average shipper spends a tremendous amount of money on paying people to operate their logistics programs. However, when you turn to a 3PL professional, the cost is a fraction of the amount of payroll. Plus, when a 3PL manages your logistics duties, it permits you to allocate your employees to improving customer service, introducing new sales opportunities or other focus areas.
- Improved Efficiency of Supply Chain Communication
Missed deliveries or delivery reattempts cost shipping companies loads of money. While this cost is often linked to using inefficient carriers, this can also be a result of lapses in communication. 3PL’s utilize advanced cloud-based TMS and CRM systems that can provide real-time updates on traffic, weather, or other service disruptions to delivery recipients to keep them updated on the status of their shipments. Not only does this improve delivery efficiency and save money on shipping, but it also helps to improve customer service. When your customers are pleased that you went through the extra effort to communicate with them, they are more likely to continue working with your company.
The FLEX Logistics Team is Here to Help!
For their part, retailers should remember that “free delivery” doesn’t actually have to be completely free. As the research shows, consumers are willing to pay a certain amount in exchange for speed and convenience. Consumers may be willing to pay such a premium for faster delivery and guaranteed quality from retailers with established reputations.
While 3PLs and retailers have many options to compete in an Amazon world, inaction is not one of them. Amazon clearly sees the value of investing in fast, “free” delivery. Tomorrow’s leading retailers and 3PLs do, too.
Our team understands the importance of getting your products to the market. That is why we aim to understand your business and build lasting relationships with you and your team. Whether you are looking to add a new warehouse to your existing operations, growing and need to increase your distribution efforts, or starting a new company, FLEX has the solutions to meet your supply chain needs.
Contact us today to discuss your current and future warehousing and logistics needs. We will work together with you to understand your requirements and develop a solution that will set you up for future success.