How Much is Free Shipping REALLY Costing You?

Let’s get this out there … I’m old! I’ve been a marketer for over 30 years. I started my journey in flea markets, but found my niche in direct-to-consumer marketing via catalogs, TV and now the internet. I’ve seen a great deal. Gone are the days when you could actually make money on shipping. Now marketers are all too willing to move to a free shipping model without being aware of the entire cost of shipping a package.

I’m here to tell you if you're offering free shipping, it's probably costing you 30 percent MORE than you think.

I’ve talked to many companies that offer free shipping and ask, “How can you afford this?”

Their answer: “I work the cost of shipping into the product.” I then ask, "What's the average number of items per order you ship?" Most say under two items per order. This is an important number which I will delve into later.

Sure There’s Postage, But What About Other Carrier Costs?

I bet you have a pretty good idea or could easily find out what your postage rate is. However, there are many other costs involved in shipping a product in addition to postage.

Are you monitoring your delivery area surcharge (DAS) or extended delivery area surcharge (EDAS)? Most carriers have these charges. For us at PulseTV, DAS affects about 28 percent of our packages. The “published” rates for DAS can range from $1.85 to $4.65 per package. Notice I say “published” because you can, and should, negotiate these charges.

Quick math means you're incurring a minimum of an extra 52 cents on EVERY package going out of your building.

How about DIM weights, non-machinable packages, peak surcharges, address corrections and fuel surcharges? When was the last time you went through your carrier bill, line item by line item? There are a host of charges that most aren't aware of and many are unwarranted, but that's for another article.

Other Costs?

What about packaging, labor, and credit card/PayPal fees. These are all hard costs that need to be accounted for when evaluating the financial viability of offering free shipping. In the past, this was the “handling” part of shipping and handling.

Even a packing slip is a cost if you're not using the free ones FedEx and UPS provide.

Therefore, when I say free shipping is probably costing you 30 percent or more than you think, you can see that's conservative as unanticipated costs add up quickly.

A good exercise is to look at your average monthly packaging, warehouse labor and credit card fees, then divide that total by the number of packages you shipped. It’s not perfect but it should give you a quick idea of the costs to ship a package.

What Happens When There’s a Price Increase?

Every January there's a carrier and/or postal rate increase. If you offer free shipping, how do you add the increase into every item? I can see that task taking a lot of man hours. This past January saw a 4 percent increase!

But I Have to Compete With Amazon

If your business is trying to compete with Amazon.com on pricing and shipping, it will lose. You can however offer better customer service and better product content.

Make no mistake, Amazon wants your website to fail. Bezos’ dream is that Amazon be the only destination for all products.

“But as an Amazon shareholder or analyst will tell you, profit, frustratingly, is not something that Bezos or Amazon are after. They're after customer loyalty. They want to lock up the market. They want customers to make Amazon their destination for all of their shopping. So he's had this long-term view of that's the way to conduct his business, and profits are very low down on the list of his priorities.” — Brad Stone, "The Everything Store: Jeff Bezos And The Age Of Amazon"

Competing with Amazon has turned into a race to the bottom price — a race Amazon can afford to win.

But Studies Show Customers Want Free Shipping

If you ask people, "Would you like free shipping?" who would say no? It’s all in the way you ask the question.

What if you asked, “Would you be willing to pay for shipping if it actually lowered your overall order total?”

Remember when I asked what your average items per order is? This is where you can beat Amazon and gain profitability. For PulseTV.com, we cross-sell and offer additional discounts to add more items to an order. Our average shipped items is just under four.

After all, it's the first item that costs the most to ship because of the labor and packaging costs. Actual shipping cost on the first item to the fourth is negligible. The customer sees the shipping charges barely go up as they add items.

Our goal is to break even with shipping costs and what we collect from the customer. Even with charging for shipping we have a net loss.

To sum it up, there really are many factors that should be included in your evaluation of whether to offer free shipping. My talks with fellow retailers have almost always shown that they come up short in figuring the costs.

Anisa Ali is co-founder and COO at PulseTV.com, a discount online shopping site.