Why Free Shipping Hurts Your Small E-Commerce Business
Although the myth of free shipping is a topic often discussed, it seems necessary to reiterate the main takeaway: free shipping isn’t free. Someone always pays the cost for shipping, and frequently that someone is the business.
Despite this revelation, brands still implement free shipping to meet ever-growing consumer expectations. Sixty-six percent of customers want free shipping on all orders, while 88 percent want it when they spend a designated amount.
At this point, it’s become an essential part of the online shopping experience. But it’s not always a sustainable option. Unfortunately, free shipping ends up hurting small and even medium-sized businesses.
So why is that?
The simplest answer is they can’t compete the same way larger corporations can, like Amazon.com, which set the bar high for free shipping. Thanks to economies of scale, Amazon manages to offer free shipping by generating massive sales despite the willingness to lose money from growing shipping costs. Amazon spent $76.7 billion on shipping in 2021 alone. But even with spending this amount, it was still able to generate $469 billion in sales between 2019 and 2021. These numbers not only offset shipping costs, but help Amazon achieve bulk shipping rates that smaller businesses can’t.
Amazon also rigged the free shipping game in a way that has warped consumer shopping and shipping behavior through its Prime membership. By making two-day free and fast shipping accessible, consumers now look for similar perks when shopping with other brands and retailers. (It’s worth mentioning that Amazon’s two-day shipping isn’t guaranteed anymore, with shipping times increasing to five, six or seven days.)
To compete, smaller businesses feel pressured to offer free shipping despite not having the same means or margins to offset shipping costs. If these companies wanted to follow in Amazon’s giant footsteps and offer two-day free shipping, it would cost them $25-$35 per package, according to Dhruv Saxena, co-founder of Shipbob.
So when small and medium-sized businesses incorporate free shipping, they’re likely losing money one way or another to cover shipping costs. For example, some brands might increase product prices to compensate for free shipping. However, this runs the risk of losing customers and pushing them to search for cheaper options elsewhere.
Another alternative is creating a minimum spending threshold through increased average order value to receive free shipping. However, to be successful, calculating the correct amount is crucial or a business runs the risk of hurting its margins.
If e-commerce brands don’t offer free shipping at all, they run the risk of cart abandonment. Shipping fees were the top reason for cart abandonment, hitting as high as 48 percent, according to a 2022 Baymard study.
And with recent supply chain issues, rising inflation, and logistics chaos already causing smaller businesses to suffer (34 percent have permanently closed their doors as of April 2021), many can’t afford a drop in customer spending.
So what can be done?
Free shipping will only grow in popularity as consumers continue to expect it in some form. E-commerce brands will either need to determine how they can find the balance between customer appeasement and financial security or conclude that free shipping isn't a feasible option for their bottom line.
Alaina D'Altorio is the content marketing specialist at Smith Corona, a manufacturer and seller of thermal labels, direct thermal labels, and thermal ribbons used in warehouses for primarily barcode labels.