March 05, 2015
Posted by Alicia Baumann

Why Online Retailers Offer Free Shipping

One of the major challenges faced by e-commerce business owners is how much to charge for shipping products to customers. In the competitive world of online retail, shipping costs are a significant complication when striving to offer the best prices without losing product quality, customer satisfaction, or seller’s income. Shipping is the #1 reason for shopping cart abandonment and in the last year alone there was over $4 trillion worth of merchandise left unpurchased in online shopping carts.

For online retailers, this is a constant struggle. Should they offer online free shipping or should they charge an additional fee?

Why are online stores compelled to offer free shipping?

We all know that “free shipping” isn’t actually free. Products must be marked up to cover the cost of shipping. So why are online stores compelled to offer “free shipping”? It’s simple, consumers hate paying for shipping. Even when the same product is ultimately cheaper WITH shipping costs, consumers are drawn to the seller offering free shipping.

Take this dining room set that is listed on Amazon as an example. There are multiple options for purchasing this set. One option includes the set that is sold and shipped for “free” by Amazon for $250.32 and the other option is charging $149.99 for the set with a $95.45 shipping charge.

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Despite the initial shock of such a high shipping cost, this is actually the better option. So why do online stores insist on offering free shipping and what is actually going on in the background that consumers can’t see?

The answer is simple. Consumers would rather not have to deal with shipping prices; they would rather initially pay more and get “free shipping” than accept that they are paying big bucks to have their purchases sent to them. Online sellers know that seeing large shipping costs scare their customers away, so they turn to the alternative- free shipping or flat rate shipping. In both scenarios, the price of the product must be set according to the vendor’s overall expenditure to ensure positive margins for each purchase.

Future of Shipment Pricing

However, this is not always a win-win for the online seller-consumer duo. Sometimes, a consumer lives close to the warehouse and the online seller is actually charging too much for shipping and other times there are additional charges required to deliver an item to an obscure location. As a business owner, it is ideal to charge exactly what is needed to ship each item to each individual customer, instead of setting one flat rate for every sale. As the e-commerce industry proceeds to grow and expand, online buyers will continue to become more savvy and start demanding better rates on shipping (even if that rate is absorbed in the cost of the item).

The next step towards enhancing the online market is for the retailers to have the capability of personalizing shipping rates right inside the shopping cart for each unique order the consumer plans to purchase. When a more robust algorithm-based shipping software hits the market, online sellers will be able to optimize the shopping experience, resulting in higher quality shipping methods with more accurate prices for consumers and better margins for sellers.

 

 

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