The Strange Economics of “Free Shipping”: Why Free Shipping Isn’t Really Free
More and more transactions take place online, which means that the online shopping industry is more competitive than it’s ever been. With competition becoming more intense, everyone from private online sellers to large companies is taking steps to make their products more appealing, and it could be argued that nothing is more powerful than free shipping. However, understanding how free shipping works can help you decide if you’re actually getting a good deal, or if you’re paying for shipping without realizing it.
A $40 product with $7.99 shipping can suddenly feel expensive. The same product priced at $47.99 with free shipping can feel like a better deal, even though the final amount is exactly the same, and that’s where things get interesting for online retailers, consumers, and even shipping companies.
Someone Is Still Paying for the Shipping
When it comes to free shipping economics, the most important thing to remember is that someone is still paying for shipping. The term “free shipping” just means that the consumer isn’t paying an extra fee to cover the price of transporting the item. A retailer may absorb the cost itself, build some of it into the product price, negotiate lower rates with carriers, or spread shipping expenses across thousands of orders. Companies that ship out a higher volume of packages can also operate very differently from a small business sending a handful of packages every day.
In many cases, the retailer simply includes the price of shipping with the cost of the item. For instance, a company may sell you a $50 item that costs $7 to ship. Instead of showing you a $7 shipping fee, they may simply sell the item for $57 and advertise free shipping. That distinction matters because shoppers don't always evaluate a purchase by simply adding up every dollar.
We Treat Shipping Money Differently
There is a psychological difference between paying $7 more for an item and paying $7 for shipping, and online retailers know this. When the cost of shipping is lumped together with the cost of the item, you feel like your $7 provided something tangible. When you’re charged $7 more for shipping, the money feels like it’s disappeared into the method of delivery. For many consumers, that difference makes shipping costs more of an annoyance than paying a few dollars extra for an item.
Research into online shopping has repeatedly found that consumers are sensitive to shipping charges, and retailers have noticed. Shopify, one of the biggest online retailers in the world, cites shipping fees as a major contributor to cart abandonment and notes that shoppers may add products to an order specifically to qualify for free shipping.
The $5 Item That Costs $10 to Ship
Shipping costs can become especially difficult to navigate when the item being purchased is inexpensive. Imagine you need a replacement part for something in your home, and that part only costs $5. However, when the retailer wants $10 to ship it to you, you might feel like you’re paying three times the amount that the item is worth. This type of perceived value is why many retailers create free-shipping thresholds.
A company would rather spend $9 shipping five products in one box than spend $45 shipping those five products separately. The economics become much more favorable when the shipping cost is distributed across a larger order. Promotions that offer free shipping on orders of $50 are more aren’t necessarily about being generous to consumers. Instead, it’s an opportunity for retailers to make a sale, unload more merchandise, all while offsetting shipping costs by increasing the overall value of the package being shipped.
The Geography of “Free” Shipping
Not every package costs the same amount to deliver, a fact that retailers and private sellers are very familiar with. Shipping a small package a short distance can be relatively inexpensive. Shipping a large, heavy package across the country is a different proposition. Rural deliveries, remote addresses, oversized products, and unusual delivery requirements can all have an impact on shipping costs.
This is one reason scale matters so much in e-commerce. A retailer shipping thousands or millions of packages can negotiate carrier rates and optimize warehouses in ways that would be difficult for a small business. This makes the idea of free shipping a reflection of logistics.
Is Free Shipping Actually a Good Deal?
There are certainly cases in which free shipping is a good deal, but it’s not always as straightforward as it seems. “Free shipping” doesn’t always mean “lower price.” As a consumer, you should take the time to evaluate the overall price that you’re paying for an item, how long it will take you to get it, and other factors before deciding which deal is best for you.
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