Is Free Shipping Killing Your Profits? You’re Not Alone

Free shipping is a tremendous challenge for ecommerce retailers, particularly in auto parts. Consumers expect shipping to be free when ordering online, and will often leave a website that doesn’t offer it. But shipping costs are substantial, particularly for auto parts and accessories (which tend to be heavy and/or bulky).

It’s a catch-22: Offer free shipping, and profits go out the window. Charge for shipping, and consumers buy elsewhere. What’s an etailer to do?

Free Shipping Is An Industry Problem

Free Shipping Killing Profits

NOTE: This plan only works if your company is backed by venture capital.

A recent article on FastCompany.com delved into the challenge that many retailers face. Titled “Free Shipping Is A Lie,” the article is a must read for anyone in the ecommerce business.

One of the key points in the article is that all etailers struggle with shipping costs:

  • Amazon.com, which enjoys deeply discounted rates on shipping, is losing billions of dollars a year on shipping. The company only charges consumers for 55% of what they spend on shipping. This practice of undercharging cost Amazon $5 billion in 2015.
  • Larger “big box” retailers have found that it costs three times as much to ship inventory to a customer’s door than to a retail store. Yet, these retailers sell products for the exact same price in stores and online. This means they’re losing money.
  • Startup online retailers often need to be backed by venture capital in order to overcome the high cost of providing free shipping…these businesses literally can’t afford to offer free shipping until they reach high volumes of sales.

The long and short of the FastCompany.com article: Free shipping is expensive, and arguably not sustainable. But, for now, just about everyone in ecommerce is stuck with it.

Free Shipping And Auto Parts

Depending on the type of parts you sell (OEM replacements, after-market replacements, or accessories), free shipping may or may not be a concern. Most OEM part retailers, for example, charge for shipping. After-market part and accessory retailers, on the other hand, usually have to offer free shipping to be competitive.

Still, there are certain categories and types of parts where free shipping isn’t expected:

  • Most etailers are charging to ship large or bulky items, like crate engines, body panels, headliners, etc
  • Most etailers are charging to ship hazardous materials
  • As mentioned, most OEM part retailers are charging for shipping

On the after-market side of the auto part and accessory business, MAP (minimum advertised price) policies have helped etailers absorb the costs of free shipping.

Still, after accounting for overhead, marketing and advertising, and free shipping, a lot of etailers are earning a small profit margin.

Shipping carriers

It’s always a good idea to ask carriers for a discount on rates, especially as your ecommerce operation grows.

How To Cut The Cost Of Free Shipping

There are a lot of little things that can be done to cut shipping costs. None of these measures will have a big impact by themselves, but in concert they can cut costs substantially.

  1. Shrink your packaging. When UPS and FedEx rolled out “dimensional weight” shipping rates, it meant that package size mattered just as much as package weight. One solution: cut boxes down to the smallest possible size. Uline sells multi-depth boxes that can help with this.
  2. Entice customers to “add on” to their order. If you can get your customers to increase their purchase amount, the cost of shipping (as a percentage of total revenue) goes down. If your ecommerce platform doesn’t offer any sort of ‘add on’ call to action, consider calling or emailing customers to confirm their order. Then, when you’ve got them on the phone, ask about adding a discounted set of oil filters, floor mats, etc. to the order. Just make sure it’s a low pressure “oh by the way” type of offer.
  3. Ask for a discount from UPS and FedEx. Discounted shipping rates are available to companies that ship in large volumes. The larger the volume, the bigger the discount. However, even smaller etailers can get a break on rates. Talk to your UPS and FedEx rep and see what they can do.
  4. If you’re drop-shipping, check rates from multiple fulfillment centers. Depending on the customer’s location, different distributors will offer different pricing. It’s a good idea to check costs with at least a couple of different fulfillment centers to see if you can find a better overall price (including shipping costs).
  5. Offer customers a low-cost ‘expedited’ shipping option. If you’ve got parts in inventory, you might consider offering a free shipping option that takes 5-7 days alongside an ‘expedited’ shipping option that takes 2-4 days. The expedited option can be offered for a small upcharge (say, $5). The ‘expedited’ shipping can just be the lowest cost UPS or FedEx ‘ground’ rate – the same method you use to ship for free – but with guaranteed same day fulfillment. Customers are often willing to pay a little more to get their order a day or two sooner.*
  6. Make sure you’re excluding parts that are expensive to ship. Most auto parts etailers exclude entire categories of parts from free shipping. If a part is bulky or heavy, customers often understand that they have to pay for shipping.
  7. Limit free shipping to the continental USA. Free shipping isn’t usually available to residents of Hawaii or Alaska, nor is it available to US service members overseas. Excluding these areas from free shipping probably won’t impact sales.
  8. Consider a high minimum order amount. A lot of after-market parts retailers require $50 or $99 in purchases in order to qualify for free shipping. However, we see that most auto part and accessory retailers have an average order value over $250. So, you might consider increasing the free shipping threshold to $199.*
  9. Compare stocking and fulfillment costs for all your parts. It’s always a good idea to evaluate the cost of stocking and shipping parts against the cost of drop-shipping on a per-part basis. Sometimes, it makes sense to drop-ship a part you’re currently stocking. Sometimes, you should stop drop-shipping and invest in inventory. But you don’t know until you do the math.
  10. Investigate shipping refund options. Last but not least, check out the shipping refund platforms we talk about in this post. There might be some money you can “recover” from UPS and FedEx using these tools.

*As always, be sure to test changes like these before you implement them fully.

Uline multi-depth boxes

Image via U-Line.com

The Future of Free Shipping

The other big takeaway from the “Free Shipping Is A Lie” article on FastCompany.com: free shipping might not last forever. Currently, big online retailers like Amazon.com are subsidizing the cost of shipping in an effort to grow market share. But, looking a few years down the road, it’s hard to imagine this subsidy continuing.

Most likely, some or all of the following will happen:

  • Shipping companies will find ways to reduce shipping costs, perhaps via automation technologies, drone delivery, etc.
  • Minimum spending thresholds will increase. Amazon raised their minimum order requirement for free shipping from $35 to $49 in February, 2016. Will they raise it again in 2017? Or 2018? How high will they go?
  • Consumers will be asked to pick-up their orders at a local store, something that Walmart.com is finding a lot of success with currently. Orders are shipped for free to the closest Walmart, and then consumers drive over to pick the order up. This cuts shipping costs by more than 50%, and it’s possible Walmart (or some other large retailer) will offer this shipping method to other businesses at some point.
  • Product manufacturers will start to incorporate shipping costs into their suggested retail pricing and/or implement a MAP policy that preserves a minimum profit margin to help etailers make money.

Still, for the time being, free shipping is a fact of ecommerce…even though it isn’t actually “free.”

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