Free shipping is not really free…

high angle shot of a truck

Or: Why “Free Shipping” is not actually good for the customer.

So, when I offer you “free shipping”, am I really saying “I don’t have to, but I choose to pay the cost of shipping rather than charge it on to you?”. No, of course not. “Free Shipping” is a marketing gimmick. It works because a lot of customers like the up-front certainty of seeing the total, final price from the outset. In return for that certainty, they’re prepared to overlook the lie that they are getting something for free. Or maybe the average consumer really does assume that the average retailer makes so much from each sale that we would quite happily and gladly choose to forgo some of that to give you something for free. I don’t know.

The circumstances where “Free shipping” works to the customer’s benefit are incredibly rare, as will become apparent as you read through my examples below. Sadly, it is a widely used marketing gimmick, and I am pretty much forced to offer it. In fact, several of the online marketing platforms appear to strongly discourage “freight extra” sales, offering incentives (in the form of preferential treatment, not extra money) for businesses that offer “Free Shipping” – at least for some of their markets.

Some truths about my business

My business model is that I do not carry stock of most of my products. That is a huge outlay of money up-front and I cannot justify that cost. I have arrangements with a number of suppliers to produce a product when you order it, and ship it directly to you. I shop around between suppliers to ensure I can offer you a good range of product options at the best price I can manage. As an aside, that is also why there are “Standard Quality” and “High Quality” versions of some products – cheaper products are often cheaper for a reason – and if that means a lower quality of production, I like to give you the choice. If the higher quality product isn’t much more expensive, however, I just won’t bother with the lower quality product.

And a few more truths for you.
– My profits for a single item are usually in the region of 10% – 25% before shipping costs.
– Shipping just one of an item can be nearly as expensive as producing the item itself.

At least one of my suppliers charges a flat rate for shipping the product to you, regardless of wherever in the world you are (very similar to global “Free shipping” but without the lie about it being “free”). For these products, there is no advantage to you from offering “freight extra” since all freight costs the same anyway, so I don’t.

Some truths about shipping

  1. Transport companies charge for their services (they aren’t free!)
  2. Products generally need to be shipped from the manufacturer or warehouse to the customer
  3. Transport costs more to ship further, or to ship heavier or larger items; however:
    1. It generally does not cost 2x the price to ship something that is 2x as heavy (or 2x as large) – in fact, the price difference is often small compared to the initial cost.
    2. It generally does not cost 2x the price to ship something 2x the distance – although this is considerably more variable than the additional costs for extra size or weight.

In order to offer “Free Shipping”, I HAVE to bump the price up to cover that cost. This is not a exorbitantly profitable business (most aren’t), and the payment for the “free shipping” has to come from somewhere, because the transport companies still want to get paid. So, free shipping is not really “free”.

A (hypothetical) example

Suppose I have a product that costs me $15.00 to have produced in Australia. For this hypothetical product, my mark-up is roughly 25%, so I sell it for $18.50 ($3.50 to me). However, to ship this product anywhere in Australia costs (hypothetically) $5.00. This is a flat rate thanks to the Australia Post parcel service. So I can sell this item to someone anywhere in Australia for $23.50 and still make my $3.50. And if that was the end of the story, there’s no difference whether I charge $23.50 with “Free Shipping”, or $18.50 plus $5.00 shipping.

But it costs me $7.00 to ship this same item to New Zealand, and $10.00 to Europe and the Americas. It costs up to $12.50 to some other parts of the world. In order to offer “Free Shipping” worldwide, I either need to offer different “Free Shipping” prices for each country (or at least, groups of countries with similar shipping costs), or I need to bundle in the worst case price into my “Free Shipping” price. If I do one price world-wide, instead of charging you $23.50 with “Free Shipping” the same product is now $31.00 with “Free Shipping”.

If I’m lucky and you live in Australia, I make a nice tidy $11.00, but if you live somewhere in Africa or a Pacific Island, I still make my $3.50. That’s a bonus for me on sales to everywhere except Africa or the Pacific Islands, but it makes my products very expensive in some markets. Also, it is making me profits I don’t actually budget for. I’ve budgeted for $3.50 per item, and I’d rather sell them with just that profit and have them affordable to more people than pocket the extra money.

But you’re popular…

I’m not (at least, not yet!).

However, if I was selling 100 of this product a month, with a predictable split across different parts of the world, I could make allowances and adjust my “Free Shipping” price to match.

If I reliably sell 50% of this product in Australia at the lowest freight rate, and only 10% of them at the highest freight rate, I could adjust my global pricing to $27.00. That allows $8.50 for average freight cost, which nicely works out to me still making an average of $3.50 per product sold. The bulk of sales to Australia and New Zealand offset the losses on sales to Africa and the reduced profits on sales to Europe and the Americas. Compared to the previous pricing, that’s cheaper for everyone. The Australian and New Zealand customers are still paying extra to allow that to happen, however. And I face a risk – what happens if the product suddenly goes viral in Africa or the Pacific Islands? Fantastic, right? Except that it costs me $27.50 for every single product I ship there…

But wait, you want more…

So, you love this product and you want one for your best friend too? Fantastic! I’m glad you like it!

You order two of this hypothetical product. Shipping two of these items in one package costs me $7.00 anywhere in Australia. Not each, total. But “Free Shipping” does not allow a freight discount for multiple items. Assuming I have set up “Free Shipping” with per region pricing, for the Australian version you will pay $47.00 (2x the $23.50 “Free Shipping” price to Australia). If I charged you separate freight, the same items, sent from the same warehouse to the same address in Australia, would cost you $44.00 (2x the item price of $18.50 ($37.00) + $7.00 freight). That extra $3 is nice in my pocket, and thank you for your generous donation. But it isn’t necessary. I budget on making $3.50 profit per item, as that is reasonable for the amount of my effort involved. My should I make an extra $3 profit (30%!) just because you want 2?

I won’t go through the rest of the world, you get the gist.

Please note: The example product price and freight prices in this post are purely hypothetical. The prices do not reflect the actual prices of any products on this website, or the shipping costs of any product. They serve to explain the issue, that’s all.

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