Issue link: https://maltatoday.uberflip.com/i/835410
maltatoday, SUNDAY, 11 JUNE 2017 VIII Logistics & Shipping The free shipping everybody loves is a lie Why do companies offer free shipping? • Reduce barriers to purchases Unexpected costs is a major reason people don't complete their online orders. Customers are usually not pleased when they are presented with "ad- ditional" shipping costs at the checkout page, even though mentally, they understand that it is necessary. This negative feeling – like they are being "conned" at the point of pur- chase – is something online retailers want to avoid in order to ensure customers complete their purchase. • Increase order size You shop for the cool items you want online, only to realise you're a just a couple of dollars away from qualifying for free shipping. Sure, you can pay for the ship- ping, but won't you rather add on another item or two? Having an appropriately-set free shipping threshold can motivate custom- ers to spend more. It is also more cost-effective for retailers to process and ship larger orders rather than filling many smaller purchases. Who pays for "free"? In economics, we know that "free shipping" is not actually free. In fact, shipping is really expensive. Amazon's net shipping costs for the third quarter of 2016 was around €1.56 billion. So, who pays for it? For some retailers, not having to maintain a physical store and pay someone to unpack the goods, arrange them on shelves and have cashiers serving customers already give them profitable enough margins that they can offer free shipping. It's fantastic when they can do it, and it's the dream that e-commerce promised. However, sometimes the math doesn't work out and the cost of free shipping needs to be passed on in other ways. If you look care- fully, some e-commerce sites do a slight mark up on prices, or delib- erately cut their customer service, or impose strict purchase or return conditions. As an informed consumer, it would be wise to read the fine print and ask around others for their experiences before buying. The free shipping arms race Ever bought something online and wondered how the company was able to make any money from your purchase after factoring in free shipping? They don't. With investors flooding cash into e-commerce companies, companies with big cash reserves are able to strategically absorb the economic blow of free shipping in the hopes of quickly gaining mar- ket share, though without any real evidence that this would pay off in the long term once the war chest is depleted and they can no longer "subsidise" customers' purchases. In a way, such companies with investor backing, like Alibaba and Amazon, "spoil the market" by pressuring the industry to offer free shipping. Unlike these companies though, they can afford not to be profitable in the near term. The size of large e-commerce companies is another advantage over the smaller players when it comes to shipping: economies of scale. They can secure very favour- able shipping rates by guaranteeing their courier partners a certain number of shipments. With their massive resources, these companies have begun to own and operate their own logistics and shipment infrastructure. The implications of this arms race aren't often felt by us consum- ers, who have come to expect free shipping. And it's actually very nice for us to be "courted" by these competing e-commerce websites to be their customers. The one facing the "pinch" are the smaller e-commerce businesses, for whom the cost of free shipping might turn out to be unsustainable. Will the dream of free shipping last? Thousands of retailers now offer it in one form or another. As customers, we have come to expect free shipping as a norm and it does look like it is here to stay. For online businesses to continue to grow and be viable, they need to seriously look at their numbers. Ultimately, someone has to pay the cost of shipping. Whether it's the customers (accepting the trade- off of higher prices or lower service standard), investors (who pump in money to allow the business to gain market share), or companies themselves (to write off the ship- ping costs as a loss leader). Free shipping for online shopping is a popular concept. Whether you're shopping at ASOS or Boohoo, once you meet the minimum spend, you are entitled to free shipping. Popularised by early internet start- ups, free shipping has grown to the point that it is now an expectation from consumers, a necessity for any e-commerce company that has hopes of remaining competitive in today's marketplace.