One of the biggest challenges online retailers face is how much to charge for shipping products to their customers. Should they offer free shipping or should they charge an additional fee? Shipping is the #1 reason for shopping cart abandonment and last year alone there was over $4 trillion* worth of merchandise left unpurchased in the shopping cart.
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.
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 pay more and get “free shipping” than accept that they are paying big bucks to have their purchases shipped to them. Online sellers know that big shipping costs scare their customers away so they turn to an alternative. The most common alternatives are free shipping and flat rate shipping. In both scenarios, the price of the product must be set according to the overall price to the consumer to ensure positive margins for each purchase.
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 optimal to charge exactly what is needed to ship each item to each customer instead of setting one price for each item. As the e-commerce industry continues to grow and expand, online buyers will get more savvy and start demanding better rates on shipping (even if that rate is absorbed in the cost of the item). It won’t be long before consumers expect personalized shipping rates right inside the shopping cart for the unique order they plan to purchase. When more robust algorithm based shipping products hit the market, online sellers will be able to optimize the shopping experience, resulting in better prices for consumers and better margins for sellers.