Free Shipping Ain’t Free….
As we pointed out in an earlier article where we discussed the effects of Wal-mart making a much more aggressive “push,” into the e-commerce marketplace, their titan competitor Amazon would be forced to respond in kind.
Consumers in the digital retail vertical…or for that matter, consumers in general are much savvier than in the past. With wages growing at a generally slower pace than they have over the last decade, competition for their discretionary income is heating up.
In short, if a single retail behemoth offers reduced shipping rates…the other major players in the game have no choice but to follow suit. Who are the winners and losers in such a “Game of Thrones?” Let’s try and figure that out.
Winners can be Choosers!
Amazon used to require a minimum purchase amount of $35.00 for non-Prime members to qualify for free shipping. Then Wal-mart introduced its own membership program called Shipping Pass which offered free two-day shipping for a fee of only $49.00 a year. It is precisely for this reason that Amazon has now lowered its free shipping threshold by $10.00 to only $25.00!
While it is true that consumers may still gravitate towards Wal-mart’s shipping deal because of the two-day advantage for delivery… it is also true that Amazon cannot lower its free shipping threshold too much farther without it running into trouble convincing shoppers that Prime membership may not be worth the money.
Obviously, digital marketplace consumers will benefit from this latest “shipping war,” between the major retailers. While Amazon and Wal-mart are apparently locked in a logistics wrestling match, other retailers are climbing into the ring as well. As an example, Target has launched a pilot program where it is testing next-day delivery for certain home essentials. Additionally, Wal-mart has free shipping for some items not included in its new shipping program.
At this point, it is correct to note that virtually every large retailer in the United States has free shipping available now in some capacity for their customers. As free shipping is a major factor in online purchasing decisions, a new study by Internet Retailer and Bizrate Insights found that it may be the most important decision an e-commerce shopper responds to.
Someone has to pay…
There is an old business adage that goes, “…nothing is truly free as the burden of that cost is not a figment of one’s imagination.” Consumers are not usually conscious of the costs associated with free shipping. While some shoppers may think the shipping is covered in the “outrageous” margins that must exist in the retail price they are paying…the truth is that everyone in the logistics chain pays for free shipping.
If you are an Amazon (Wal-mart, Target or other large retail) Seller who either provides product to these retailers or you are a Seller who’s own product is listed on their e-commerce marketplaces…you will eventually be required to support the free shipping of your product.
It is just a matter of time for you to receive a notification instructing you to provide some type of shipping support in the form of invoice discounts or direct product discounting so these digital marketplace retailers can continue to support the free shipping wars they are waging.
The Bottom Line – Free Shipping Ain’t Free…
It is imperative that you begin including another line item in your cost analysis as a Seller for the digital marketplace you currently target. You need to extrapolate what percentage of cost you must add into your Seller’s price for your products to offset the free shipping charges you will eventually be asked to support.
For some Seller’s, you are already feeling that pinch in the digital marketplace. In many cases, it may be too late for you to adjust your margins to offset those charges. As your margins are being squeezed (again) due to the free “shipping wars,” it is imperative that you protect your profits where you can. It is for this reason that partnering with a company like MosaicaFX to help manage your foreign currency and protect those profits is paramount to your continued success.
Set an appointment today to with a MosaicaFX Account Manager to hear our strategies to help protect your profits.
