Monday, December 2, 2013

How is it that online retailers can afford to offer Free Shipping?

If you are an online retailers you probably have asked the question. "How do so many of my competitors offer free shipping on customer orders?", which is then followed by the thought.  "How can I compete with free shipping offers?"
There are a few ways online sellers are able to provide discounted or free shipping, but unfortunately the reality is there are NO free shipping service options with Fed Ex or UPS or the USPS or anyone else. So, whether your business is a high volume shipper, small ecommerce start-up, or growing ecommerce retailer there is no such thing as free shipping for anyone.
 What large shippers do get, that most small companies typically do not, are significant discounts on UPS/ Fed Ex  published rates. In addition, if a company is shipping a very large amount of the same size packages there is often the chance to get preferential rates in those circumstances.
Clearly if you are a small online retailer you are at a real disadvantage because you are without the leverage to negotiate better rates with FedEx or UPS. But in the end, just like your business, the big online retailers are covering the cost of shipping with the margins in their products.
What to do about it as a startup or small online retailer? Obviously it is paramount to figure out ways to minimize shipping expenses because these are costs that are not going away no matter how big you get. The cost to an online retailer of managing inbound freight and other logistics expenses are a matter of scale as well so make sure to be managing shipping costs for larger product moves as well. This includes the right ecommerce shipping software as well.
Consider alternatives to FedEx or UPS by looking at the options offered by the USPS. Many companies find that options like a Flat Rate Priority Mail box are a good way to reduce costs. FedEx and UPS charge hefty residential, extended delivery area and fuel surcharges that hurt the economics of shipping Business to Consumer (B2C).
More distance equals more cost so your shipping location is directly correlated to your shipping costs. The densest population centers in the US are located in Northeast part of the country. If you are shipping from San Francisco to customers in New York, the cost could be double or more than the cost to ship to New York from a location on the east coast. Another advantage the big guys have is the volume to ship from multiple points within the US. They can service most of the country with a bunch of cheaper ZONE 2 or 3 shipments (short distances), as opposed to expensive ZONE 8 shipments (long distances) going cross country by having multiple warehouse locations to ship from. In the end it does take volume to make it worthwhile to set up multiple shipping points around the country.
Many 3rd party ecommerce order fulfillment warehouses will pass on their volume discounts with FedEx/ UPS, so consider outsourcing your order fulfillment and shipping. Your operation will potentially benefit from the scale and volume of all the customers shipping from that fulfillment center, not to mention the other costs and headaches of managing your own fulfillment.