Should You Offer Free Shipping to Meet Rising Customer Expectations?

The following is adapted from Adapt or Die by Jeremy Bodenhamer.

My oldest son ran into my home office the other day.

“Daddy, daddy, did you know that they don’t have Origami paper at Michaels?”

Caught a little off guard, I stared at him trying to figure out the urgency.

“They haven’t had any in three years!” he exclaimed. “Do you know where else I can get some?”

“Online,” I told him.

“That’s what I was thinking,” he replied, “but I don’t want to get it online because it takes soooo long. Like three or four days.”

So true, my little friend, so true. Three or four days does feel like a long time in a world of instant gratification and two-hour delivery promises. This is one of the reasons shipping has become the most crucial component of warehouse automation.

Amazon gets a lot of the credit for creating the systems and the infrastructure, but the real demand is coming from us, the buyers. Whether it’s a bike or a burrito, we want our stuff easy and we want it fast.

Before 2005, when Amazon first launched Prime, two-day shipping was considered something akin to rush delivery, and it was costly for both the shipper and the customer. Not only were the most-needed items sitting on local retailer shelves, but when online orders were placed, customers were happy to get them delivered within a week. One- or two-day services were so expensive they were usually unthinkable.

Now, fifteen years later, most customers expect free, two-day shipping. In an attempt to exceed market expectations they themselves created, Amazon announced in early 2019 the introduction of one-day shipping for Prime customers, a change the company expects will cost roughly $800 million in the first quarter, and more later. This is in addition to the same-day delivery offered through Amazon Prime Now in most major metropolitan areas.

Amazon Prime members loved the announcement (remember, that’s you and me!) because that means we get our stuff faster.

Research has shown that the “majority of buyers refuse to shop from a retailer following a negative delivery experience,” which slow shipping times contribute to. The reality is that most buyers only judge shipping carriers by on-time deliveries. Shipping and delivery are near the top of consumer priorities, and “loyal customers [are] worth up to ten times as much as the value of their first purchase” and “increasing customer retention even by 5 percent could lead to increased profits of between 25 percent and 95 percent.” The Big 5 e-commerce merchants — Amazon, Alibaba, Walmart, JD.com, and Shopify — know that rapid delivery times help them gain and retain new customers.

They also know nobody likes to pay for shipping. Buyers’ experiences of shipping services rarely equate to the real cost of delivery, unless there is an urgent need. Think wedding dress on the wedding day. In that circumstance, the shipping value is almost priceless. Any cost sounds reasonable. However, your order of razor blades and pimple cream doesn’t meet the same value threshold. In fact, we find almost no value in routine, day-to-day shipping services, which is precisely why sellers have rapidly adopted free shipping policies.

Of the approximately 75 percent of customers whom e-commerce sites lose through cart abandonment, the number one reason given is unexpected shipping costs. One could argue that in today’s environment, any shipping cost is unexpected. According to a 2016 survey, free shipping, more than any other factor, would persuade customers to buy from e-commerce sites more frequently.

Although almost no retailer can compete with the Big 5 on this or most other fronts, in 2018, Amazon spent US $27.7 billion — more than the GDP of 100 countries — on shipping, of which it recovers only about 55 percent. Due to its profits in other areas, Amazon has been able to sustain enormous losses like this year after year as they have built their distribution infrastructure.

How many years can your business afford massive losses to subsidize fast, free deliveries?

To survive, you’ve got to have everything from bikes to burritos (and Origami paper, apparently) delivered fast and free, or even the kids will complain. So, how should retailers, manufacturers, and distributors react to strategic moves which have been designed to be virtually unreproducible?

For more advice on modern delivery automation for small businesses, you can find Adapt or Die on Amazon.

Jeremy Bodenhamer is a leading expert at the intersection of shipping and e-commerce. He has been featured in Inc., TechCrunch, AOL, Fortune, Internet Retailer, and Entrepreneur; is a frequent speaker on innovation, technology, and logistics; and was a 2018 Supply Chain & Executive Pro to Know. Jeremy is an active volunteer in the community, an avid Crossfitter and surfer, and champion of a company culture that promotes health, family, and happiness among employees. He lives in Santa Barbara with his wife — educator and youth advocate, Bethany Bodenhamer — and their three sons.