Can retailers escape the scourge of free shipping?

Source: Walmart
Jun 13, 2017

Knowledge@Wharton staff

Presented here for discussion is a synopsis of a current article published with permission from Knowledge@Wharton, the online research and business analysis journal of the Wharton School of the University of Pennsylvania.

If retailers are hurting today, among the wounds — both self-inflicted and imposed from outside — is free shipping. On the demand side, customers are increasingly expecting free delivery and even free returns. The problem for retailers, of course, is that free shipping cuts deeply into profits.

Given that online shopping is woven into the habits of most U.S. shoppers, might retailers be able to cut out free shipping?

Ironically, the answer may lie in a phenomenon best illustrated by Prime is promoted as a way to get “fast, free shipping and more,” and many customers themselves refer to the service as being free. But of course, they are paying $10.99 a month or $99 per year for their “free shipping.” Amazon and other mega-retailers can also negotiate lower shipping rates.

One way to side-step the free-delivery trap is to give customers another system of options and incentives “to try to get the customer once again to bear the cost of that last mile,” says Wharton marketing professor Barbara E. Kahn, “so even if you are shopping online, if you pick it up in person in the store, that saves a lot of money.”

Shoppers might be offered a better price on an item if they are willing to wait until a delivery truck is already scheduled to come to their neighborhood.

The extent to which retailers are being threatened by free shipping depends on whether the retailer addresses “fast shopping” akin to the Amazon experience or “slow shopping,” according to retail futurist Doug Stephens.

“If you’re a brand about slow shopping, it’s about having a rich, immersive, tactile and maybe even emotionally connected experience, and then the emphasis is taken off [of free shipping],” said Mr. Stephens.

Ms. Kahn doubts that free shipping is going away, but says the economics of it will be hard to sustain without some mitigating factor.

“I do think there will be some kind of shake out,” she said, “and then it’s maybe you get free shipping, but you are paying a subscription price, or the price is built in somewhere else.”

Discussion questions: How can retailers reduce consumers’ expectations around free shipping or at least lessen the costs involved? Do you see incentivizing in-store pickup, slower delivery times or other options mitigating the free-shipping expectation?

Please practice The RetailWire Golden Rule when submitting your comments.
"The days of fulfillment being a profit center are definitely over."
"Retailers need to focus on building the average sale, the customer LTV and retention rates. These will ultimately pay for the costs of free shipping."
"Like the cat who tasted fresh tuna, there is no going back to the canned variety."

Join the Discussion!

34 Comments on "Can retailers escape the scourge of free shipping?"

Sort by:   newest | oldest | most voted
Art Suriano

I think free shipping is here to stay and has become a must-have to compete. However, some retailers like Walmart have created an incentive to pick up the item in the store and that not only saves the retailer the shipping expense, it also creates the opportunity for more sales through impulse buying. I see subscriptions as another method some retailers may try, but the subscription would have to include more than just free shipping, possibly a percentage off on all purchases or points accrued toward future purchase savings. It’s more a matter of being creative and finding unique opportunities for your business that will motivate customers to respond.

Dick Seesel

Retailers have competed over e-commerce free shipping for a number of years, so it’s hard to envision the genie being put back into the bottle. (Customer expectations are hard to unwind, after all, when customers are given a benefit for free.) The trick that Amazon seems to be mastering is the trade-off between speed and cost. Even Prime members may pay extra for same-day or next-day delivery compared to truly free shipping for an item showing up in two days; the shoppers figure out the value equation that matters to them. But will competing retailers take advantage of the solution that Amazon is providing to them?

Mark Ryski

It will be very difficult if not impossible to put the free shipping genie back in the bottle. Consumers have come to expect free or low-cost shipping and I believe will switch retailers to get it. However, free/low-cost shipping is greatly impacting already fragile profitability for many retailers and is unsustainable in the long-run. Retailers will continue to experiment with all sorts of permutations like in-store pick-up and other incentives to minimize the impact, but I suspect that we’re going to be talking about the challenge of shipping costs for years to come.

Lyle Bunn (Ph.D. Hon)

Free shipping is what it is — a business development tactic for online retail, a loyalty reward for shoppers and a transition toward the variable pricing that is reflective of the total cost of sales. The honeymoon will end and customers of retail, as has been the case with airlines, auto repairs and medical services, will realize that the total cost is comprised of all inputs. Retailers are well served by ship-to-store and consumer experience on-location needs to take customer satisfaction to new levels in acknowledgement of the visit provided.

Ken Morris
Ken Morris
Managing Partner Cambridge Retail Advisors
3 years 4 months ago

Free is never really free as explained above in the Amazon model so membership is an easy alternative, but brick-and-mortar has another option. In-store pick-up via BOPIS, Uber-like services, associate delivery and eventually autonomous delivery and distribution will all play a part. I like to use the Walmart example where 90 percent of the U.S. population lives within a 10-mile radius of a store. There is a feasible model that in fact leverages the store and the associates of the store in non-peak hours and gives the customer same-day delivery. Systems need to be real-time and networked to make this truly work (similar to how distribution centers operate) but the time is coming when a unified commerce experience will leverage stores and technology to satisfy increasingly picky customer expectations at a cost that is reasonable.

Phil Masiello

I think trying to reduce a consumer expectation or change an expectation never works. You can’t change consumers or consumer behavior. That has been the issue with retailers for years. Retailers try to make consumers conform to their method of doing business. E-commerce is consumer-centric so the consumer is in charge.

The problem is not free shipping. The problem is how we think about free shipping.

It is true that Amazon has set an expectation of free shipping to consumers. Pure-play e-commerce companies view free shipping as part of marketing, whereas retailers view free shipping as an expense. That is short-sighted.

Free shipping is not going away. Retailers need to adapt their business model, streamline processes to make them efficient and low-cost, negotiate the best rates they can with USPS, UPS and FedEx and offer free shipping with a minimum purchase. What retailers need to focus on is building the average sale, the customer LTV and retention rates. These will ultimately pay for the costs of free shipping.

Lesley Everett

While we can’t dispute the fact that free shipping is an attractive option at point of online sale, I’m not so sure consumers expect it every time or if they do they realize that the cost is taken care of elsewhere in their purchase and it’s not actually free. Loyalty schemes where points can be built up to use against shipping might work, or perhaps even very low shipping fees will be enough to keep consumers happy. It’s the high fees that in my view create an issue for consumers.

Max Goldberg

Retailers are not going to rid themselves of free shipping. It’s become a cost of doing business. They may be able to get consumers to accept slower free delivery or a minimum purchase to qualify, but free shipping is not going away because consumers hate to pay for delivery. And Amazon, with over 60 million Prime subscribers, is going to keep it that way.

Charles Dimov

Don’t pay Peter from Paul’s pocket! Sure free shipping is a challenge, but getting shoppers hooked on the idea that they get a discount for doing an in-store pickup is just bringing free shipping’s margin-eroding behavior to a new front. If retailers us the click-and-collect pickup discount as a short-term promotion to create awareness — great. If it becomes the norm then it will just erode margins.

Despite Amazon’s $25 free shipping limit, many retailers are resisting by setting a higher limit. This is a good way to wean customers off the immediate expectation and drive up the basket size value.

Otherwise — retailers should focus on the in-store pickup but be careful not to erode margins with the easy, knee-jerk reaction of discounting as a quick fix.

Dave Nixon
Dave Nixon
Retail Solutions Executive, Teradata
3 years 4 months ago

If the store evolves to become more experiential versus just transactional, you can provide different options for the acquisition of the product besides just shipping it. Over time we can educate and influence the new retail shopper to use alternative methods for getting the product instead of the outright priority being put on delivery because of online retailers disrupting the industry.

Pickup, delivery and shipping can be done in such a way to capture more incremental basket lift and impact the customer experience in a way that negates the need for free shipping.

Pavlo Khliust

Free shipping and returns became standard customer expectations over the years and they’re here to stay. At the same time, retailers need to provide the same Amazon-like level of service to stay competitive. Subscription-based solutions like Prime with the same or next-day delivery options and in-store pick-ups are a way to go for those retailers with a vast high-street presence. For others, it’s either providing additional incentives, as Professor Kahn noted in the article, or figuring out other ways to provide more value in exchange for a longer delivery time.

Shawn Harris

Free shipping is here to stay and we will continue to see further demonetization in retail. Retailers with the right culture, regional scale and capital have the greatest chance to change their existing profit models to cost items out up to delivery to the door vs. to a shelf. This will require a complete reworking of manufacturing methods and supply chain management techniques.

Ken Cassar
Ken Cassar
Principal, Cassarco Strategy & Analytic Consultants
3 years 4 months ago

We are (finally) seeing brick-and-mortar retailers offering appealing in-store pick up options for online orders. Walmart Grocery and Amazon Fresh Pickup are great examples. As is Target’s new store format, with a separate entrance for in-store pick up orders. But the most common store pickup experience today remains a slog to the old layaway desk in the back of the store to wait in line. Brick-and-mortar retailers have got to accelerate the refitting of their stores to make in-store pick up a more appealing option that offers convenience, immediacy and cost savings.

Peter Charness

Free shipping costs need to be recovered as part of the cost of doing business for a retailer, most probably as part of the overall transaction cost. Using your credit card isn’t “free” for the retailer any more than is the cost of getting the product through a DC into a truck and on the shelf. The cost will have to be recovered either by a shipping/membership fee or part of the overall margin. In any case, it’s now an expectation of the customer and that’s not going away.

Brandon Rael

We are past the point where retailers can avoid or mitigate consumers’ expectations on free shipping. Free shipping, which once was a key competitive differentiator, now has essentially become the standard. Competing directly with Amazon in this arena will be a difficult proposition, however what can really differentiate brick-and-mortar as well as “hybrid” e-commerce companies with a physical presence are personalization, outstanding service and, ultimately, a subscription-based model which will enable online companies to scale, grow their community and retain consumer loyalty.

All of these incentives will help to reduce and potentially mitigate the significant costs associated with free shipping. There’s honestly no going back.

Ken Lonyai

There is no free lunch, I mean shipping. It’s an illusion that has in just a short number of years, become a pillar of on-line shopping.

Consumers are OK with a minimum purchase threshold to get it and are willing to accept more than two-day delivery to save delivery costs, but the standard has been set by Amazon and Prime. Any retailer that balks at free shipping or tries any scheme that imposes on shopper expectations is going to fail. Plus, Amazon is well positioned to counter any competitor’s move that threatens their sales – need I say $25 free regular shipping is back?

I don’t see much changing from the status quo for most retailers now: offer free shipping at a threshold, roll the costs into pricing, try to encourage BOPIS, beat up the carriers as much as possible, find cost efficiencies everywhere throughout the supply chain, deliver the best UX imaginable in hopes of building loyalty, grin and bear it.

James Tenser

You are absolutely correct, Ken. Nuthin’s free. One way or the other shipping has to be figured into the cost of goods … eventually. Amazon knows full well that it is in a position to use shipping policies as a competitive pressure point. Other digital retailers follow suit because they think they have no choice but to match customer expectations. They may be right. So the illusion of free shipping won’t go away unless some retailers bite the bullet and take it away. My money’s on Walmart and my suggested tactic is true shipping cost transparency – down to the penny. Let shoppers make informed choices about fulfillment: where, how soon, and how much.

Tony Orlando
As a single store owner, I am pretty much aware of the fact that I simply cannot be Amazon, Walmart or any other behemoth that can offer free shipping without it costing what is left of my bottom line. Rural areas like mine are difficult to manage. We are the largest county in Ohio and have fewer than 90,000 in population, plus income per capita at the bottom. If anyone thinks they can crack the code for a delivery service here that can actually turn a profit please feel free to speak up. And this does not include Amazon or Walmart, as I’m speaking for the local retailers who are trying to figure this out as well. Yes I deliver catering for customers who understand the delivery fee, but the profit margin built into catering services makes it a worthwhile trip. Daily delivery in our area is another story. There are no third-party services here, and I wish there were, but I can not figure out how to make this work and turn a profit.… Read more »
Ian Percy
There is still truth in the adage that “you reap what you sow.” Trying to obtain competitive advantage through free shipping has brought an enormous cost to retailers. There is also truth in the adage that sometimes “you reap what someone else sowed” as in the weeds in your lawn spread from your lazy neighbor’s yard. So everyone is now in this dark free-shipping hole. There is no escape as pretty well everyone is saying. The trick is to find a way for customers to pay for shipping but in a way that they forget they’re doing so. That’s been Amazon’s genius. Unfortunately the consumer isn’t going to keep joining retailer clubs, joining Amazon Prime is enough. Is there much point in have both a Costco and a Sam’s Club membership? Canada has long had an approach to changing cultural norms. It created a new flag. Changed to coins for $1 and $2 bills. Stopped using pennies totally. Sure Canadians whined about it for a week but the response was “deal with it.” So they… Read more »
Ralph Jacobson

The high-level suggestions in the article and even in the discussion questions are a start, potentially, to easing the pain of free shipping. However the challenge needs to be addressed at the systemic level. Shoppers will continue to demand stuff for free so it’s time for all retailers large and small to look into the very latest innovations around emerging technologies, like blockchain, to minimize supply chain and transaction costs. This is where innovators are reducing and even eliminating costs as we speak. There’s a ton of good insight around these newer capabilities on the web.

Meaghan Brophy
Meaghan Brophy
Senior Retail Writer
3 years 4 months ago

In short, you can’t reduce consumer expectations. In that sense, retailers are stuck with free shipping. As long as one or two retailers continue to offer free shipping, everyone will have to.
Incentives for store pick-up could help. Amazon has offered incentives for slower free shipping to Prime members for a while, which I know personally I’ve never taken advantage of. Encouraging subscription or auto-renew orders could help save costs for retailers. Even if the shipping is still “free,” subscription orders can at least be planned for ahead of time and fulfilled using slower and cheaper shipping. Essentially, retailers will have to get creative to find cheaper solutions that still provide a great value to the customer.

Lee Peterson

Retailers need to pivot to the fact that shipping is free and solve the back side or develop better private label goods. Built-in shipping cost structures have ALWAYS been a part of product development, so why is this different? If it’s an issue due to the commodity factor, the manufacturer is also going to have to adapt to the new facts of life or be faced with consumer desertion.

Welcome to modern retail: shipping is free, figure it out.

Larry Negrich

Amazon, through Prime, has been successful at convincing consumers that shipping is free. So retailers need to find a way to blunt this with some sort of collective delivery service offering to defray the cost, eat the cost of shipping and hope there is enough room in the product margin to cover or, as Walmart is trying with a few new tactics such as pick-up discounts, change the perception. Challenging times for any retailer that wants to hold on to its margins and customers.
As long as Amazon can use its other businesses to shore up its lack of profit margins in its retail business and have investors and Wall Street not care, then many retailers will have a difficult time competing.