The Future of Shipping Charges

A few weeks ago Amazon raised the price of an Amazon Prime membership from $79/year to $99/year. If you read the news or followed Twitter, you would have thought they raised it to $99/month judging by the reactions. Read a few of the comments on this Lifehacker post and you’ll get a feel for how upset the majority of people were.

Personally the reaction has been a bit perplexing. If you get $99 of value out of it, keep it. If you don’t, ditch it. It’s pretty easy to look through your history and figure out how much you potentially saved in both money and time. I saved much more than $99 and also use the included Prime Instant Video as well as the Kindle Lending Library, so for me it was an easy decision to stick with it. You also have the option of adding up to 4 family members (or friends). Split it 4 ways and you’re down to $25/year for guaranteed 2 day delivery on the largest selection of goods online. Seems like a pretty good deal to me.

As an e-commerce business owner, there were two huge takeaways for me:

  1. Taking things away from your customers is always painful.
  2. Shipping charges are normalizing. Even Amazon can’t subsidize everything.

Let’s look at each of these a bit closer.

Taking Things Away From Your Customers Is Painful

I suspect that this is the reason why so many people were upset. Rationally, I think most people understand why the price is rising, and I’d suspect that the difference between $79 and $99 doesn’t change the math for the majority of consumers. I mean, it’s hard to argue with Amazon’s reasoning. The email sent to me said, in part:

Even as fuel and transportation costs have increased, the price of Prime has remained the same for nine years. Since 2005, the number of items eligible for unlimited free Two-Day Shipping has grown from one million to over 20 million. We also added unlimited access to over 40,000 movies and TV episodes with Prime Instant Video and a selection of over 500,000 books to borrow from the Kindle Owners’ Lending Library.

Another angle: Gizmodo explains that, with inflation, $79 in 2005 dollars is really $95 in 2014 money. This really isn’t about the money, it’s about the pain of losing something that was once given to you. Consumers don’t like getting a worse deal today than they did yesterday, even if there’s logic behind it. As a consumer I can sympathize with that, and as a business owner I take note of how painful it can be to take permanent everyday deals away from your customers.

Shipping Charges Are Normalizing

This is long overdue in my opinion. When e-commerce first began, it was normal to pay shipping (and gasp, even handling sometimes) on your order. Just as it was with mail order catalogs dating back over a century. After all, you have the convenience of shopping from home. You don’t have to interrupt your day, wait in line, or put miles on your car. It’s completely fair to pay the cost to ship the package to your door.

Eventually competitiveness kicked in and it became more and more common for retailers to offer free shipping. This was great for both consumers and retailers. It was a differentiator.

Somewhere along the lines though, we took it too far. It became a consumer expectation to always get free shipping on anything they ordered online. I can’t tell you how many e-commerce advice articles I’ve stumbled upon in the past few years that claimed you HAD TO offer free shipping to be competitive online. Often times these articles, written by supposed experts, would suggest that it was business suicide to sell products online and charge for shipping.

No one bothered to ask – can retailers actually afford to offer free shipping?

In most cases, unless you have unusually high margins, the answer is no…at least not universally. I suspect that many retailers, especially new retailers, didn’t bother to do even a little math. Shipping is expensive, really expensive. Offering free shipping blindly can be the end of a once profitable venture. Sure, you can send a towel in an envelope with the USPS for a few bucks with no insurance or delivery confirmation. But if you want to ship in any volume, if your products weigh more than a pound or two, and if you want the speed & reliability of a FedEx or UPS, shipping gets expensive fast.

In most industries you cannot, absolutely cannot, afford to have the lowest prices, offer coupon codes, pay out affiliate fees, etc AND offer free shipping on everything. Amazon couldn’t even do it with a $79/year fee and they negotiate the very best shipping rates and have the very best shipping operations. Many suspect that even at $99 they’re still losing money. They’ve also quietly rolled out Add-on Items, items that can only be purchased when you spend $25 as a Prime Member or $35 as a normal user. Turns out not even Amazon can pay $10 to ship you a tube of toothpaste and still turn a profit.

I subscribe to the theory that this is good. As consumers, we need to be brought back down to reality a bit. Shipping a physical good across the country is an amazing feat that takes a vast array of resources to make happen efficiently. It’s not free. It’s not magic.

I suspect that other retailers will follow suit, if they haven’t already. It seems to me like less and less big retailers are offering free shipping with no limits. Generally there’s a min spend attached. Obviously this is just anecdotal, but I think that’s the direction all online retail is heading and I think it’s for the better. We have to be realistic if we want the sites we love to still be around in 10 years.

What About Us?

Our shipping journey began back in 2009 when we did our first exhaustive shipping study. Since then we’ve continued to analyze our shipping numbers and take calculated risks, the most notable being our DI Ship & Save coupons in 2012 where we offer free shipping over $149 and $4.99 shipping over $49. We’ve recently unveiled a few new shipping “innovations” that I’ll discuss in my next post. As usual, they are data driven, very calculated offerings that we spent a long time planning, years in some cases. That’s the only way to offer great shipping deals AND run a profitable business.

13 comments on The Future of Shipping Charges

  1. Dave says:

    I don’t get the backlash about Amazon prime rate increase either. It’s a $1.66 more a month. I use Prime Instant Video all the time and order stuff constantly, knowing that I’ll get it quick.

    Over the holiday season last year I worked on a UPS truck and a majority of the packages were amazon. A couple days before Christmas, Amazon sent out a prime member email saying “order by the end of today and get your package Christmas eve”. The truck was packed with amazon boxes!

    • Adam McFarland says:

      Totally agree Dave, the benefits of Prime are well worth the price. Thanks for reading and taking the time to comment.

  2. Dale says:

    Agree, shipping charges are real and someone has to pay for them. That’s why big box retailers exist, it’s so much more efficient to ship in volume. For my product, even going to 2 bottles instead of 1 drops the shipping charges a ton. One bottle of The Bucko Cleaner sells for $14.99 while the 2 pack sells for $26.99, or $13.50 a bottle. When going to a gallon (or 4 bottle equivalent) it goes down to $33.99/4 = $8.49 per bottle. This is mostly because of efficiency of shipping costs; I’m not making that much more on margin (in fact right now I’m breaking even on the single bottle hoping people like it and will order bigger quantities in the future).

    I chose to roll the shipping charges into the price, mostly based on that great post you wrote on shipping charges that you talked about in this post. One of my competitors charges it separately and I see on their Facebook page that they get a lot of complaints about how much shipping is.

    Great subject, I might have to do a post on our shipping strategy/woes.

    • Adam McFarland says:

      Good info Dale. I love the strategy of rolling shipping into the price, especially for a manufacturer/distributor like yourself that sells a limited number of products and can ensure the correct margins are always there.

      My partners and I joke that we’d love to have a bunch of Detailed Image’s running simultaneously – one that operates like we do now, one that has everyday low prices but no discount codes or sales, one that has free shipping but rolls it into the price, etc. There’s no “right” answer so long as you do some math to ensure you’ll turn a profit.

      You should definitely do a post on the topic. It’s one of those topics with almost infinite material. I originally thought about doing a “shipping week” of 7 shipping-related posts but I dialed that back to 2 lol because I thought that might be overkill.

      • Rob says:

        My partners and I joke that we’d love to have a bunch of Detailed Image’s running simultaneously

        Errmm.. why don’t you then? Create some parallel brands, perhaps with only a limited number of products targeted at an even more specific niche (Ferrari owners etc.). I other brands I sometimes work under, each with their own website, wording, pricing and packages etc. It really helps dominate in the search results too – people think they’re picking between competitors but really they’re just choosing which of my brands I’m going to be serving them under.

        • Adam McFarland says:

          It’s a valid question. What I was referring to would be targeted at the exact same market with the exact same strategies to drive traffic, and then just tweaking shipping, discounts, etc on-site to see how it would affect conversions. It would be difficult to build up brand equity equal to DI so that you could accurately compare A to B to C. It’s also just a ton of work to manage and maintain, we have a hard enough time keeping up with ~900 product descriptions, all of our sales/promotions, newsletters, social media, marketing dollars, etc that I can’t imagine doing that times 3 or 4. And I think from a branding standpoint we like building one strong brand as opposed to several.

          That said, if we ever make our own products, or decide to go after boats or motorcycles, I could see us trying a completely different discount/pricing model.

  3. Tim says:

    As a consumer I’m a little taken back by the increase, from a business owners perspective I think it was a wise move. We’re Prime users, but like others have mentioned our benefits are far greater than what we pay, even with the increase. We use a lot of Amazon Prime Instant view, it’s replaced our netflix account (which was $120 annually), obviously the shipping is great and the other bells and whistles are fun to explore. Even with the increase we’ll keep our Prime account and continue to use the services.

    On the broader discussion about shipping, I wonder what the right move is. We (the company I work for now) includes shipping in it’s price, however they have abnormally high margins and shipping is super expensive (avg. shipping cost is over $125) and I think the consumer perception of paying that in addition to the price of the product would be unfavorable. I think that’s the trick, what is consumers perception and what is a good deal? Recently I purchased a chandelier online and paid $49 shipping, which upset me, but even with that added it was still a much better deal on a nicer quality piece than I would have gotten locally, not to mention we couldn’t find anything locally we liked. So I was upset about paying for it, but it still was a good deal – humans sure are weird! I wonder how I would have felt it was rolled into the price?

    Consumers use price filtering a lot with online shopping, that could sway the AOV higher without including shipping, however conversion rate could be impacted. It’s a really interesting discussion, kind of the chicken or the egg or an item for a high volume online retailer to AB test – which I’m sure they do and keep the results to themselves to have a bit of an advantage.

    • Rob says:

      With regards to your comment about the $49 chandelier shipping, I think that with a purchase like that the general consumer impression is that the value of the item is strongly correlated to the price paid. They’d think that a $199 chandelier with $49 shipping is inferior in some way to a $249 chandelier – people are often proud of how much they have paid for something, especially things like artwork, sculptures and other “pretty things”. I don’t think they’d usually talk about how much the shipping was when someone says “Oh my, I love your chandelier, how much was it?”.

      You could sell a handmade vase for $30 or $3000 and there be absolutely no difference in the construction, quality or finish of them but you can be sure they will be perceived differently. What I’m saying is that having a higher price can be beneficial to creating a particular brand impression, and I don’t think shipping charges factor into that for most people as they’re not paying for anything tangible.

      • Adam McFarland says:

        Yea absolutely Rob, good discussion.

        I think it depends on what you’re selling and whether other people are selling the exact same SKU or not. If you make/manufacture the product, then I would hypothesize that rolling the shipping cost into it is the better option. You can, theoretically, price something however you want because of the perceived quality you mentioned.

        However if you’re like us and people are comparison shopping for the exact same product, often times using Google Shopping or other comparison engines, it becomes more murky. I would suspect that the lower price gets the customer “in the door” so to speak, which has to increase your chance of conversion. Of course, not knowing the shipping price heading into checkout generally also increases the % of customers who will bail.

        That’s why we’ve sort of adopted a hybrid approach where we sort of do everything but don’t fully commit to one thing. Most of the time we have the lowest every day prices (or at least equal to the competition). We’re always running some sort of pretty major sale on our home page. There are always deals like the Daily Special. When it comes to coupon codes, we make available free items, % off codes, and free shipping codes, and let the consumer decide which they want to use, with the limitation that they can only use one.

        The downside is that this is fairly complex and involves a lot of math to avoid losing money on any one particular order. And we’re not able to brand ourselves as “the free shipping store” or “the lowest price” store because we’re never one of those things in every circumstance.

        We’re running some interesting tests regarding shipping specifically, which I’ll delve into in my next post.

        If we ever make our own products and we have more control over pricing, I think we’ll consider any and all possible models.

        • Rob says:

          Agree 100% – if it’s something they can price compare on and they’re price sensitive then you can’t really do that. I always love the sofa adverts on TV where they say “You won’t find these cheaper anywhere else”…yeah, because they’re custom made for your company. It’s like the supermarket versions of brand TVs where they’re very slightly different so you can’t do direct price comparisons as the features have minor differences and the SKUs are different.

          I think the hybrid approach is OK. As you said in the OP, Amazon do it now with add-on items, thresholds for free shipping, different shipping rules per category.

          Why don’t you make your own products? It seems everyone and his dog is now into getting some factory in china to make things and slap their label on it. My uncle and aunt have their own line of energy saving lightbulbs ffs. It would certainly enable you to do interesting things with your margins as you wouldn’t need to compete on price for those items. You could make use of all the feedback and reviews you’ve had to make some really kickass products. Have you seen this? http://www.fastcompany.com/3021229/chaim-pikarski-the-amazon-whisperer

          • Adam McFarland says:

            Why don’t you make your own products?

            Umm, I think officially our stance right now is “no comment” 😉 (but I will say that what you’re suggesting makes a whole lot of sense and we may or may not have had that same thought)

            …And that is a great article. I did see it a few months back. It’s really really interesting. I sent it out to my partners when I first read it.

          • Adam McFarland says:

            Also – this is one of the funniest lines I’ve ever read, on so many levels “My uncle and aunt have their own line of energy saving lightbulbs ffs. “

  4. […] my last post I discussed my views on the changing landscape of shipping charges. Increasing costs along with the fear that changing/eliminating shipping offers will upset your […]

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