Free Shipping Disproportionately Affects Small Retailers

Big box retail is dramatically shifting the online retail landscape. An increasing focus on “free shipping” has changed changed this offer from a promotional tactic to an ecommerce requirement.

By including shipping in the price tag or part of a subscription package (i.e. Amazon Prime), and using their scale to negotiate the lowest shipping rates, big retailers can claim “free shipping” while minimizing their own shipment costs.

Consumers widely agree with this business model. Over 50% of orders from the 30 biggest e-commerce merchants last year were shipped “free.” Two years ago it was 33%. As long as a retailer is big enough to absorb the cost and continue to get the best shipping rates, they make up for this discount in sales volume.1

According to consumer shopping polls, Amazon is leading all search engines combined as the default start site for online shopping searches. 44% of people begin their searches on Amazon, largely due to Prime’s free shipping and Amazon’s market dominance.

Package carriers offer favorable bulk discounts to retailers who have predictable shipping volume. This pressures small eCommerce sites with highly variable shipping volume. Retailers can frequently receive around 70% discounts on high volume shipments, while smaller retailers average out at a 5% discount. This increases the barrier to entry for online retail, and squeezes their already thin margins at a time when they need to be focusing resources on building a repeatable, scalable customer acquisition funnel.

Boutique retailers only ship a small fraction in comparison to their larger counterparts, and each penny matters even more to a smaller retailer than large ones. A big double-whammy. Additionally, price hikes and subscription service models are harder to implement for small players than large ones.

whammies

There is a high opportunity cost associated with increasing prices, as demand for those niche products is relatively elastic due to an abundance of substitutes on other sites, and the amount absorbed by a small increase in price is typically negligible at the small retailer scale. Subscription services are usually not profitable for boutique retailers either. Unless the content or goods offered are bountiful in range and depth, consumers seem to have little interest in paying extra for a niche service with a small retailer.

In terms of breadth and scale, Amazon has effectively cornered the market. It shipped more than 1 billion parcels in 2015. The next closest was Wal-Mart, shipping 156 million. Their volume allows for premium shipping benefits, like 80% discounts on overnight air shipments, and 60% on ground delivery. This allows Amazon to save half off the industry average: they pay $4 on average while others pay about $8 for ground shipments. In fact, Amazon is one of the few retailers able to only pay an average of $1.87 to the USPS for the residential leg of a package delivery; other retailers pay for the entire package journey.

Combined, these unique benefits offer Amazon the opportunity to subsidize distribution costs on their own. Selling through Amazon does come at a premium price, but a retailer selling through Amazon can get 37% off on overnight air shipping (if they spend over $1000). But the great exposure more than makes up for the high cost.

Either way, whether it is vending, selling, or influencing, free shipping has helped Amazon and other big retailers to completely corner the online retail landscape.