If your company sells online, shipping costs are a very real factor in your revenue equation. Is it worth footing the bill? Should You Offer Free Shipping?
If your company sells online, you have one significant disadvantage to your brick-and-mortar competitors: shipping costs. Most consumers don’t like the idea of having to pay extra fees after they already agreed to a certain price. But the obvious need to move product from point A to point B comes at a cost. This cost is explicit in online sales. Sure, buying from a store also has its costs: gas money, wear and tear on the car, opportunity cost for the time it takes to go to the store, etc. But these costs aren’t as evident as a “Shipping and Handling” fee on a website’s Check Out page. So it’s no surprise that, according to the National Retail Federation, 40 percent of online shoppers didn’t commit to a purchase because of the shipping costs associated with the transaction.
Some online retailers have made the decision to confront this issue head on by offering free shipping and handling on certain online orders. That is no small feat. Shipping costs are very real.
The realities of shipping costs in 2011
Shipping has gotten significantly more expensive. Over the past year the cost of shipping a 20 pound package has gone up between 5 percent and 7 percent. If you sell low-margin items on your website or have significant handling costs, that increase could have a material impact on your profitability. As the United States Postal Service reduces services and increases prices to compensate for its huge deficit, there will be less competition among shippers, further stimulating the rise in costs. The significant increase in energy costs will also continue to have a negative impact on online sales.
If you are a small business, then the problem is further exacerbated by your size. On average, small businesses—defined as those with less than 20 employees—pay 50 percent more for shipping compared to their larger counterparts.
The decision to offer free shipping
If you do decide to offer free shipping, then it’s going to be more expensive for your business today than it would have been several years ago. Whether or not it’s a good decision comes down to your belief that profitability from the incremental revenues will offset the additional shipping costs. That is no small hurdle. If you expect the increase to come from pure unit sales increases, it will require a tremendous impact. If instead you believe that it will help increase revenue and sell more high-margin products, then the boost wouldn’t have to be so large.
