Who really pays the price for free delivery?
Updated: Feb 22
Ahh, free... It's a perk, a bonus, a little added extra, something gifted to us that doesn't cost us a penny. But is anything ever really free? When we subscribe to the idea of free delivery have you over really considered where that cost is being offset to?
Lets make one thing transparent from the get-go; it always costs money to ship a parcel. There is a material cost associated with packaging an item (whether that's a cardboard box, paper bubble wrap, paper tape). Then there is the delivery fee to consider. Additionally, the time it takes to package an order then take to a Post Office. Surely small businesses can't be expected to absorb all that cost?
Delivering an order costs money and whether you realise or not, that cost will always be covered by the consumer; you.
The psychology of free shipping
How many times have you abandoned your shopping cart because of the cost of shipping? We've all been there. I know I have! We anticipate paying a price for something based on its perceived worth, and when it comes to checkout, all of a sudden, there's an additional fee to pay.
The price has suddenly inflated to a rate we are no longer comfortable to pay. Sure, it may only be by a few quid, but it now feels like a worse deal. Why would I pay for something that doesn't add any value to my order? Shipping isn't anything tangible, I can't keep it; it's a service.
Enter free delivery.
Now that's something we can all get behind, right? I just want the product and I don't want to pay to have it delivered to my doorstep. It's a win for the consumer, surely?
This is where we have to consider the human psychology of making a purchase. The incentive of free delivery is just a little cherry on the cake to entice you into fulfilling your order. No more abandoned carts at the checkout because there's no nasty shipping fees waiting for us there!
Where did those shipping fees go then? Surely they didn't just disappear... Correct, they didn't just disappear, they were hidden somewhere else (likely the cost of the product instead).
The economy of free shipping pushes up the price of items
Great, we're not paying for delivery. Instead, we're paying extra on each of the items we buy.
Companies can offset the cost in many ways: increase the price of the item, offer free delivery above a minimum order spend, have a yearly subscription model (such as Am*zon, AS*S) and much more.
Prices will often be inflated elsewhere in order to cover the cost of "free" delivery. Companies can influence buyers spending habits and manipulate how much you buy by offering these free incentives. From a business perspective, it always costs them less the more items you purchase in a single order.
The perception of worth
Have you ever seen two comparable products online, lets use a terrazzo plant pot for this example. One of the plant pots is £17.50 with £2.50 delivery, the other is £20.00 with free delivery.
They are the same size, the same colour, essentially identical. But why does the more expensive one with free delivery seem so much more appealing?
It's to do with our perception of worth. It's worth £20.00 so it must be better quality, right? I immediately think the £20.00 pot must be of a higher value. Plus, you're investing your money into something you can keep afterwards, you're not throwing £2.50 away on delivery. The £17.50 must be poorer quality, that's why it's cheaper.
This is the kind of consumer psychology we need to untangle and believe me, it's hard.
How does this impact small businesses?
The online marketplace sometimes feels like the world's smallest retail window; not only is it difficult to get noticed, it's also extremely competitive.
Free delivery is one of those incentives that can give you that competitive edge.
Online marketplaces actively encourage small businesses to offer free delivery. Your items get a lovely green badge that says "free delivery" and shoppers can browse under the "free delivery" filter. If you don't offer free delivery, your benefits are far less when trading on sites such as Etsy, Not On The High Street etc.
Not only this, sellers are charged a fee on each of the items they sell. Taking Etsy for example, which, on average, works out somewhere around 10-15%. That means Etsy also take a 10-15% cut of the price it costs you to post an item to a buyer. This is not sustainable.
While there is a consumer expectation of free and fast delivery, this often negatively impacts smaller brands who do not have the overhead or the bottom-line to absorb.
Charging our worth is already tricky enough, but imagine not charging for delivery too because of a pressure generated by larger companies. We cannot compete with the likes of countless large retailers who adopt this free delivery strategy and generate these consumer expectations.
What are the actual pros and cons to free delivery?
Lets look at this from both a consumer and retailer perspective. Who does free delivery really benefit?
Benefits to the Consumer
Cons to the Consumer
If you return the item, the full price you paid is returned to you. If you pay for shipping, the cost of shipping will not be refunded to you
If you buy more than one item, you are effectively paying for delivery multiple times (the delivery price is likely hidden in the cost of the item)
The price you see is the price you pay, you don't have to calculate any additional costs
The price of the product is not accurate to the product's value and artificially inflates its perceived worth
How does this compare with the pros and cons for the retailers and small businesses?
Benefits for the Retailer
Cons for the Retailer
People like the "perk" of free delivery and are more likely to fulfil their purchase
If the buyer returns the item and you have wrapped the delivery into the cost of the item, you have to refund the buyer the price they paid, which includes delivery
You appear in the "free delivery" filter, where consumers may go to find your items
If the buyers wishes to exchange the item and you have wrapped the delivery into the cost of the item, you are effectively paying for delivery multiple times when you send out the swap
If the parcel is lost/damaged, your delivery provider will refund the price of the item and the delivery cost paid
If you include the delivery cost in your item, they may appear more expensive and potentially put off consumers
The buyer may be more likely to return/exchange items as they never have to pay for delivery
Should I move to paid delivery
This is not a sustainable practice that seems to manipulate consumers and puts pressure on small businesses to constantly push themselves to using strategies that are not suitable for the size at which they operate.
By moving to paid delivery it could provide significantly greater transparency for my consumers. Additionally, the value of my products would be more accurately represented and anyone who purchases more than one item will no longer be paying an inflated price.
Paid delivery could be considered the more ethical option as it doesn't exploit shopping habits
Shoppers who purchase more than one item will benefit from overall cheaper/accurate prices
My prices will accurately reflect the value of my items
It reduces the risk of partaking in a wasteful culture of returns and impulse buying and instead encourages customers to make more informed choices with their purchases
All items are sent via Royal Mail 2nd Class Signed For. This service costs me £4.20 per small parcel. In addition to Etsy fees and listing fees, packaging materials and the time it costs to print, package and dispatch each order, in addition to paying taxes. It costs me somewhere between £6-8 to send each parcel.
I don't want to risk jeopardising attracting customers to my business by no longer providing free delivery, but this is a subject that deeply concerns me regarding the ethics of how I run my business.
How does free delivery make you feel? Were you aware that prices are inflated elsewhere in order to cover that cost?
References and Further Reading
Ship Bob - There's No Such Thing as Free Shipping: How to Choose the Right Shipping Pricing Strategy
Fast Company - Free Shipping Is A Lie
Andrea K. Leigh - "Free Shipping" Online: The Truth About Who Pays It
The Guardian - UK surge in post-Christmas returns reveals dark side of online shopping boom