There’s no such thing as a free lunch. Nor — even though shoppers may wish otherwise — is there such a thing as free shipping.
Someone has to pay. Often, it’s merchants. Within the Digital Commerce 360 Top 1000, 77.2% of retailers offer free shipping in some capacity, such as with a minimum purchase.
The reason for this is simple: Retailers are eager to please shoppers who appreciate “free” shipping.
But during the pandemic and subsequent supply-chain crisis, retailers learned anew just how expensive it can be to offer free shipping. Fuel costs rose, while warehousing space and delivery drivers grew harder to find.
In times like these, wise merchants look to cut the cost of shipping. The question, of course, is how best to do so. Should a retailer outsource shipping to a third party or marketplace? Or does keeping shipping in-house have advantages of its own? Can changing shipping schedules or packaging types make a difference? Is there room to negotiate with carriers?
One way to answer those questions is to hire an expert in logistics. That’s what Steeped Coffee did.
Wade Wickus joined the California-based retailer as vice president of operations in July 2022. Steeped sells coffee in “single-serving brew bags” similar to tea bags.
When Wickus came on board, the retailer was doing its own fulfillment out of its manufacturing facility. That had worked well enough during the earlier years when Steeped Coffee was a start-up with a direct-to-consumer site. But by 2022, the merchant was also running a wholesale business with customers including Whole Foods and Target Corp., had launched a business-to-business service for Airbnb hosts and other hospitality providers, operated a store on the Amazon marketplace, and was still running a direct-to-consumer business through Shopify.
That made for a complicated mix of shipping needs. But regardless of complexity or customer mix, the path to cost savings is generally the same, according to Wickus, who offers advice about retail logistics on his Supply Chain Secret Sauce podcast.
The place to start, he says in an interview with Digital Commerce 360, is the basics.
“One thing that I would look at is the box — the shipping box that you’re sending it out in as well as the packaging of the product,” Wickus says. “So if you can trim down DIM, that will help pricing strategy.”
DIM weight is the dimensional weight of a package, which measures the amount of space a package takes up in relation to its weight.
UPS, FedEx and the U.S. Postal Service all compare DIM weight and actual weight of a package and then charge retailers whichever is more expensive. So packing a box as efficiently as possible with lightweight materials and without extra space will generally cut shipping costs.
To cut shipping costs, ask for what you need
But it’s not quite that simple because carrier rates vary across regions.
“Optimizing the box is the first thing, and then once you have that, you have to optimize your rates,” Wickus says. “You have to get with your carrier and make sure your rates are aligned with your weights, because usually rates are set for certain zones and certain services and a certain way of shipping.”
Merchants with significant volume can optimize rates by taking advantage of “zone skipping.”
Zone skipping is when a retailer allows a trucking company to hold its packages until there are enough boxes heading to the same area of the country to fill a truckload. That truck then travels the long distance, for example, from California to Philadelphia, bypassing the regional sorting centers of carriers like UPS. When the truck reaches its destination “zone,” the packages are only then unloaded and sorted for last-mile delivery. The result is a lower cost-per-package to ship.
Wickus declined to say what percentage of his packages are sent through zone skipping or how much his company saves in costs by doing so. But he urges all retailers to talk with carriers about the options that are available.
Talk through pricing
In fact, Wickus says talking with carriers is often the easiest way to lower shipping costs. For example, major carriers including DHL, UPS and FedEx offer discount prices for ecommerce shipments. But not every clerk at every shipper is eager to offer discounts.
“You have to be sure to ask for those ecommerce rates because they don’t often just give them to you,” he says.
Similarly, retail shippers often don’t notice price discounts from USPS.
In May, the postal service opened its USPS Connect eCommerce service to merchants across the U.S. (The service had previously been part of a test that was available only to merchants in Texas.)
“That can reduce expenses for a lot of folks, but if you don’t ask to be part of USPS Connect, you won’t get those discounts,” Wickus says.
The clock is ticking
Another basic area of logistics where savings can be found is in the warehouse itself.
Automakers saved on logistics expenses in the 1970s using just-in-time manufacturing principles that sought to reduce the time supplies were held in a warehouse and thus cut the labor and real-estate costs associated with storage.
Among retailers, a just-in time/lean approach can be a novel way to reduce shipping costs.
For example, Wrist Mafia sells watches online, but almost exclusively through subscriptions. The subscriptions it offers are monthly, every three months, bi-annually or annually. It uses fixed shipping dates, founder and CEO Johnny Brown said in an interview with Digital Commerce 360, meaning that billing and shipping each happen on the 15th of every month for essentially all customers. That helps avoid worrying about keeping inventory in stock and storage fees, Brown says.
“The product comes in and goes right back out all within a week’s time,” Brown said. “And then we’ll usually have some sort of reserves for people with billing issues, new customers and things like that. But it really just limits our overhead where we’re not just sitting on a warehouse full of watches.”
Brown declined to give a dollar figure for those savings.
Outsourcing and robots
In April, UPS released the results of a survey of 500 ecommerce businesses, and 27% said it was “difficult to manage shipments and ensure a consistent, positive shipping experience across multiple marketplaces and carriers.”
So when a retailer reaches a volume level where in-house staff is struggling and when the operations team has optimized packaging, negotiated shipping rates, and reduced warehouse carrying time, it’s time to consider adding additional expertise.
In January 2023, Steeped Coffee was at that point.
“We had a warehouse, we had manufacturing on site, but based on our scale and where we wanted to go and how fast we’re growing, we just needed to outsource logistics to a third party because they can do it so much more efficiently than we can,” Wickus says.
Wickus put together a request-for-proposals (RFP) process aimed at finding a third-party logistics provider that had advanced robotics capable of case picking, box packing and more that could maximize savings across Steeped Coffee’s customer base. Similarly, Wickus wanted to know the robotics’ constraints.
“Because the more that we can use their robotics, the better pricing structure we have from them,” he says.
In the end, Steeped Coffee signed a deal with Nimble.ai, a provider of what it calls “fully autonomous fulfillment” services.
Wickus declined to say how much Steeped Coffee will pay for Nimble’s services, but he expects to save roughly 30% in fulfillment costs by making the change.
How does a retailer know if outsourcing is the answer?
There are many reasons a merchant might decide to outsource fulfillment services. First and foremost is that 3PLs and other logistics vendors promise that such moves bring cost savings. But there are other considerations, particularly for smaller retailers.
For example, using the small staff at a small to mid-sized merchant for fulfillment poses a risk. If just a handful of people are doing it all — selling, packing, shipping, etc. — a single sick day by a single worker can throw deliveries off schedule.
Similarly, using a marketplace or 3PL with a national or regional footprint that can store merchandise in multiple warehouses close to major cities, highways and airports ensures rapid delivery. No small retailer that does fulfillment on its own can hope to match such speed.
Black Wolf Skincare recently opted to outsource its fulfillment operations for these reasons. The skincare brand went with fulfillment services vendor ShipHero.
Black Wolf sends its products to ShipHero’s West Palm Beach, Florida, facility. ShipHero then distributes shipments across its network of warehouses and carriers to ensure the fastest delivery times. As a result, Black Wolf cut its shipping costs and reduced the time it takes to ship orders to customers to less than three days, on average, from five or more days, co-founder Alex Lewkowict said in an interview with Digital Commerce 360.
“By my calculation, even at our volume of 1,000 orders a month, we saved more than $2 in shipping costs [per order] using their ecommerce tool,” he says.
The tool helped Black Wolf Skincare find the cheapest available shipping carrier, he says.
“The plan started around $1,800 a month,” he says.
Eliminate the middleman
But some merchants take a different approach.
Marketplace seller Rohan Thambrahalli told Digital Commerce 360 that one way to reduce fulfillment costs is to not have marketplaces provide fulfillment for you.
Thambrahalli, who sells a line of rechargeable headlamps under the brand Kawach on the Amazon marketplace, says he opted not to use Fulfillment by Amazon, a service in which the marketplace handles shipping and delivery and charges merchants fees for processing and long-term storage.
“First, neither you nor Amazon has to bear the cost to take the product from your facility to their facilities, then to the customer. It’s less costly,” he said.
Cutting a marketplace out of the fulfillment equation also decreases the probability of product being damaged, he says.
“If we ship from my facility directly to the customer, we are 6% to 10% more profitable on that order,” says Thambrahalli, who is also founder and president of DimeTyd, a provider of a service to help merchants recover money lost to Amazon accounting errors.
Of course, not participating in the FBA program comes at a cost too. FBA sellers can distinguish themselves from competitors and increase their chances of winning the Buy Box — the section on the right side of an Amazon product detail page where shoppers can add a product to their cart with a simple click on the bright yellow box that says, “Buy Now.” Participating in FBA also allows a retailer to offer Prime shipping.
Charge for shipping?
The most obvious way for a retailer to cut shipping costs is also the most difficult: Stop offering free shipping.
But by offering free and fast shipping for its paid members, Amazon has conditioned shoppers to expect free shipping everywhere. And many retailers decide they have little choice other than to follow Amazon’s lead.
And with good reason. A January 2022 Digital Commerce 360 survey of 1,108 online shoppers found that 76% said free shipping would make them more likely to make an online purchase. It was the most-cited factor.
Furthermore, in an August 2022 survey of 1,116 online shoppers by Digital Commerce 360 and Bizrate Insights, 70% of respondents listed the availability of free shipping as one of the three top reasons for choosing online retailers. Female shoppers were more likely than male shoppers to say that free shipping led to a purchase.
Given shoppers’ affection for free shipping, it’s not a surprise that the percentage of Top 1000 retailers willing to ship orders for free in at least some cases ticked up to 77.2% in 2022 from 73.8% the prior year, according to Digital Commerce 360 research. It was 70.1% in 2019, the last full year before the pandemic.
Put a different way: Less than a quarter of the top retailers charge customers for shipping.
Shipping: Free for consumers, pricy for retailers
Free shipping is most common in categories where products are relatively expensive and lightweight, making them less costly to ship. In the jewelry category, for example, 97.6% of Top 1000 retailers offer free shipping in some form. However, the median minimum purchase of $99 is at the top end of free shipping thresholds. Retailers in this category are also most likely to offer free return shipping, at 59.5%.
In the large apparel/accessories category, 84.7% of retailers offer free shipping and 39.7% free return shipping. The threshold for free shipping is lowest in flowers/gifts at $30, followed by health/beauty at $45.
Some 47.3% of Top 1000 retailers require a minimum purchase to receive free shipping. And that minimum has moved up noticeably in recent years. The median purchase required to get free shipping is now $75, as it was in 2021, whereas it was only $50 in 2019.
The percentage of mid-sized retailers that offer free shipping is only slightly lower, at 73.6%, according to the 2022 Next 1000 report from Digital Commerce 360.
Free shipping is costly for retailers. But many merchants find they have little option other than to give shoppers what they expect. It’s thus crucial for retailers to find ways to lower the expense of meeting those expectations.
That’s what Steeped Coffee tries to do. It offers free shipping for U.S. orders of $49 or more and has no plans to stop doing so.
“We’re going to continue to offer free shipping. We’re growing our brand. It’s important to get it out there, so we’re going to keep it easy and simple,” Wickus says. “But we’re reducing our costs on the fulfillment side. So perhaps it balances out.”
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