KEY POINTS

  • Small and large retailers alike are turning to free shipping to better compete in an Amazon-dominated market. But free shipping comes at a cost — rising shipping expenditures are eating away at retailers' margins. Even Amazon reported in 2016 that its shipping costs jumped 40%.
  • And consumers are increasingly demanding this perk. Free shipping is more popular than one-day shipping and free returns, with 88% of respondents saying they’d shop more online because of it, up from 83% in 2015, according to a survey of 1,400 US consumers conducted by Walker Sands.
  • But most retailers, particularly small ones, lack the resources necessary to compete with the massive online retailer. BI Intelligence estimates that Amazon — which ships over 1 billion packages annually — spends approximately $5.77 on average per package compared with the average $7 to $8 for ground delivery paid by a typical large retailer, which ships between 35 million and 50 million packages a year.
  • Both retailers and logistics companies will likely invest in technologies that help to lower shipping costs. These include augmented reality (AR), artificial intelligence (AI), and radio frequency identification (RFID) tracking. Additionally, as logistics providers continue to raise shipping rates, large retailers may move some logistics operations in-house.
  • Retailers should test out different shipping strategies to find one that's best suited for their business. Some niche retailers could integrate shipping costs into pricing, for example, as customers won't be able comparison shop for one-of-a-kind items. Other retailers may find it more beneficial to forego free shipping altogether, and instead implement click-and-collect or flat-rate shipping.

Introduction

Amazon Prime’s free two-day shipping has led to an industry paradigm shift. Online retailers — small and large — are increasingly offering the perk to keep from losing customers to the behemoth marketplace. But free shipping comes at a steep cost: Rising shipping expenditures are eating away at retailers' margins. Even Amazon reported in 2016 that its shipping costs jumped 40%, and its net shipping costs (shipping costs minus shipping revenue) reached $7.2 billion.

Larger retailers that can better afford to eat the cost of free shipping are battling to gain an advantage over Amazon. For example, in February, Walmart attempted to undercut Amazon Prime — which has an estimated user base of about 80 million [...]