There’s No Such Thing as Free Shipping
It can cost retailers billions to cover shipping fees, but they’re hoping it’ll make their customers feel good and buy more.
Last year, my boyfriend wanted go to Best Buy on Black Friday to get a Blu-ray player for our apartment. I told him he was crazy, but let him go because a) I did really want a Blu-ray player for our apartment and b) some people need to learn the hard way. This Black Friday, we stayed home and watched Highlander, biding our time until Cyber Monday. After all, why leave home when there’s free shipping?
Shopping online can be such a crapshoot, to the point where—now that I’m a seasoned online shopper with 10 years of experience—I rarely buy from online stores that charge shipping for purchase or returns. After too many pairs of shoes that didn’t fit, and products that looked nothing like what was advertised—it’s mentally hard to pay for shipping when there’s a high chance you’ll return it.
But I should know better, as all economists (and shoppers) should know: There’s no such thing as free … shipping.
The Wall Street Journal reported that Amazon spent more than $6 billion on shipping last year. Retailers including Amazon, Best Buy, and Gap have all raised free-shipping minimums, not just because of the higher cost of shipping, but because it encourages shoppers to buy more. And from a game-theory perspective, that makes sense: Why pay the shipping fee when another $10 would get you free shipping and a pair of shorts? A cognitive bias called “anchoring” might also be to blame, as we still regard a shipping fee as the norm—free shipping seems like a discount in our mental calculations.
The National Retail Federation reported that 85 percent of online shoppers said free shipping is very important to them (though sales or discounts remain the most important factor). On the flip side, nearly half of the retailers they surveyed said they plan to increase free-shipping offers. Down the supply chain, UPS, FedEx, and even USPS are promising retailers that they’re more prepared this year than last for the surge of shipping that will occur in the holiday season.
There are other reasons that free shipping is a good idea for retailers: One survey found that 74 percent of respondents abandoned their carts before checkout because of high shipping costs. Cart abandonment is a big deal, and has led Target to join the free-shipping bandwagon. It’s been speculated that free shipping can even build brand loyalty. Another study showed that higher shipping fees reduce store traffic.
Which is all to say that customers really love free shipping. Like free appetizers at a restaurant, it’s likely that the cost of free shipping is either baked into the prices of the products, or it’s part of a retailer’s strategy to increase a customer’s order size. Knowing the biases of the customer base, and how good free shipping makes them feel, increasing product prices by a small, unnoticeable amount seems to be the win-win strategy for both customers and retailers. Because even though I know free shipping isn’t really free, no matter how irrational—it doesn’t stop feeling good to get it.