Amazon quickly set itself apart by offering customers free shipping on certain orders. Even though they racked up some big net losses, they still managed to come out on top, and the move has had the added effect of influencing customer expectations. Now, consumers are increasingly demanding that ecommerce companies offer free shipping, but everyone knows that nothing in life is truly “free”.
Once Amazon reached the point where absorbing the shipping cost was no longer sustainable, it launched Amazon Prime. Subscribers pay $99 per year to get “free” two-day shipping, and the fee is used to help defray some of the firm’s logistics expenses. Without the money paid for Prime memberships, Amazon’s retail operations would not turn a profit.
This membership-based business model is similar to that of Costco, which relies on a membership fee in order to make a profit on its retail sales. Now Walmart appears to be getting on board with its Shipping Pass, which will give customers free two-day shipping for a yearly fee of $49.
Overhauling Distribution Networks and Packaging
For smaller firms, however, volume and infrastructure limitations can make such offerings nearly impossible. Instead, they need to find ways to keep logistics costs as low as possible and make their distribution networks more efficient. Sometimes this requires a complete overhaul, along with new software and handling equipment that is suited to the job.
Another way to trim costs is by improving packaging. One company managed to slash its freight costs by an impressive 30 percent with the simple move of changing its packaging.
Some companies are turning to independent logistics service providers to help optimize their distribution processes. While some companies might never reach the heights of Amazon, creative approaches to optimization can help them remain competitive. Ultimately, however, it looks like consumers will have to bear some of the costs of “free” shipping in one way or another.
This blog post was based off of an article from Supply Chain Brain. View the original here.