An Opposing View: The Bottom Line Costs of Free Shipping This Season
Retailers may have spoiled their shoppers this Christmas—with free shipping.
Some 63% of Internet retail sales were shipped for free during the week through Dec. 4, according to comScore. That is up from 51% in the same week of 2010 and 44% in 2009. While there is a regular spike during the holidays, the average during the rest of the year is well above 40%.
One reason: Many retailers need to offer free shipping to keep shoppers’ attention once they visit websites. Indeed, a recent comScore study found that 46% of online shoppers have canceled purchases at least once after finding free shipping was unavailable at checkout.
Keeping shoppers keen comes at a price, though. Amazon.com, which has been at the forefront of free shipping, has experienced shrinking margins for years. Free shipping has likely played a meaningful role in this, although the company hasn’t detailed the cost. And with online competition heating up, the company recently said it may have an operating loss in the fourth quarter.
Even retailers that offer free shipping stand to lose out when customers notice differences between offers. Bed Bath & Beyond, for instance, will offer free standard shipping for orders of $99 or more through Dec. 17. Amazon, meanwhile, offers a similar service for orders of at least $25 all year round.
Retailers are also going for speed to entice shoppers. Amazon’s Prime program includes two-day shipping on most items for a fixed $79 a year. A service called ShopRunner charges the same annual fee for a similar shipping service with a network of 90 retailers, including Lord & Taylor and Toys “R” Us.
And even faster deliveries may be on the way. Matt Nemer of Wells Fargo points out that Amazon already has enough distribution centers to make next-day service possible for many customers, and the network is growing quickly.
Traditional retailers also can exploit their scale to get packages to consumers faster. At Wal-Mart, for instance, more than half of online orders are picked up at stores. The company is also testing a program that would use stores like warehouses and make local deliveries.
Of course, there are some retailers that probably won’t feel as much pressure to offer free and fast shipping. Williams-Sonoma, for instance, focuses on many unique items that help to insulate it from competition. And some brick-and-mortar retailers like Dollar Tree and Family Dollar Stores have stores in convenient locations, so shipping isn’t necessary.
But for many retailers looking to expand Internet sales, free shipping will be tough to ignore. And while Internet sales tend to have higher margins than sales from physical stores, shipping costs could narrow the gap.
For retailers not willing to sacrifice profits like Amazon, a booming Internet business may not prove as lucrative as it once looked.
Reposted article By JOHN JANNARONE
Free Shipping Deemed Important to Online Shoppers this Holiday Season
Traditional retailers are taking the expensive step of offering more free-shipping deals this holiday season, as they seek to lure the growing number of Internet shoppers to their websites and away from online-only rivals, particularly Amazon.com Inc.
Amazon offers free shipping on most orders over $25, as well as cheap, low-hassle delivery options such as its Prime membership program, which other retailers have found hard to match. The online retail giant also offers low prices, since it doesn’t have to pay for sparkly stores or cheery salespeople and— as rivals like to point out—because it doesn’t collect sales taxes for the most part.
To fight back, Toys “R” Us, which last year had only select items available for free shipping, has made its entire on-line inventory eligible as long as customers spend $49. Similarly, Wal-Mart Stores Inc. has made every consumer-electronics item—rather than just select gadgets—on its website available for free shipping through Dec. 19 with a minimum $45 purchase. And Best Buy Co. is offering free shipping for every product it offers online, including giant TV sets.
For consumers, free shipping can make a big difference in the ultimate price they pay. Amazon and Wal-Mart on Tuesday both were selling a hot holiday toy, Let’s Rock Elmo, for $49.66 and offered free standard shipping—about a $6 savings. To keep up, the Toys “R” Us website is waiving its $10 shipping fee for the holidays. (It is charging $10 more for the toy itself, though.)
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“Free shipping used to be a way to entice customers to your store over another site, but now it’s just the price of entry,” said Kevin Mansell, chief executive of Kohl’s Corp., the discount department store.
Newegg.com, which specializes in electronics and is the second-biggest online-only retailer, also offers free shipping on many products.
High shipping costs can turn off customers altogether. Amanda Lordy, a 29-year-old from Hoboken, N.J., does about half of her holiday shopping online. She recently canceled an order for $30 of gourmet cheese because the site was charging $14 for shipping.
“It was a great deal for the cheese, but with the price of shipping, all of a sudden it wasn’t anymore,” she says.
For giant retailers such as Wal-Mart and Target Corp., free shipping hasn’t yet started to affect their bottom lines, said Colin McGranahan, retail analyst at Sanford C. Bernstein. Internet sales make up less than 2% of Wal-Mart’s $419 billion of annual sales and Target’s $67 billion.
That could change as the companies seek to increase online sales. Wal-Mart has begun offering free shipping all year round on clothing and household items, with a minimum $45 purchase.
Several department stores, too, are now offering year-round free shipping—and the cost has begun crimping gross margins.
Nordstrom Inc., which in August, began offering free shipping and returns on all online orders, estimates that the free shipping cut its gross margin—of 36.6% in the third quarter—by about 0.15 percentage point. Even so, the company says that the boost to sales from free shipping outweighs the costs; online inventory offers higher returns because of fewer overhead and labor costs, said Nordstrom’s chief financial officer, Mike Koppel.
Macy’s Inc. and Kohl’s, which now offer free shipping all year on purchases of $99 and generally $75, respectively, said their gross margins were impacted by lost shipping revenue. During the holidays, Kohl’s offers free shipping for purchases of $50.
Internet sales are projected to rise 15% this holiday, while in-store sales are expected to grow by less than 3%. But some of that Internet growth will occur at traditional retailers’ websites rather than at online-only retailers
Amazon, however, is expecting its fourth-quarter sales to jump between 27% and 44%. The company loses more than $1 billion a year in shipping costs, estimates Sucharita Mulpuru, an analyst at Forrester Research. Its operating margin shrank to 0.7% in the third quarter from 3.5% a year earlier as expenses rose 48% to $10.8 billion.
Retailers are trying to find a way to offer a program similar to Amazon Prime, in which customers pay $79 a year for unlimited two-day-delivery service on purchases, as well as other perks, like movie streaming. Some analysts estimate that Amazon Prime will have 10 million customers by the end of the year and that the service accounts for about $7.5 billion of the company’s revenue, although the program still loses money for the company.
One such effort is Shoprunner.com. For $79 a year, or $8.95 a month, customers can get unlimited two-day delivery from—and free returns to—any of about 90 affiliated retailers, including Toys “R” Us, American Eagle Outfitters Inc., Drugstore.com and Newegg.com.
Toys “R” Us says the Shoprunner option has been popular. “It has been a good option for customers who want to shop across many retailers at one shipping rate,” a spokeswoman said.
What can Ground do for You? Read this before you send your next Overnight Package
Here is an important point to consider when you are looking for ways to save money on shipping packages. FedEx and UPS deliver to many locations, next day guaranteed, with their low cost Ground Service. So why pay for next day air service on a package you need to be delivered tomorrow at double or triple the cost? For example, from Landis Logistics, our order fulfillment warehouse in eastern PA, FedEx will deliver to anywhere from New York City down to Washington DC next day with their ground service. There is no need for you to EVER pay for next day air to any of those points. Similarly, FedEx Ground is just a 2 day service to Chicago and most of the Midwest. Again, as a more cost-effective option compared to Second Day Air, Ground is a better choice.
Check out the FedEx site or UPS to calculate transit time from your location to where your package is going. Ground may be a cheaper option and it offers your business the same delivery service as overnight delivery!
Why it’s Important for your Fulfillment Company to be Flexible
Outsourcing to a third-party fulfillment center can provide growing companies the warehousing and distribution services they need to support business growth. However, in order to maximize their potential benefits, companies should consider working with professional fulfillment services that utilize flexible technologies to deliver a customized distribution platform designed around their specific business requirements.
Many business owners believe that using third-party fulfillment services will force them into a predetermined model for fulfillment, distribution, inventory management, and reporting. In reality, many fulfillment and distribution providers offer greater flexibility in designing effective distribution models customized to each of their clients.
Every business organization has unique needs in terms of inventory management, warehousing, and distribution. Consider the following questions: Does the fulfillment service provider have the capability to effectively track customer orders, regardless of volume? Are they able to support business-to-business (B2B) fulfillment, direct-to-consumer, or both? Do they have the ability to integrate their systems with your organization’s data infrastructure?
If your business supplies products that require complicated, large-scale assembly and packing processes, for instance, it certainly helps to take advantage of services that offer the use of spacious and reliable warehouses, as well as the technology and experience needed for special or complex assembly work prior to delivery.
As your business grows, you may need better storage options, not just in terms of available space, but also for inventory control and management procedures. A fulfillment service provider should be able to customize their inventory management system based on your business requirements. RF tracking systems, for instance, can provide a more accurate view of your inventory, even as items are brought in or out of the storage area. Automatic ordering rules can also be set in place to ensure that stocks never fall below the minimum required amount.
Some fulfillment centers also have the capability to integrate their own ordering system into their clients’ existing Electronic Data Interchange (EDI) or e-commerce infrastructure, This can help eliminate the additional step of sending the order information to the warehouse floor for processing, and facilitate fast and accurate product distribution.
While boxes and cartons can be manufactured in any size, automated packaging capabilities can help create perfect-fit, custom shipping packaging for each order. Some fulfillment services can even provide special care for certain products during pack-out, such as POP/marketing materials or garments on hanger (GOH) for fragile items.
Working with a third-party fulfillment center can provide tremendous savings in terms of storage and distribution costs, and ease the burden of inventory and order management. However, to gain an edge in a competitive business, you’ll need the services of a company that goes beyond meeting your basic needs. By identifying specific business needs and creating a customized solution, a professional fulfillment center can ensure reliable, efficient, and cost-effective product warehousing and distribution that will fuel your business’ growth.
Blog Article Source: http://EzineArticles.com/6610546
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What are the Cost Components of Shipping an Order for an Online Retailer?
One of the largest expenses for any business that sells products online is the cost for order fulfillment. In total, the order fulfillment process includes the storage, packing, and shipment of customer orders that come through an online store. These costs are beyond the expense of sourcing and purchasing the products being sold (regardless of what the business might be selling) plus all the marketing and other various cost of sales type expenses. Taken all together, this long list of different cost items have to be managed effectively for a business to maintain an acceptable profit margin. It goes without saying, a positive profit margin is vital to the viability and success of an ecommerce retailer. Fortunately, making the right decisions regarding the storing, packaging, and shipping costs are likely the easiest on the list to impact for the better.
Below is a list of the three primary cost considerations for ecommerce retailers when it comes to packing and shipping customer orders.
- Packing Supplies. These costs include the dunnage (or packing material) to fill in and around to protect the product, as well as the cost for the cardboard carton the goods are placed into. Basic shipping supplies and cartons from UPS, FedEx, and USPS are free, as is the logistics software they will provide – so that is one thing to take advantage of when you can. Of course shipping a lot of empty space in a bad fitting carton is a poor choice for a number of reasons. Your business may also prefer to brand packaging with a company logo and not a big UPS label! The additional cost of customized packaging has to be considered.
- Direct Shipment Costs. The choice of who ships the order (whether it is USPS, UPS, Fed Ex) and at what service level (Ground, Next Day Air, etc.) impact costs often more than any other single item. Shipping Ground Service instead of Next Day Air can often save over 2/3 off the shipping cost. Of course it can also add 4 or more days on to the delivery time. Volume means a lot when it comes to shipping with FedEx and UPS, so make sure your contract stipulates that discounts on shipping will kick in once you hit certain volume thresholds. There is a “hybrid” option in which a shipping company (such as FedEx or DHL Globalmail, or various others) acts as a mail integration partner. These companies will pick the packages up on their own trucks but then move the parcels to the USPS who make the final delivery to the consumer. This set up works only in a business to consumer model and generally requires a minimum daily amount of parcels (typically 250 per day).
- TIME. Is packing up customer orders in cartons, maintaining space for storage, and printing shipping labels the best use of your time? As a small business owner you should be asking yourself constantly throughout the day – Is what I am doing right now helping to make my business more successful? Managing your social media presence, marketing, or selling are all important priorities. Chances are you could make better use of your time than doing your own order fulfillment
Tips for Choosing a Fulfillment Company to Ship Your Products
As your business grows, the process of getting your product out to the customer consumes a larger portion of the time you have to focus on your business. Plenty of businesses today are outsourcing the delivery of their customer orders. This enables the business to focus on managing customer relationships and increasing sales revenue while leaving the picking, packing, and shipment of their customer’s orders to a company that specializes in order fulfillment. Before choosing an order fulfillment company it is important to feel certain that the products your customers buy from your business are in safe and capable hands. The following are some tips and guidelines for selecting a fulfillment company.
First, before selecting an order fulfillment service, consider the location of the company’s fulfillment warehouse. This is a very important component of your decision because to the location of your product inventory will affect to how the shipping costs involved with each order. You definitely want to choose a fulfillment company that is close to your customer base. If your fulfillment company is located close to the customer who place orders with your business, shipping costs will be reduced. Lower shipping costs can be passed on to your customers. Since shipping costs often affect the purchase decision, choosing a fulfillment company located in the right place can help to increase customer orders.
Next, you should factor in the size of the fulfillment company’s warehouse. Knowing the storage capacity, and how much of the existing space is already in use by other customers can give you a good idea of the volume of orders the fulfillment company can handle. Your business may be small at this time, but you should consider future expansion opportunities. If your business grows and customer orders increase in volume, will your fulfillment warehouse be able to keep pace with this growth? You ought to check on the storage fees that the fulfillment company charges to receive and store your product inventory as well.
You need to manage your expectations and understand that order fulfillment services are not perfect. They can and will occasionally make mistakes, and you need to know what they will do in case something goes wrong. For example, what if your customer receives the wrong product, a partial product shipment, a defective product, or a product that is received late due to a shipping error? You should ask the fulfillment company about these scenarios what they intend to do to make it right in the event that this happens. This is vital to maintain good customer service. It would be wise to place a few test orders so you can see how they are packing and shipping each item.
Other things to check for in a product handling company are to the customer support skills and to the order processing. Will you feel good about handing your customer orders to this fulfillment company?
Proper evaluation and selection of the fulfillment company you choose can save your business money and time, allowing you to focus on other important business matters. And please put Landis Logistics at the top of your list of fulfillment companies to evaluate!
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Connecting Your Shopping Cart Software When You Outsource Order Fulfillment
Start up online retailers and small to medium size ecommerce retailers are the types of clients we work with most often. Sometimes these are businesses that are not yet shipping orders, or in other cases are doing the order fulfillment themselves.
As the decision gets made to outsource the order fulfillment function one of the first questions that comes up is how to connect their ecommerce (or shopping cart) software to our system so their customer orders can be fed to our order fulfillment warehouse for packing and shipping.
This can happen a number of ways.
API – Most ecommerce software programs offer an API plug in that will connect directly with our warehouse management system (WMS). The WMS is the system that controls all the operations within the warehouse including inventory, pick tickets, shipping, etc. This is the most hands off approach.
FTP, Email – Order files (as a csv, txt, xml etc) can typically be created automatically from a shopping cart program and placed on an FTP site and then imported into our WMS. The files can also be emailed. This can be completely automated end to end or may involve some manual file handling depending on how it is set up.
Web Portal – For lower volume clients, some prefer to enter the orders manually via our web portal.
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Strategies for Online Retailers to Compete with “Free Shipping” Offers
There are a number of good strategies to deal with the free shipping war going on right now in the online retail space. The bad news is there is no FedEx “Free” option that companies like Amazon know about, while you are stuck shipping FedEx Ground. The key is to manage your shipping costs while also packaging those costs in the right way to your customers so they can see the holistic value of your products and not make purchasing decisions based on just on the perception that the shipping is free.
- Free Shipping for a minimum purchase or on certain products: A key to being able to offer low cost or free shipping is to have enough margin built into your product to cover those costs. Knowing your margins and shipping costs can help you develop the right model to know the points in which your margins can support covering shipping costs.
- Flat Rate Shipping Options: For many online retailers, the shipping costs for their customer orders will be very different order to order. This is the result of weight, size, and destination being different depending on the product mix. With some analysis you can determine your average shipping costs and charge based on the average. Displaying shipping costs earlier in the check out process reduces cart abandonment and a flat rate shipping cost can make this easier.
- Shipping Clubs and Optional Upgrades: Many online retailers offer a service that for a one time fee you can receive free or upgraded service – see Amazon Prime or Shoprunner. Or consider on top of a flat rate price, the option to upgrade from Ground to Second Day Air for a small up charge.
What’s one thing a startup online retailer should know when it comes to shipping customer orders?
If you are a startup online retailer then you have a lot of things on your plate. From developing the website and choosing the ecommerce software for the site, to figuring out the best way to package and ship order from your online store and many things in between.
A lot of businesses would be surprised to know that, on average, the cost of order fulfillment whether it is done in-house or is outsourced will account for 4-5% of the total operating costs. Meanwhile, shipping costs will typically make up 10-15% of operating costs. The point is that in most cases the more focus an online retailer can put on driving shipping costs out of the process the greater impact the can have on being more efficient.
How can a startup spend less on shipping?
-Make sure all the options are being considered by looking at pricing from FedEx, UPS, and the USPS. Compare Ground services vs. Priority Mail and the other services. Never assume one service is always the best.
-Make sure the packaging is optimized for efficiency and less weight.
-If you have not considered it, look at outsourcing order fulfillment to a 3rd party that will pass on a discount with FedEx or UPS. Many times that order fulfillment cost will be more than offset by the savings realized by leveraging the fulfillment center’s volume discounts.
Good Article On What To Consider When Creating Your Online Store’s Returns Policy
Also, here is a link to another post that talks about how a 3rd party order fulfillment operation handles returns.
http://fillship.com/blog/2011/05/17/how-are-returns-handled-at-an-order-fulfillment-warehouse/
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