The High Cost of Free Shipping

Any lingering doubt that we have graduated from E-Tailing 101 has dissolved over the past few months.

In the real-world laboratories of E-Tailing 303, the free shipping experiment marches on. Most recently, Buy.com announced it will waive shipping charges on orders over US$99 that weigh less than 20 pounds.

Indeed, shipping deals are the incentive du jour among e-tailers these days.

But the formula for shipping success is still an enigma. And shipping freebies are not likely to work for every e-tailer, or for every shopper.

Target Practice

I am not surprised to see this wave of shipping bargains. After all, 63 percent of online buyers consider high shipping and handling charges a deterrent to online purchasing, according to Jupiter Media Metrix.

E-tailers are taking aim at the shipping target with a variety of different promotions.

BarnesandNoble.com (Nasdaq: BNBN) offers free shipping on orders of two items or more. Amazon (Nasdaq: AMZN) shoppers qualify for "Super Saver Shipping" when they spend $99 or more on items other than toys, video games, baby products and third-party goods.

Buy.com throws weight restrictions into the mix, and similar deals also abound at FreeShipping.com.

Restrictions Apply

As always, e-tailers want to attract more shoppers who spend more money at more frequent intervals. Will free shipping do the trick? Perhaps for some merchants, but not for all.

For one thing, many e-tailers cannot afford to offer free shipping on a grand scale. Even with standard shipping charges in place, 45 percent of merchants lose money on shipping and handling, according to Jupiter Media Metrix.

This fact helps explain the fine-print restrictions on volume, price and weight. After all, e-tailers are still gunning for profitability, too.

Volume Control

What is more, free shipping will not convince many shoppers to pump up their order total.

For example, Jupiter Consumer Survey data shows that just 3 percent of online buyers regularly increase their order size to save money on shipping and handling.

This figure does not bode well for e-tailers that are counting on spikes in order volume and value to offset the cost of offering free shipping.

Weighing Options

There is no question that limited-time free shipping offers can fuel online sales spurts. For example, Toys "R" Us (NYSE: TOY) enjoyed a 300 percent annual sales increase as a result of its 2000 holiday shipping promotion.

But it is still unclear whether e-tailers can profitably waive shipping fees over the long haul.

Buy.com's combination of price and weight restrictions will probably make the most sense to consumers, because shipping costs typically are calculated based on weight and distance.

So, for an order that weighs less than 20 pounds, $99 just might cover the item's cost and most, if not all, of the shipping costs, depending on the buyer's location.

Perhaps Buy.com's experiment will pay off and contribute to the company's ongoing effort to revitalize itself.

Fine Print

Shipping deals based solely on price or volume, on the other hand, come across as marketing ploys, which many consumers will detect.

And the fine print makes it very clear how some e-tailers cut other services to make free shipping affordable. For instance, according to Amazon's free shipping terms, orders may take an additional three to five days to arrive.

Consumers would be well advised to benchmark in-store book and CD prices in coming months, then watch to see whether Amazon or BarnesandNoble.com start recouping shipping costs by inflating price tags.

Cash Flows

The fact is that consumers are getting smarter. When they hear that 45 percent of merchants lose money on shipping, they correctly conclude that more than half are breaking even or making money.

And e-tailers' bottom-line watchers no doubt have ensured that their shipping promotions will not significantly dent their overall financial status.

So, be wary of shipping bargains and be careful about spending extra money or going out of your way to qualify for such deals. Because one way or another, e-tailers will profit from your efforts.