BEST OF ECT NEWS
The Facts and Fallacies of Online Shipping Costs

This story was originally published on April 17, 2009, and is brought to you today as part of our Best of ECT News series.

You search, you find, you click "buy." Your e-commerce quest is nearly complete. You get to that checkout screen, and you think it's all good. Then the shipping charges get tacked onto your total, and you're left thinking that US$9.95 deal didn't end up being such a bargain after all.

Then there are those times when you need to make sure your package gets to its destination before the holidays -- a day late makes it a wasted effort. So you fork over the few extra dollars to guarantee the delivery date -- but did you really need to do that?

Countless online shoppers are asking themselves whether paying a premium for express shipping and handling fees is really necessary. After all, there have been many times when they've ordered an item for the "week-to-10-day" delivery and received it within three business days without paying the premium.

So what gives? You might think the retailer is charging extra for a service you don't need, and that it's all a sales ploy to hit unsuspecting consumers with extra charges just to beef up profit margins.

However, shipping and handling is a growing expense for retailers, and in these trying economic times especially, it's hitting their bottom lines more than ever.

"We work with many major retailers and can tell you that the vast majority lose money on shipping, especially during the holidays," Fiona Dias, executive vice president of partner strategy and marketing for GSI Commerce, a specialist in online business services, told the E-Commerce Times.

At What Price?

The reason retailers are willing to take the hit on shipping and handling is that shipping costs represent the single biggest deterrent for consumers shopping online, Dias explained. "They pretty much have to offer free shipping or add constraints -- such as a minimum purchase amount."

With the tumbling stock market last fall, retailers actually "took a bath on shipping," she added. "Then [the] Thanksgiving and Christmas holidays were more compressed. [To encourage purchases,] retailers were either offering express delivery for free or subsidizing it greatly."

Today's price-sensitive consumers, for their part, are being extra careful when assessing shipping costs for an online purchase, confirmed Kevin Brown, director of marketing for Newgistics, a transportation system provider.

"They didn't think anything about shipping and handling costs. Today, a lot more that used to want next-day delivery now realize that five days is fine. They've decided they paid a premium for something they didn't really need."

Crummy Deals?

These perceptions about gouging consumers on shipping and handling may have come from other retail channels, such as infomercials, where unsuspecting shoppers have sometimes been hit hard with hidden costs after placing that order for those too-good-to-be-true deals.

The online flower delivery business, for example, is another industry that may have gotten a bad rep when it comes to charging express premiums, Aron Benon, CEO of HonestFlorist.com, told the E-Commerce Times. "A lot of 'practices' weren't up to where they should be," he explained "There were florists that charged extra for express delivery. That's ridiculous [in some cases], because delivery could usually be made within four hours anyway. Some have made a lot of money in shipping and handling."

Today, the only premium that should be paid is for a guaranteed delivery time, according to Benon. "You can assume it will get there in reasonable time, but a premium will get you that guarantee if you need it."

High Hopes

If there is confusion among consumers about shipping costs, it's more around setting expectations, Dias said. "The No. 1 call center complaint is the 'where's my order' inquiry."

That's one of the main reasons why retailers will tend to overestimate the standard shipping times. "It's better to under-promise and over-deliver," she said. "If you say it will take a week and the package comes in four days, then you have a happy customer . If you say it will be four days and it's longer, a disappointed shopper is complaining to your call center."

As far as express shipping is concerned, the extra costs are necessary since retailers need to use more expensive delivery services versus the U.S. Postal Service.

"It's less about the labor and more about the carrier,"" Dias said. "Sending through the US Postal Service is cheap. But once you get to UPS or Fedex, there is a lot more involved."

Given the fluctuations in fuel prices and the like, retailers have had to absorb those transportation costs, Brown added. "You're not seeing those rate increases being passed on to the consumer, which means costs are going up on the retail side. There's a point consumers won't go beyond, and shipping fees is one."

Best Practices

There are a number of things online retailers can do to avoid problems and keep customer expectations in line.

One is to provide clear messaging on your site about shipping options, associated costs and delivery times. During holidays, spell out deadline dates for orders to avoid disappointment.

Second, do not put items on the site that aren't in stock. "I'm not a big fan of back orders," Dias said. "If it's not in inventory, let people know before they get to the shopping cart."

Third is to have a system in place to fulfill orders in a timely fashion. Where deliveries may have to cover lots of ground, partner with someone that offers regional warehousing services. On-site pickup at a store is an option that has proven very successful for retailers like Sears and Nordstrom, Dias said.

Providing visibility into shipments on the move can also ease consumers' minds and reduce the load on call centers. "It can cost $4 to $5 per call for a customer service engagement," Brown explained. "If consumers can track a shipment themselves, that can help reduce that cost."

For shoppers who are simply unhappy about shipping and handling fees, Avivah Litan, senior analyst for Gartner (NYSE: IT) Research, offered the following advice: "Remember, it's a free world. If you don't like shipping terms on a site, shop somewhere you do."