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Strategic insights
All Shipping in the Future Will Be Free

Written by on May 9, 2014

In my Plus report about the fascinating world of online grocery shopping, I wrote about the shift that we see in the world of shipping. With groceries, shipping needs to be done fast enough for the food to stay fresh, frozen or refrigerated, which usually means no more than six hours from packaging to delivery.

But one thing I didn't mention was another fascinating trend that all shipping in the future will be free. Yes, free. Of course, companies still need to pay to get their products shipped, but for the consumers, all shipping in the future will be free.

Here is why:

If we look at the traditional 'cost to market' it basically looks like what I have illustrated below.

You have a cost in terms of creating your products, from designing them, to manufacturing them, getting them shipped to your warehouse, and then distributing it to your store. You also have a huge cost in terms of the stores themselve. You need to place a store in each city you want to sell in. These stores have to be placed in the city centers or in malls where the rent is the highest and most expensive. They have to be furnished and decorated, and you have to hire employees for each one, regardless of the demand throughout the day.

The total cost of all of this is quite high, as any retail manager would tell you. And yet, for the consumers, all of this is included in the price of the product.

When you walk into your local fashion store to buy a pair of jeans, they don't tell you that you also have to pay for the lighting of the store, or the cost of distribution, or the employee salary. It's all included in the price of the cost of doing business.

Except shipping.

In the traditional world, shipping is an extra service. It's something above what everyone else is getting. And people also think of it as an extra because they know everyone else have to go to the store to pick up the products themselves. Which makes a lot of sense.

However, when we then look at a purely digital business, we have an entirely different cost structure:

You still have the cost of creating your products, of course, as well as the marketing costs. But instead of placing an expensive store in each city center, you can just place one central warehouse where the rent is cheap. You can optimize your workforce with little overhead, but you do have the additional cost of shipping.

Obviously, the cost of shipping is expensive, but it's nothing compared to placing a physical store in the popular shopping street. But more to the point, people online do not think of shipping as an extra service. You cannot buy a product and not have it shipped.

This means that the concept has shifted from an added service to an annoying and often misleading fee that are forced upon you during checkout. It's a terrible customer experience. And more so, it's insignificant compared to the cost of doing business in the traditional sense.

And the fascinating trend that is now emerging is this very shift. The only reason why we even have the concept of shipping is because of how we used to think about it in the traditional world. It has no competitive value in the digital world, and as such, you cannot charge extra for it.

Over the next years, the growth of digital combined with the ruthless competitive nature of abundance, will eliminate the very concept of shipping entirely.

Ten years from now, we won't even talk about shipping as an element anymore. It will merge into where it should have always been, as being just one of the many elements required to bring your product to market.

It will simply be a part of the cost of doing business.

Also, think about what this means in relation to the many discussions people have around omni-channel. If shipping is no longer a concept, most of the omni-channel discussions lose their meaning. They are based on the old concept that shipping is an extra service.

Of course, many would argue that it doesn't work because "what if my shipping cost is $10, and people only buy something for $8?"

Well, true... that is a problem. But you have the very same problem with the physical stores. A physical store has a fixed monthly cost which, when per purchase, require to to sell a certain amount each day to break even. If one day, only a few people choose to visit your store and only buy for $8 each, you won't make enough money to pay your rent. But then the next day someone comes along and spends $1000 and it's all good.

That's exactly the same with shipping online. Sometimes the sale is not high enough to cover the cost, other times it is. And the success of your business depends not on the individual sale, but on whether the total sale can cover the cost.

Obviously you have a problem if every sale is smaller than the shipping cost. But if that is the case, your business would never work online anyway. Asking people to pay $10 shipping on a $8 product wouldn't work either.

Thus, in the future, shipping will no longer be a concept. In the eyes of the consumers, it's just something that happens the same way as all the other things you need to do in order to bring your products to market.

Another possible outcome would be that shipping would be a service across many brands, like what we see with Amazon Prime. But from a trend perspective, that too will lose its competitive edge in the future.

Free shipping today?

Does this mean you should do free shipping today? Well... yes and no. There is no question that you can cover some of your costs today by asking people to pay for shipping, which has an impact on your profit.

There is also no question that you will have a competitive advantage of offering free shipping today and adopting for this future now. However, it's a short term result. Because in the future, when goes away as a concept, your competitive advantage will also disappear. Everyone will be doing it.

So while it to your advantage to do free shipping sooner rather than later, it's cannot be seen as a strategy. Think of free shipping instead as a way to gain short term growth and market share. But you still need to develop a separate strategy for how to grow in general.

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Thomas Baekdal

Thomas Baekdal

Founder of Baekdal, author, writer, strategic consultant, and new media advocate.

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