Commentary: Does ‘free’ shipping really exist? Here are the marketing tricks you need to know

For retailers, offering unconditional free shipping without a markup can be difficult to sustain profitably. The bump in sales usually does not offset the lost fee revenue and the costs of fulfilment.

A major reason for this lack of profitability is that free shipping leads to significantly higher product return rates.

Consumers tend to make riskier purchases if the appearance of waived fees lowers the perceived financial risk of the transaction.

For example, you might order the same shirt in two different sizes, knowing you can just send one back for free. Who pays for that added convenience? The retailer, who now has to cover the courier fees twice.

The retailer usually won’t simply absorb this cost, but will have to pass it on in other ways.

THE SUBSCRIPTION ILLUSION

To combat these unpredictable costs, many businesses are turning to membership, loyalty or subscription models such as Amazon Prime. Consumers pay an upfront annual fee in exchange for “free” expedited shipping year-round.

Membership-based programs successfully increase customer loyalty and purchase frequency, and allow for better customer segmentation.

But in the long run, they may actually hurt a retailer’s profit margins. While loyalty rises, the operational costs of fulfilling many smaller, free-shipped orders can potentially outweigh the benefits if not strictly managed.

For the consumer, this model manipulates our “mental accounting”. Because we view the upfront fee as money already spent, every additional purchase feels like it comes with a free perk. We end up shopping more frequently on that specific platform just to “get our money’s worth”.