Curious How Free Shipping Works

I don't have time to answer in an extended manner, but here are 2 things.
1. We knew early on buyers don't like to see shipping fees. It's built into the price. There's no free.
2. It costs us way more to ship to Canada from here. Maybe one of the Canadian vendors can answer, perhaps there's some government subsidy in the Canada to US shipping to encourage exports???

Man, could I make political "hay" out of that, but I won't. 

It's also in Economics 101. Literally. Usually under the title "There's No Such Thing As A Free Lunch". Literally.
It's an important yet basic topic/concept.
This is how they teach "opportunity cost". Unfortunately not everyone gets the message.

It’s a pet peeve/personal mission of mine to explain opportunity cost to people. It doesn’t seem to be taught in schools. The late, great Walter Williams was big on preaching the concept.


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Man, could I make political "hay" out of that, but I won't. 

It's also in Economics 101. Literally. Usually under the title "There's No Such Thing As A Free Lunch". Literally.
It's an important yet basic topic/concept.
This is how they teach "opportunity cost". Unfortunately not everyone gets the message.

It’s a pet peeve/personal mission of mine to explain opportunity cost to people. It doesn’t seem to be taught in schools. The late, great Walter Williams was big on preaching the concept.


Sent from my iPad using Tapatalk

I know all that stuff.  When I posted I was not wondering about the magic of free shipping but rather the precise mechanics of the allocation of the burden.  Its obvious that the mark up includes a shipping cost factor.  So everybody is paying for the shipping but those people who don't qualify for free shipping either because they don't meet the spend threshold or they're outside the US pay even more if you break down the price into aggregate cost of merchandise + shipping cost.  So if I buy from a US based vendor who never offers free shipping outside of CONUS then I am in effect subsidizing US based customers' shipping and merchandise costs.  Its the way the market works given the competition.

I wasn't referring to you personally in my response about Free & Opportunity cost.
I don't know about other companies, but when you buy from us and we ship to Canada, the extra you pay only covers part of the cost. You're not subsidizing anyone with us.

Factoring in shipping costs is not unlike credit/debit card fees which are already rolled into asking price. Again, I think some are overthinking this.

Widget dealer cost = $5.00.
Widget S&H cost to vendor is $5.00
Dealer sells to internet customer for $20.00 + $5.00 S&H
Dealer therfore has $15.00 profit which they can buffer via discounts to offer depending on their ability to absorb potential profit loss MINUS their actual S&H costs.

Factoring in shipping costs is not unlike credit/debit card fees which are already rolled into asking price. Again, I think some are overthinking this.

Widget dealer cost = $5.00.
Widget S&H cost to vendor is $5.00
Dealer sells to internet customer for $20.00 + $5.00 S&H
Dealer therfore has $15.00 profit which they can buffer via discounts to offer depending on their ability to absorb potential profit loss MINUS their actual S&H costs.

What material is this widget made out of? What is the blade gap of the widget? What is the blade exposure on this widget? Is the handle hollow or solid? Is this just one limited run on this widget? I can't wait until they come out with a titanium widget?

I know all that stuff.  When I posted I was not wondering about the magic of free shipping but rather the precise mechanics of the allocation of the burden.  Its obvious that the mark up includes a shipping cost factor.  So everybody is paying for the shipping but those people who don't qualify for free shipping either because they don't meet the spend threshold or they're outside the US pay even more if you break down the price into aggregate cost of merchandise + shipping cost.  So if I buy from a US based vendor who never offers free shipping outside of CONUS then I am in effect subsidizing US based customers' shipping and merchandise costs.  Its the way the market works given the competition.

Kind of. If you don't meet the free shipping threshold, you'll pay for shipping, but the company who sells the item will have priced it knowing that people will mostly be paying for shipping so the subsidy is generally low. Let's say your free shipping threshold is $100. The bulk of your business is $20 items so you know it'll take five of those or some combination of those $20 items along with something more expensive for customers to qualify for free shipping. You know shipping for those five items is going to cost you $10 so you factor in $2 per item which means your real selling price is $18.

Now, if you're hitting your goal margins at $18, then you're good. The customer is paying real shipping costs and you are getting your required profit. But what if your costs are such that you actually need to sell these at $19 to hit your margin goals? Now you have two options. You can charge the customer $21 instead to bake shipping in again. But this now puts you over $20 so you have to consider whether $21 is the right price point. Can the market bear it? Are people turned off by the extra dollar since people like round numbers? Does the number 21 just look ugly in your store? Maybe $20 was the right price point you decide. So now the other option is for you to just eat that extra $1 per order of lost profits. Now you're losing $5 of profit on those $100+ orders, but you decide it's worth it in order to hit that $20 price point.

To make up for this, maybe you charge actual shipping on items under $100. Say your average order volume for orders under $100 is $40 made up of two of those $20 items. Actual shipping is $10 so the customer pays $50 out the door. However, they're still covering $1 worth of added shipping costs baked into each item so they're sort of paying $12 in shipping. Of course, you can also say that they're still paying $10 in shipping and now you get $2 extra in profits. Six of one, half dozen of the other. International shipping is a similar game. And so is wholesale since the retailer will be selling it at the shipping-factored-in price of $20 even though it doesn't include shipping anymore.

This can sort of be looked at as subsidizing other customers and I can see how some would consider this unfair. But it's no different than any other product. For example, something most people don't consider is that the open comb base plates of all my razors are more expensive to machine than the safety bar version. I could make OC razors more expensive, but it's not a good look. It looks like you're gouging, it makes pricing confusing, and the store suffers visually from varying price points. So I decided to keep the pricing the same. This means that the SB customers are subsidizing the OC customers. Or maybe it means that I'm subsidizing the OC customers by taking a lower margin. All depends on how you look at it.

Anyway, that's the game we're playing. Business is about overall margins. Some product or customer is always subsidizing another one.

Is there a CliffsNotes version?

Is there a CliffsNotes version?

That is the Cliff Notes version. There are full books written about just pricing models and plenty of university courses on the topic. Every other post in this thread is the too-short version and you can read those for brevity if you'd like. Marko wanted a deeper dive with specifics so I obliged.

There are some times that free shipping can be had. The one retailer that does this is west coast shaving. They have certain days where they will ship to you for free with no minimum amount ordered. I am sure they are making a profit on whatever they sell on those free shipping days but are making less profit on that day. I'd rather be the one that they make less profit from if I am purchasing a discretionary item(let's face it, all shaving supplies to people that are reading this post are discretionary).

Thanks Shane Blackland Razors , that's exactly what I was looking for.    Pricing is complicate and multi-faceted.  You touched on subjective perception / psychology of price points and numbers which all play into the decision.  Its not always having the best product that will win you the day - business model plays into it sometimes too.  I spent 30 years or so working legal in large (some very large) oil companies and did a fair amount of procurement/supply chain management work and I've come to understand that sometimes in business its not always a good idea to grind your counterparties/suppliers to the bone.  If you end up putting people out of business because you've been so demanding in negotiations that's not great.  Sure you may have beat them at the negotiating table and got a nice bonus but what happens when there are fewer players in the marketplace and now you can't get the materials or services you want at all, at any price because your competition got there first and maybe left a little on the table for the contractors.  Who's the winner now?  

My favourite procurement experience was a number of years ago when all the big companies wanted to get their suppliers signed up to Master Service/Supply Agreements - agreed upon Terms and Conditions so all you had to do was sign a service order/purchase order and stuff happens.  The big guys used their market power to leverage these agreements.  If you want to work for us you'll sign this agreement.  Two things - first (and my favourite) was when they approached the Well Control contractors - these are the guys that put out oilfield fires, cap blowouts and generally clean up the messes that sometimes happen.  There aren't very many of them and the work is extremely hazardous.  So the Company says if you want to work for us you'll sign the MSSA including a fee schedule.  The well control guys laughed and said no thanks.  What?  Don't you want to work for us?  They replied, sure we do and when you need us give us a call and we'll tell you the terms and the fees we'll work for and you'll pay it.  When you're a firefighter for hire you don't negotiate contracts when there is no fire.   Second favourite was same drive to sign MSSAs this time they got agreements and day rates in place with all the drilling contractors for drilling rigs.  Well, drilling rigs are a long lead time item and there is a practical limit to the supply so when the company calls the drilling contractor and says we need rigs under the MSSA they get told there aren't any rigs available.  Gasp!  Why would that be?? Well, how about because your competitors are willing to pay us a higher day rate than you are.  Take your MSSA and...sometimes when you want to have your cake and eat it too somebody else got to the cake first and ate it and there's no cake for you.  And no bonus either.