You run a small e-commerce startup firm, with a great stable of products, IP protection, a finely-tuned social media promotional strategy, a fantastic web interface, a reliable contract manufacturer, good financing. In short, you think you’re ready to go.
However, you face a serious hurdle – the discrepancy between your costs to ship to your buyers and those facing your mega-sized online retail competitors. Your e-commerce dream may seem to be slipping away, not because your products or concept are at fault, but because you can’t compete on shipping.
Shipping Costs: Disproportionately High for Smaller Sellers
The channel cost of handling, shipping, and delivering inventory to a consumer has fallen on average over time. But the averages disguise the differences between steep discounts on shipping costs available to the biggest online sellers, and much higher shipping costs for others.
In 2015, Amazon shipped over 1 billion parcels, while the 10 next largest shippers together shipped 703 million parcels. Those that ship at least $100 million annually can reap overnight-shipping discounts of more than 80%, and up to 60% for ground residential deliveries. If you’re not in that set, it’s tough to compete by selling direct online, as these shipping costs show:
Consumers Have Been “Taught” that Shipping is “Free” and “Quick”
Combine this with consumers who have “learned” that shipping is both “free” and “quick,” particularly through Amazon Prime membership. Of course it’s not really “free,” both because of the $99/year Amazon Prime membership fee and because many sellers up-price the products they sell through Amazon Prime. Despite this, separate surveys show that the percentage of e-shoppers starting their search at Amazon increased from 30% to 44% from 2012 to 2015. While Amazon doesn’t publish the number of Amazon Prime members, survey-based estimates placed it at 40 million subscribers in early 2015 – a lot of buyers. And although shipping isn’t truly “free,” Amazon has made it truly “quick,” with next-day and Sunday deliveries a commonplace service criterion.
The confluence of high shipping costs and demand-side learned expectations for free and speedy shipping means high hurdles to smaller retailers wanting to sell online.
What Can You Do?
What can you do as a small seller? Let’s think as a channel strategist about your best channel structure choice. You can stick with the DIY channel option, facing the high cost of shipping and trying either to pass it on to your (reluctant) consumers or to eat those costs to gain online market traction. Or, you can enlist a go-to-market channel partner like Amazon, both for the benefit of reaching all those loyal Amazon shoppers and piggybacking on Amazon’s shipping network. Amazon of course charges its Amazon Prime resellers a hefty fee to pick, pack, and deliver their products, but given your cost to go it alone, it’s an option that you, like many other sellers, are likely willing to consider. Or, you can do both with a multi-channel targeted selling strategy.
My own purchases show that there are non-trivial incremental sales to be had with this strategy. I’m a heavy tea drinker and I buy reasonably high-quality loose tea. I discovered Davidson’s Organic Teas (http://www.davidsonstea.com/ if you want to buy direct) through Amazon and have ordered various tea flavors and amounts from them 17 times through Amazon since 2010, for cumulative Amazon-driven CLV to Davidson’s of $968.66 in purchases. These are all incremental sales to Davidson’s, because I was unaware of them before finding them on Amazon. And because I did know of them, I also bought $266.21 directly from www.davidsonstea.com in 2014 and 2015 – choosing the company’s website over Amazon in order to buy their most premium-quality tea items, which aren’t offered through Amazon at all (not to mention the word of mouth promotional value of mentioning Davidson’s in this blog post!).
Davidsons’ strategy uses Amazon to increase awareness and reach into the convenience-oriented Amazon buyer population. Some of us, like me, enjoy variety and high quality, and Davidson’s offers that larger variety to us online. We are likely to shop cross-channel in order to buy more of Davidson’s high-end (and higher-profit) SKUs as well. Our direct purchases don’t incur Amazon channel intermediary costs, letting Davidson’s capture more of my segment’s purchases and profits. In effect, Davidson’s and other smaller retailers are paying Amazon for the ability to find new consumers whose CLV would have been zero otherwise – but, once acquired, may additionally make higher-profit direct online purchases.
A Good Deal on Balance?
Remember that you (don’t) get what you (don’t) pay for, so consider what your DIY channel strategy is likely to generate in sales, costs, and profits. You too may find that partnering with bigger online retailers like Amazon may be a reasonable investment in your multi-channel strategy.
 Stevens, Laura (2016), “ ‘Free’ Shipping Crowds Out Small Retailers,” The Wall Street Journal, April 27, http://www.wsj.com/articles/for-online-shoppers-free-shipping-reigns-supreme-1461789381 .