How Do Online Retailers Offer "Free Shipping?"

A question we get a lot from clients is "How can so many online retailers offer free shipping?", which is then followed up with "What can we do to compete with free shipping offers?"

There are a couple of reasons online retailers are able to offer free or cheap shipping, unfortunately the reality is that there are no free shipping service options with Fed Ex or UPS or the Post Office or anyone else. So whether you are a large shipper, ecommerce startup, or growing online retailer there is no such thing as free shipping.

What large companies do get, that startups and small companies typically do not, are substantial discounts on small package company's published rates. In addition, if a company is shipping a very large amount of the same size packages there is often the chance to get preferential rates in those circumstances.

Clearly if you are a startup or small online retailer you are at a significant disadvantage because you are without the leverage to negotiate better rates with FedEx or UPS. But in the end, just like your business, the big online retailers are covering the cost of shipping with the margins in their products.

What to do about it as a startup or small online retailer? Obviously it is paramount to figure out ways to minimize shipping expenses because these are costs that are not going away no matter how big you get.

Consider alternatives to FedEx or UPS by looking at the options offered by the USPS. Many companies find that Flat Rate Priority Mail boxes are a good way to reduce costs. FedEx and UPS charge hefty residential, extended delivery area and fuel surcharges that hurt the economics of shipping Business to Consumer (B2C) with them.

More distance equals more cost so your shipping location is directly correlated to your shipping costs. Most of the people in the US are located in the mid-atlantic and northeast part of the country. If you are shipping from San Francisco to customers in New York, the cost could be double or more than the cost to ship to New York from a location in Pennsylvania. Another advantage the big guys have is the ability (as in volume) to ship from multiple points within the US. They can service most of the country with cheaper ZONE 2 or 3 shipments, as opposed to expensive ZONE 8 shipments going coast to coast by having multiple warehouse locations to ship from. Similar story, but it does take volume to make it worthwhile to set up multiple shipping points around the country.

Many 3rd party order fulfillment warehouses will pass on their volume discounts with FedEx and UPS, so look into a partnership to outsource your product shipping. Your operation will potentially benefit from the collective volume of all the customers shipping from that fulfillment center.

Is The Shipping Industry On The Way To Follow Aviation Into The EU ETS?

As aviation is on the way to become a part of the EU's system for carbon trading from 2012, the question that will inevitably come under the spotlight is whether or not the shipping industry will also inevitably follow this path. Although the International Maritime Organisation (IMO) and the UN Framework Convention on Climate Change (UNFCCC) are making efforts to reduce emissions from shipping, the European Commission is gradually getting impatient and seems to be determined to take action in 2012 if sufficient progress is not made in the meantime.

Despite of the approaching expiration date of the Kyoto Protocol and the uncertainty arising thereof, The EU's resolution to move toward a low-carbon economy seems stronger than ever and the expansion of the EU ETS system is a step in that direction. The recent inclusion of emissions from the airline industry has brought about excitement and worry in the shipping sector as well, especially considering that a commitment to include it into the EU ETS was made as early as 2005 - the year when the carbon cap-and-trade system was first launched.

At present, the EU Emissions Trading System (EU ETS) is the most integrated carbon trading mechanism in the world, operating on the basis of the "cap and trade" principle, where companies receive emission allowances within a certain limit or a "cap" that they can later on trade among themselves. One of the most important steps toward integrating the transport sector into the EU ETS was taken as the European Commission adopted the decision that, from 2012, emissions from all domestic and international flights arriving or departing from EU airports, will be covered by the EU ETS. The decision was met with approval and criticism alike and naturally provoked the discussion about the inclusion of the shipping industry in the emissions reduction system.

Shipping currently accounts for a surprising 3% of global emissions, and according to the Directorate-General for Climate Action of the European Commission (DG "CLIMA"), in the absence of action, greenhouse gas emissions from shipping are expected to more than double by 2050. With the increased shipping traffic recently observed through arctic shipping routes, the environmental consequences of shipping seem to be more pressing than ever, as carbon emissions could further speed up ice melting in the Arctic.

Emissions from the shipping industry are not covered by the Kyoto Protocol and the specifics of the maritime sector make its inclusion in a carbon trading scheme a rather complicated matter. Just like aviation, the shipping sector is not a land-based industry and does not operate on a limited territory. Therefore, the successful integration of shipping emissions into EU ETS would require cooperation of both governments and shipping companies based outside the EU. And to complicate matters even more, recently the UK shipping industry rejected the urges for European action in the field. As Mark Brownrigg, director general of the UK Chamber of Shipping, told the Guardian, "The EU's emissions trading scheme will not work for shipping. It is not suitable. It is not a global system, and shipping is".

Meanwhile, the IMO is also taking steps toward reduction of greenhouse gas emissions. On its 62nd session in July 2011, the Marine Environment Protection Committee (MEPC) adopted measures aimed at the reduction of emissions of greenhouse gases from international shipping, as the new regulations are expected to enter into force from 2013. It still remains uncertain, however, whether these measures will be considered as sufficient by the European Commission and especially by Connie Hedegaard, the EU Commissioner on Climate Action, who stated that it was "high time" for an agreement in IMO. "Much as we prefer a global solution, the Member States and the European Parliament have asked the Commission to present a possible proposal to reduce shipping emissions for 2012 in the case that the IMO fails to find a solution", she said in a statement from 28th June 2011.

The integration of shipping into a carbon trading scheme could be an additional way to raise money for combating climate change in developing countries. However, in order to make that effective, an agreement for the reduction of emissions from shipping will have to be reached on an international level, and not to be limited solely to the EU/EEA region. An opportunity for a global agreement might emerge at the upcoming climate conference in Durban, where the EU is expected to initiate talks on shipping, together with the fight for global regulation of emissions from the airline industry. The absence of a global solution, however, will most probably not influence the determination of the European Commission to include emissions from shipping in the EU ETS.