Why Free Shipping Can Be Bad for Small Businesses

Free shipping sounds fantastic.

As a customer, I like it too. If I am comparing two websites and one wants €8 or €10 for delivery while the other offers free shipping, I know which one immediately looks more attractive.

I have chosen the free-shipping option plenty of times myself. Occasionally I have even thought afterwards that I should probably have supported the smaller business instead of giving my hard earned money to a large faceless entity. The post purchase guilt trip is never easy.

The problem is that shipping is never actually free. Somebody is paying for it.

For a large retailer, absorbing that cost can be relatively easy. For a very small business, particularly one making or selling low-margin products, free shipping can quickly turn a perfectly reasonable sale into a transaction that barely makes any money at all.

I know because I tried it.

Small business owner reviewing low profit margins beside parcels, shipping costs and a box marked free shipping.

I Kept Increasing My Free Shipping Threshold

When I first introduced free shipping on my own website, I think my threshold was somewhere around €50. People used it, got free shipping and I thought, great.

That did not last very long.

I quickly realised I was giving away too much of the profit from the order, so the threshold started moving.

It went from roughly €50 to €60, then €75, €80, €90, €100 and eventually as high as €125 at different stages. I may even have pushed it as high as €175 in desperation towards the end, only making sure my highest paying customers were rewarded.

I experimented with it repeatedly because I wanted to offer customers something attractive without making the numbers ridiculous for the business. There's a very fine line between meagre profit and higher quantity sales. A lot of the time, the gamble didn't pay off.

Eventually, I stopped offering free shipping altogether.

The problem was not that people were doing anything wrong. The problem was that the numbers simply did not work particularly well for a small business like mine with a huge variation of stock.

This is one of the realities of running a small craft business that customers rarely see. The selling price is only the beginning; VAT, packaging, delivery, website costs, stock, equipment and time all have to come out of the same transaction.

I have written more broadly about those pressures in How Hard Is It to Run a Craft Business in Ireland?, where I look at some of the less visible costs and challenges behind keeping a small business going.

A €5 Transaction Profit Is Not Really €5 in Your Pocket

One of the misunderstandings around small retail businesses is the difference between the selling price of something and what the business actually makes from it.

A product might sell for €20, €30 or €50, but that certainly does not mean the business owner is making anything close to that amount.

Many of the products I sell generate what I think of as relatively small transactional profits.

Depending on the product, I might be looking at approximately €2, €3, €5 or €10 after the direct product cost and VAT have been accounted for. There are exceptions, of course, but plenty of small products live somewhere in that range.

Now imagine I sell an item and the ex VAT transaction leaves me with €5.

Before that €5 can contribute anything towards running the business, I still need to package the order.

A small shipping box might cost somewhere around €0.75 to €1.

Suddenly my €5 has become approximately €4.

And that €4 still has a lot of work to do.

It contributes towards electricity, website costs, payment-processing fees, insurance, equipment, storage, packaging materials, accounting costs, replacing tools and machinery, my time and all the other expenses involved in operating a business.

Then imagine that I also have to pay the courier charge because I promised the customer free delivery.

That transaction can very quickly become pointless.

Small Businesses Usually Pay Much More for Shipping

This is where the difference between a small business and a large retailer becomes enormous.

Major retailers can ship hundreds, thousands or tens of thousands of parcels per month/year.

That volume gives them negotiating power.

Courier companies want their business, so large retailers can often negotiate rates that a small business could never hope to receive.

A very small business sending comparatively few parcels does not have the same leverage.

We generally pay much closer to the normal public courier rate.

That means every shipping discount I offer is a genuine cost coming directly out of the order.

If delivery costs me €9 and I charge the customer €5, I have not magically made shipping cheaper.

I have paid the other €4.

If I offer free shipping, I have paid the whole amount.

That may be perfectly manageable on a large profitable order but it can be disastrous on a small one.

Customers Usually Do Not Blow Past the Free Shipping Threshold

This was one of the biggest things I learned from actually offering free shipping.

When businesses advertise something like: Free shipping over €75 you might imagine customers who were going to spend €50 suddenly deciding to spend €100.

That is generally not what happens.

People are very good at shopping.

If their basket comes to €68 and free shipping begins at €75, many will look for the cheapest useful product they can find to push the order just over the line.

And why wouldn't they?

From the customer's point of view, it makes complete sense.

They might spend another €7 or €8 on a product and avoid paying €9 or €10 in shipping.

The customer wins.

But from the small business's point of view, the transaction might now be €76 instead of €68 while the business has suddenly agreed to pay the entire delivery charge.

That extra €8 of products certainly does not mean an extra €8 of profit.

It might only create another €2 or €3 of actual margin.

Yet I may just have taken €9 or more off the transaction by paying for delivery.

This is why continually raising my free-shipping threshold never really solved the problem. Customers simply adjusted their baskets to whichever threshold I chose.

Larger retailers can often afford to accept very small margins, or even occasional losses, on lower-value orders because those transactions form part of a much bigger picture. They are also selling higher-value goods and processing enough orders overall to make the numbers work across the business.

A small business usually does not have that luxury.

We are not shifting thousands of products every day, so there may be no large volume of profitable orders elsewhere to compensate for a transaction where most of the margin has disappeared into the courier charge.

Bigger Orders Are Different

There absolutely are orders where free shipping makes sense.

If somebody places a genuinely large order containing several profitable products, there may be enough margin in the transaction to absorb the courier charge comfortably.

That is very different from an order that has scraped past an arbitrary threshold by a few euro.

This distinction matters particularly for businesses that manufacture their own products.

A craft business cannot necessarily solve low margins simply by selling dramatically more units.

There are only so many items one person can physically make in a day.

If I spend my time producing something and then give away a large part of the profit through shipping, I cannot compensate for that as easily as a large warehouse operation processing thousands of orders.

My production capacity is limited by hours in the day.

Why I Changed to Shipping Discounts Instead

Eventually I came to a different conclusion.

Rather than promising free shipping, I wanted the customer to contribute something towards the genuine cost of delivery.

That became the basis for the rate-per-price shipping system I now use.

As the value of the order increases, the customer's shipping charge gradually reduces.

The customer gets a better shipping rate for placing a larger order, while I continue contributing more towards the delivery cost as the transaction becomes more worthwhile.

But the customer still contributes something.

For me, that is much more sustainable.

I am no longer reaching an arbitrary figure where an order costing €1 less attracts a delivery charge while an order €1 higher suddenly makes me responsible for the entire courier bill.

It is gradual instead.

I think that is much fairer to the business while still rewarding customers who place larger orders.

Free Shipping Has Changed What Customers Expect

One of the difficulties for small businesses is that large retailers have trained all of us to expect extremely cheap or completely free delivery.

Amazon is probably the most obvious example, although plenty of major retailers now do something similar.

From the customer's side, I completely understand the attraction.

I use these services too.

If one company offers the same product for slightly less money and delivers it for free, choosing it is an entirely rational decision.

But there is another side to it.

When you buy from a small independent retailer, the €8 or €9 delivery charge might genuinely be very close to what that business is paying to get your parcel to your door.

It is not necessarily another profit centre.

Sometimes the business may already be subsidising part of it.

Sometimes Supporting a Small Business Costs a Few Euro More

I am not going to pretend I always make the perfect choice myself.

I have bought from large retailers because delivery was free.

I have bought from Amazon when I could probably have sourced something elsewhere.

And occasionally I have thought afterwards that perhaps saving those few euro was not particularly important compared with supporting a smaller company.

I think that is the real point of this article.

Nobody should feel guilty for watching their own money.

If you can save €20, €30 or €50 somewhere, particularly when money is tight, that is significant.

But when the difference is very small, perhaps there is value in looking beyond the words FREE SHIPPING.

The extra few euro may be helping an independent shop remain viable.

It might be helping somebody employ another person.

It might help a craftsperson continue making things locally.

Or it might simply mean the business owner gets to keep enough margin on the transaction to make selling the product worthwhile.

That matters because small businesses are often built on lots of decisions where the margins are tighter than they first appear. Free shipping is only one example of that.

Despite all of that, I still choose to work for myself.

There are days when working for myself makes perfect sense and others when the numbers seem determined to prove otherwise. I explored that side of self-employment in Why I’m Still Self-Employed (Even When It Doesn’t Make Sense).

For me, the independence still outweighs many of the frustrations, but that does not mean the margins can be ignored.

Free Shipping Is Not Really Free

The phrase itself is probably part of the problem.

Shipping has a cost.

The courier still needs to be paid.

The van still needs fuel.

The driver still needs wages.

The parcel still needs a box, tape and packaging.

When a website says free shipping, all that really means is that the customer is not being directly charged for it.

The cost has either been built into the product prices, absorbed by the retailer or covered through some other part of the business model.

Large companies can make that work through enormous shipping volumes, negotiated courier contracts and the overall value of millions of transactions.

Small businesses often cannot.

That does not mean small businesses should never offer free shipping. There will always be situations where the numbers make sense.

But after trying threshold after threshold in my own business, I eventually realised something very simple.

I would rather charge customers a fair contribution towards delivery and keep the business sustainable than pretend shipping costs nothing.

So the next time you see €8 shipping from a small independent shop beside free delivery from a giant retailer, it may be worth remembering what is happening behind the scenes.

Sometimes those few euro make a much bigger difference to the seller than they do to the buyer.

Thanks for Reading,

David

About the Author

I’m David Condon, a small business owner and blog writer based in Tralee, Co. Kerry. Running my own woodcraft business means I’ve seen first-hand how much confusion there can be around shipping times, delivery dates, and what “business days” actually mean. That’s why I wrote this post — to share a bit of what I’ve learned and hopefully save you some frustration.

Every so often I step outside the workshop to write about wider business topics like this one. If you’d like to know more, you can follow the link in the Note from the Author section below or visit my About Me page to learn more.

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