the true costs of free shipping

the ones you know, and the ones you don't

Many of us take free shipping, at least over a certain dollar value threshold, for granted. Amazon Prime with free two-day shipping on eligible items launched in early 2005 — yes, really. The subscription allows people to purchase necessary supplies or indulge in impulse buys without having to travel to the grocery, hardware, or other specialty store for the same or similar price as they would pay in person. While Walmart is the first player to have come close to competing with Amazon, it’s still firmly in second place — there is no Prime equivalent, and the order threshold for free shipping in the United States is $35 at Walmart and $25 on Amazon without Prime. Like Amazon, Walmart is large enough to absorb some financial losses for the sake of growing their e-commerce presence and reputation, but even they cannot quite compete with Amazon’s variety of products or customer experience.

We already know that the convenience of online shopping enables compulsive buying of unnecessary items. But this luxury’s drawbacks aren’t limited to excess spending. Amazon’s customer service policy, which resends items for free after package theft and allows free returns for essentially any reason, is good for the consumer but terrible for the environment. Not only do extra products clutter people’s homes, but many returned items aren’t even resold (instead going straight to landfill). Though it appears logically inconsistent that Amazon would be willing to suffer such great losses in revenue, their policies have allowed them to become the dominant player in e-commerce because they have economies of scale: the enormity of their operation allows them to have advantages like faster production, greater profit margins, and better shipping rates. Smaller companies that can’t afford to take a financial hit to compete with Amazon are priced out of the market or forced to sell as Amazon vendors. The psychological effect of free shipping is particularly powerful: customers will choose to spend more with free shipping versus less with paid shipping, even if the total cost is the same. 

Psychologists have studied the factors that make online shopping particularly addictive. As opposed to a single dopamine hit from an in-store purchase, online shoppers receive two: one when clicking “submit order,” and another when the item arrives in the mail. By the time an item arrives — even if it’s only two days later — the pain of having spent money on it has faded, and only the delayed gratification of receiving an exciting new product remains.

Even if shoppers actively understand that the cost of free shipping is baked into the product price, research shows that paying the entire cost less taxes upfront makes people feel less nickel-and-dimed. This means that sellers must choose between absorbing shipping costs (cutting into already tight profit margins) and increasing item prices (potentially upsetting or losing longtime customers). Choosing Amazon-adjacent shipping options is expensive for smaller sellers, while investors and venture capitalists foot the bill for large companies. For Amazon, Jeff Bezos has been open about reinvesting profits back into the business, allowing them to subsidize free shipping. This reinvestment is made possible by free cash flow. 

While traditional retailers pay their suppliers a few days or weeks before receiving money for sold items, Amazon gets paid for items a couple weeks before needing to pay for the products; this “time-staggered profit” is known as free cash flow, and it will always be higher than actual profit as long as sales remain consistent or grow. Amazon’s free cash flow is incredibly high for a tech company, and as a result, investors view their stock more favorably as it indicates a degree of stability and growth potential. Amazon can pay their employees, suppliers, and shareholders as well as invest in the business and subsidize free shipping with this free cash flow while still keeping profits (and thus taxes) low.

These factors begin to show how “free shipping” is not actually free: the costs are subsidized by players other than the consumer. But the biggest loser in this offsetting of costs is the environment. Delivery as fast as guaranteed two-day shipping requires foregoing efficient route planning and package consolidation, resulting in increased cardboard usage and fuel consumption (and subsequent carbon emissions). Furthermore, the company effectively sends all returned merchandise, defective or not, to landfill to eliminate costly and inefficient restocking. Free and fast shipping is a disaster not only for consumers’ wallets, but also for the small business economy and the planet as a whole.

I don’t know about you, dear reader, but I’m sold. Please do not return; I don’t want to end up in a landfill along with the blouse your Aunt Lydia decided was just too unfashionable to grace the family reunion.