The hidden thoughts behind free shipping on e-commerce platforms

Does free shipping affect your purchasing decision? Free shipping means that the product price and shipping fee are packaged together, which is a bit like tax in the price, so you don't feel the shipping fee. Whether free shipping is available or not, and how much the order is, hides the little tricks of e-commerce platforms and merchants. This article explains this.

A small survey: when shopping online, does free shipping become a factor in your ordering decision?

Most of the time, free shipping means free delivery, which will reduce the psychological barriers for users to place orders. Otherwise, JD.com would not have announced with great fanfare that the free shipping amount for a single order on its self-operated channel would be reduced from 99 yuan to 59 yuan.

Free delivery originated from Dangdang and Joyo, when their core products were books. In the early years, a book was a few yuan cheaper online than offline, but a certain shipping fee was required, so e-commerce had no competitiveness. Fortunately, books are standard products with relatively uniform packaging, weight, and appearance, and low shipping costs. At that time, the cost of express delivery in the same city was about 4 yuan, so they proposed free shipping.

After that, free shipping became a common weapon in the B2C war, and the proportion of delivery costs ranged from 6% to 15%, depending on the ability of each company and whether the gross profit of the goods could support the delivery costs. This is still the case today.

Whether shipping is free or not, and how much the order is, hides the little tricks of the e-commerce platforms and merchants.

Why are small commodities worth 9.9 yuan on Pinduoduo and Taobao free shipping, but on Tmall Supermarket or JD.com, the shipping is not free if the order does not reach a certain amount?

1. High threshold for self-operation

The threshold for free shipping on JD.com’s self-operated stores has been reduced from 99 yuan to 59 yuan, a decrease of 40%. This is 29 yuan lower than the threshold for free shipping on Tmall Supermarket.

Xinmei Daybreak learned that one week after JD.com lowered the threshold for free shipping for self-operated products, sales of eggs, milk and dairy products increased by double digits month-on-month. These are low-priced, high-repurchase livelihood products.

Lowering the threshold for free shipping for self-operated products can also be understood as part of JD.com’s low-price strategy. Self-operated products have been offering free shipping for 99 yuan for many years, and JD.com has been labeled as high-quality and high-priced.

The setting of this number is closely related to the cost and efficiency of the self-operated model.

E-commerce logistics costs mainly include three parts: warehousing, sorting and packaging, inter-city transportation and intra-city express delivery. JD.com covers all of this for its own business. Therefore, it cannot ask the other party to lower costs through upstream and downstream negotiations, but can only demand efficiency from itself.

Around 2016, JD.com did some calculations on this issue. In the industry, the cost of trunk transportation for outsourced express companies was extremely high. Almost 60% of the entire company's expenses were spent on trunk transportation. At that time, JD.com handled more than 2,000 orders per day in a single city, and the operating costs were actually similar to those of outsourced third parties.

But in addition to the logistics system, JD.com's self-operated model also requires a supporting and complete supply chain to achieve the ultimate in cost and efficiency. This involves issues such as how to connect information systems between retail companies and how to manage tens of thousands of suppliers at home and abroad. These are precisely the core competitiveness of JD.com's self-operated model, and are also the reason why it is necessary to set a free shipping threshold.

Zhuang Shuai, an expert in the retail e-commerce industry and founder of Bailian Consulting, told Xinmei Daybreak that the platform's fulfillment costs are related to the number of orders. If the number of orders increases, the freight will be further diluted. In addition, JD.com also has a pickup business, and the express delivery fee can be as low as 2 yuan per order. As early as 2014, JD.com's express delivery cost was 4 yuan. Taobao initially believed that these should be handed over to social forces and the platform should operate with light assets, so that cost control is the best and efficiency is the highest. So in 2011, Jack Ma said at the Taobao member communication meeting, "I am willing to make a bet with you here. This model of self-procurement, self-sales, and self-logistics will not last long."

Ten years later, Alibaba is accelerating its self-operated layout, with Tmall Supermarket as its flagship product. In addition, it includes self-operated businesses such as Hema and Maoxiang, as well as the Miaosuda Electric Appliances Tmall flagship store for 3C digital products. All products on the shelves are officially purchased.

In 2019, Tmall Supermarket Group experienced a transformation from "agent sales" to "agent sales" and "purchase and sales" in parallel. The storage and distribution of goods are handled by Tmall Supermarket, and the operation is handled by merchants. In the same year, the supply chain was upgraded, and the delivery time performance reached 1 hour, half a day and next day.

Tmall Supermarket has set a free shipping threshold just like JD.com. The actual payment amount is within 88 yuan and the weight is within 21kg. If the weight exceeds the limit, the fee is 1 yuan/kg. Order size and package weight are two important factors in delivery costs.

According to Xinmei Daybreak, the reason why Maochao set the free shipping threshold of 88 yuan is that, based on the comprehensive consideration of cost and experience, this is called profit and loss within Maochao.

"If you offer free shipping for every order, such as 9.9 yuan, you can definitely increase the number of orders, but the profit and loss will also be very high. Is it necessary to increase GMV at a loss? Internal assessment is not simply defined by the profit and loss of each order. There will be a percentage in the annual profit and loss assessment, and what we pursue is a dynamic balance."

2. Free shipping for fresh food, a dilemma

Compared with general goods, users are more sensitive to the free shipping prices of fresh food e-commerce. Whether it is Hema, Dingdong Maicai or the former Miss Fresh, the free shipping standards they set in different places are not uniform.

For example, Meituan currently charges 39 yuan per order for free delivery in Beijing and Langfang, 29 yuan per order in Guangzhou, Foshan and Shenzhen, and 25 yuan per order in Wuhan. This is truly a case of "serving different dishes to different people".

The reasons that influence the setting of free shipping thresholds are complex.

A former Meituan grocery operation staff member told Xinmei Daybreak that delivery pricing is mainly affected by distance, difficulty, time period, weather, and transportation capacity. The calculation of delivery fees = fixed delivery fees + multi-factor delivery fees + dynamic adjustment items. The specific pricing is composed of more detailed expenses. Each fee also has a complex system logic to calculate and control, such as address, category, weight, time period, customer unit price, delivery difficulty, transportation capacity, etc.

Behind all these complex calculations are actually considerations of cost and profit.

A former Hema employee told Xinmei Daybreak that the average order value is an important factor to consider. If the average order value is too low, the number of orders will skyrocket, and the transportation capacity will be limited, then the orders will have to be limited. Secondly, the gross profit must be able to cover the costs of picking, packing, and transportation. According to the above-mentioned person, the gross profit of each Hema order is about 27%-28%, the average delivery cost is estimated to be 5.7 yuan, and the store warehouse cost is 3.8 yuan. The threshold for free delivery in Hema in Beijing is 49 yuan, which is 10 yuan more than Meituan.

A contradiction that is difficult to reconcile is that it is difficult for people to stock up too much vegetables and fruits at one time, which results in a relatively lower average order value than ordinary goods, but the delivery time requirements for fresh produce are higher, so the gross profit from the low average order value cannot cover the high fulfillment costs of the forward warehouse model (logistics + warehousing + payment fees). This does not include the cost of loss.

The pioneer of domestic fresh food e-commerce is Yigu Fresh. The company’s highlight moment was not only the endorsement of Alibaba’s strategic investment, but also the acquisition of the exclusive operating rights of Tmall Supermarket’s fresh food and the establishment of its own fresh food delivery system, Anxianda. However, it ultimately could not escape the fate of collapse.

The core reason is the huge cost pressure. An industry insider once revealed that Yiguo Fresh's fulfillment cost per order is about 30 yuan, but it can only meet the time requirement of next-day delivery.

The fulfillment cost is a heavy burden for fresh food e-commerce companies. Dingdong Maicai's average customer order in Q4 2021 was 60 yuan, and the fulfillment cost per order was 17.7 yuan. Daily Youxian's average customer order in Q3 2021 was 88.4 yuan, and the corresponding fulfillment cost per order was as high as 22.2 yuan. The fulfillment cost once accounted for about 30% of Daily Youxian's current revenue.

What’s even more special is that even if the threshold for free delivery for fresh food e-commerce is set very low, it is difficult to hedge the high costs through order scale.

Zhuang Shuai analyzed to us that the fulfillment fee rate for fresh produce is not constant, but the forward warehouse model has a lower limit.

This is because the forward warehouse model generally covers customers within three to five kilometers, the order size is limited, and the fulfillment rate naturally cannot be continuously reduced. As a result, the cost of fresh food delivery is always higher than that of the e-commerce platform.

This is also the reason why JD.com has not played an effective card in the fresh food e-commerce market since its listing. The core reason is that it cannot fully reuse its original warehouse and distribution system.

Zhuang Shuai has calculated that under the assumption of neutral optimization, if a single forward warehouse has 1,500 orders per day and the average customer price is 75 yuan, it is expected to achieve an operating profit margin of 0.4% without considering management and R&D costs. According to the optimized UE model, Dingdong Maicai must increase the average customer price while increasing the number of orders per warehouse to achieve profitability.

In 2022, Liang Changlin, founder and CEO of Dingdong Maicai, made a clear statement to the public, "The company can only achieve profitability if it has been operating a forward warehouse for more than one year, with an average daily order volume of about 1,000 orders and a customer unit price of 65 yuan."

In the first half of this year, the average customer spending per order on Dingdong Maicai nationwide reached 72.9 yuan, of which the figure in Shanghai increased to 75.8 yuan. If the cost structure of Dingdong Maicai has not changed much, according to what Liang Changlin said before, we can understand that Dingdong Maicai's East China region has achieved overall profitability.

In recent years, fresh food e-commerce companies with forward warehouse models have been continuously reducing costs and increasing efficiency, because they can only survive if they meet the high customer unit price, high order density and high fulfillment efficiency at the same time. Therefore, the level of free delivery fee is a test of their management ability.

3. Merchant Flexibility

Compared with the platform’s own operations, third-party merchants have greater flexibility in free shipping.

There are a large number of merchants active on platforms such as Taobao, Douyin, and JD.com. There are no restrictions on centralized procurement and distribution. The threshold for free shipping varies from person to person, and the platform does not participate in it. It is up to the merchants to decide.

So when purchasing on Taobao or JD.com third-party platforms, some stores offer free shipping, some do not, and some offer free shipping for orders over a certain amount.

The commonality of these businesses is that they do not have their own logistics system and rely on third-party express delivery outsourcing. Whether or not they provide free shipping depends on how low the price they pay for the services of the logistics company is.

Zhuang Shuai told Xinmei Daybreak that the courier fee of 6 to 8 yuan in the same city and 10 to 20 yuan in other provinces and cities is the price for one person or a small company to send express. However, for e-commerce platforms with intensive scale, if a single product can achieve 100,000 orders a day, almost all courier companies are willing to provide services for it at a price of 1 to 2 yuan.

Fujian Daily interviewed a company that sells goods through Douyin live streaming. It has handed over all its express deliveries to ZTO Express, which handles about 6,000 to 7,000 orders a day. "In the past, the express company came every two or three days, but now it comes every day, and the price of each express delivery can be reduced by 1 yuan to 1.5 yuan."

This reflects a fact that cannot be ignored. Express delivery companies basically rely on scale to reduce costs. This forces thousands of individual merchants to negotiate with express delivery companies with "scale orders". The strength of their bargaining power determines the level of express delivery costs, and also determines whether the product details page can be marked with the words "Free shipping nationwide except for remote areas."

Even Pinduoduo, which offers free shipping for just 9.9 yuan, cannot escape this rule.

Almost all Pinduoduo products are free shipping, and users are never asked to pay for shipping. Whether it is a small gadget with a unit price of a few yuan or an Apple phone worth thousands of yuan, there is no shipping fee.

This is not because Pinduoduo's merchants are more generous and help users pay the shipping costs, but because the platform requires merchants to package the product price and shipping costs together, which is a bit like "tax included in price" so that you can't feel the shipping costs.

Moreover, Pinduoduo does not have a shopping cart. Basically, one order is placed for each product. Low prices stimulate users’ minds, and they buy and go immediately, thus minimizing the time for ordering decisions and promoting the scale efficiency of orders. This is Pinduoduo’s little trick.

Of course, the shipping fee includes the subsequent product sales price. Pinduoduo is still able to be highly competitive, which is inseparable from the platform's low-cost traffic operation. The platform's traffic distribution cost is low, but the order volume brought to merchants is huge, so the platform can obtain bargaining power. In essence, Pinduoduo helps merchants do wholesale business.

If one day you find that buying things on Pinduoduo is not as cheap as before, the rules of the game may change.

Author: Li Huan

Source public account: Xinmei daybreak (ID: new-daybreak), understand people and discover changes.