By now, we are all more than familiar seeing “Free Shipping!” on many websites and advertisements. It’s become so common place that it’s almost expected as a standard these days. But how did this come to be? Certainly, there is a cost to moving goods throughout the country. The simple answer is that there most certainly is a cost to it; and whether they know it or not, the consumer is most certainly paying for it.

            We can’t talk about the transportation industry without acknowledging Amazon and their contributions to it. Amazon has managed to revolutionize the American mindset when it comes to delivery by offering free 2-day shipping on many of the products offered. With Amazon taking the lead, many other large scale corporations are rolling out similar programs in an effort to keep up. How are they able to do this? It all goes back to your freshman year course on economics where they discuss something called “economies of scale.” To put this in layman terms, it means that these larger corporations do business on such a high level that the rates they have for shipping are considerably lower than what small and medium companies are able to obtain. This works both on the cost of the goods as well as the cost of the shipping. When large corporations buy at larger quantities, the cost per unit is significantly decreased. Combine a lower cost of goods with a lower cost on shipping and the total cost is very low. This allows them to offer programs like “free shipping” and be able to still make a profit. But is it truly free?

            While it’s always advertised as “free shipping” that doesn’t mean that you aren’t paying for it one way or another. Larger companies, using economies of scale, will generally tack on an additional profit margin to the sale cost to cover your “free shipping.” Amazon does this as well as what they call a “yearly subscription” where they have a membership fee for the year. This fee is largely used to help with delivery costs as well as other operating costs so that when you make your purchase, you only see the one total. It’s a psychological attempt to mitigate the discomfort many of us feel when we see additional line items in our check-out cart. In many instances, shoppers will willingly pay a higher price for their goods if they don’t have to see any separate charges added to their order.

            Even though we’ve determined that “free freight” isn’t actually free, does that mean it’s a bad thing? If it’s making consumers feel better about their purchases, that’s a good thing, right? Not necessarily true. Dave Earle, President and CEO of the British Columbia Trucking Association (BCTA) has this to say on the matter, “One of the ancillary effects of ‘free shipping’ is that it devalues the transportation sector because it becomes a hidden cost, and consumers don’t appreciate what they are paying for.” The American public has become accustomed to 2-day delivery at what they perceive to be “free.” This puts extreme pressure on transportation and delivery companies alike as demand for immediate and expedited service only increases and decreases the value and respect of the industry as a whole. This can be seen perfectly through the enormous strain the trucking industry has been put under due to Covid-19 and the lack of a good system in place.

            Not only does it poorly impact the transportation industry, but small and mid-sized businesses aren’t able to compete. Without the economies of scale larger companies have or their yearly subscription fees, small businesses have no other option but to charge for shipping. It makes staying in business much harder when competing against these giants! So next time when you’re looking for a product online, don’t be fooled by their “free shipping” gimmick and help out the small businesses!