Decades ago, the idea of receiving an item that you ordered minutes ago within the hour was unthinkable. The logistics seemed impossible. Even receiving an item within a couple of days without having to pay any shipping fees appeared incredible. But today there is nothing incredible about either of these situations and, they have, in fact, become the “new normal.”
Amazon has innovated the market, changing the way that customers think about choice, convenience, and price. Customers have become conditioned to the low-cost, two-day, one-day, and even same-day shipping. They have access to a rapidly expanding menu of products that are available online, including everything from appliances to packs of chewing gum.
The Amazon Effect is a force to be reckoned with for retailers. All of the customers shopping through Amazon bring the same expectations to your doorstep. And if you don’t measure up, dissatisfaction trickles down to your bottom line.
A big piece of customer satisfaction involves shipping. Customers want packages to arrive faster and don’t want to pay a cent on shipping. But how is this affecting the shipping industry, and what effect is that having on retailers? A true understanding requires a closer look at the Amazon Effect and the underlying pressures it creates for retailers and shippers alike.
What is the Amazon Effect?
In 1994, founder Jeff Bezos started Amazon, originally as an online bookstore. But it quickly diversified into other offerings, such as DVDs, music, video games, electronics, and even clothing. The company now has roughly 269,000 employees and has transformed the way that people shop.
Amazon introduced buyers to an entirely frictionless experience. Shopping for an item or group of items is no longer a time-consuming chore requiring an afternoon of visiting various stores and making trips that may yield no success. This is likely why more than half of customers start the buying process with Amazon. In fact, Amazon leads over Google as a starting point for online shopping.
The moment customers think of a product, they can move through the shopping experience within minutes, with the product delivered to their home within a matter of days rather than weeks. And in some cases, delivery is the same day.
The Amazon Effect, however, has widespread impacts, and one major area where this is true is shipping. A retail study found that nine out of 10 consumers say free shipping is the #1 incentive to shop online. What’s more, in addition to free shipping, 69 percent of consumers listed one-day delivery as an incentive to shop online more.
Nearly half (49 percent) said that same-day shipping would make them more likely to shop online, while only 9 percent reported using same-day shipping during the past year. Demand for faster and free shipping started with Amazon, but now all retailers are seeing the effects.
When Amazon started as a bookseller, the first offering of free shipping was no-cost shipping on purchases of $25 or more. In 2005, the company created Amazon Prime, which offered free two-day shipping on all orders for consumers who paid an annual membership. Now customers not only received free shipping, but they got their orders faster too. As customers became conditioned to fast, free shipping, expectations spilled over to other retailers. Why pay for shipping when you can get it free on Amazon? The result is a shipping industry that operates under a new set of expectations and intense pressure.
Shipping Sizes and Weight
Once the Amazon Effect took hold, shippers experienced higher volumes of packages to ship. Fewer people were visiting brick-and-mortar stores; instead, they were opting to shop online and get packages delivered easily to their doorsteps. The volume of packages being delivered to homes quickly skyrocketed. The U.S. Department of Transportation projects that by 2040, U.S. annual freight volume will increase by 45 percent to 29 billion tons. The pressure put on shippers increased as more packages began shipping directly from retailers to customers.
At the inception of online shipping, customers were picky about what they would ship. After all, they were footing the bill. Shipping a ball of yarn or a package of pencils was unthinkable, let alone affordable. A tube of lipstick was purchased at the local grocery store or cosmetics store, not sent through mail. The cost of shipping simply didn’t make sense. But this all changed with the expectation of free shipping. If the company is paying the shipping bill, why not buy the small stuff online? Free shipping was offered on many items online, including the small stuff.
Does a customer need a spatula for cooking? The customer won’t hesitate to purchase it online. School supplies that were previously purchased from the local office supply store are now purchased online, without any consideration for shipping, because it’s free.
This shift created issues for shippers and how they needed to charge for services. Charging by weight no longer made sense to carriers. With the Amazon Effect in full swing, they needed to change their pricing model. Many carriers started charging for actual weight and dimensional weight, which takes into account the width and height of each box, which is now an industry-wide practice.
The result is that shipping costs aren’t necessarily low just because an item is light. This has forced retailers to rethink how they’re shipping items. Amazon, for example, often packages items together in the same order rather than shipping them separately, allowing the company to minimize costs and expenses.
New Delivery Methods
The Amazon Effect has created intense pressure to offer customers free shipping, but retailers are challenged with striking the right balance between a positive customer experience and their own company’s costs. Some carriers, such as UPS and FedEx, created services to help retailers manage costs, such as SurePost and SmartPost.
These services target the most expensive part of delivery, which is the “last mile.” This last mile can encompass a few busy city blocks or a hundred miles of rural road. Regardless, delivering a package directly to a home is expensive. Large, heavy trucks, manned by employees and subject to gas price fluctuations, create extra expense. The carriers developed these services to reduce the cost for this last mile of delivery by partnering with USPS.
The USPS visits most addresses in the United States daily. By leveraging this partnership, carriers drive down costs. For example, UPS or FedEx might drop off packages at the local post office or USPS distribution center, and those packages are then transferred to the appropriate USPS truck and delivered to the recipient’s mailbox.
These types of services are more cost-effective, easing the pressure of free shipping expectations; however, they can also affect delivery time. In most cases, SurePost and SmartPost will be slower than the carrier’s normal delivery time, but that might be an acceptable tradeoff for free shipping, depending on customer expectations. Additionally, the USPS delivers on Saturdays and this provides an additional delivery date to assist with speeding up delivery.
New delivery methods continue to evolve to meet the demands created by the Amazon Effect. The problem with the Amazon Effect for competitors, though, is that it’s not a static target, but instead, it’s constantly changing.
For example, Amazon recently introduced Amazon Key, which is an in-home and in-car delivery service that allows authorized shippers to gain access to Amazon Prime customers’ homes, post office boxes or the trunks of their cars at specific times. The purpose of the service is to reduce risk for theft. On higher-ticket purchases, customers may become worried when packages are left on the doorstep, especially if they know they will be away or have planned vacations.
Amazon Key requires customers to purchase a kit that Amazon installs. The customer receives a notification through the Amazon Key app that advises of the four-hour delivery window. A camera is included with the kit, which allows customers to watch deliveries in real time. Retailers that wish to compete should keep their eye on not only what the Amazon Effect looks like today, but also what it could look like in the future.
The Rise of Drones
One additional way that the Amazon Effect is changing shipping is by paving the way for the future of drone carriers. The company launched “Prime Air,” which is a delivery system designed to get packages to customers in 30 minutes or less using unmanned aerial vehicles. Last year, Amazon reported that its fleet of Boeing 767 cargo jets was up to 32 freighters. But Amazon isn’t the only one investing heavily in this shipping option – UPS is investing in drones as well.
Commercial drones travel up to 100 mph and have the ability to deliver small goods, typically weighing under 5 lbs. Each trip costs as little as $1 per shipment, which could create huge savings. In addition, faster shipments could translate into higher revenues because 86 percent of abandoned carts online are the result of expensive shipping costs. UPS estimates that cutting off just one mile on the routes of each of the company’s delivery drivers would result in $50 million in savings.
By 2020, Amazon estimates that it will have more than 450,000 drones in its fleet, operating with delivery worldwide. The introduction of drones could shake up the shipping environment even further – putting additional pressure on retailers to make faster deliveries, and forcing them to figure out how to accomplish this while keeping costs low. Drones might provide an interesting shipping option for retailers, with potential impacts to overall shipping costs.
Understanding the Future of Shipping
The shipping industry of the future will no doubt look different than it does today. Drones could be handling smaller packages, transforming logistics and potentially driving down costs for retailers. And there will likely be shipping options that haven’t even been thought of yet that could affect shipping costs and logistics. But as retailers look into the future, they shouldn’t just aim to keep up — they should aim to get ahead.
The way to accomplish this is by investing in technology that helps make shipping more efficient and — equally important — cost-effective. For example, technology that helps audit invoices assists with identifying where money is overspent and reducing costs. With intense pressure to meet evolving customer needs, savings are critical to keeping earnings stable and healthy.
The Amazon Effect and its influence on shipping processes will continue to alter how retailers strategize and operate. Customer expectations will continue to evolve, and these expectations will continue to influence the decisions that retailers make about shipping. Striking the right balance between meeting expectations and managing costs will ensure that your operation runs efficiently today and in the future.
Shipware delivers volume parcel and less-than-truckload shippers intelligent and innovative distribution solutions and strategies. Whether you ship with FedEx, UPS, USPS or regional carriers, our invoice audit and negotiation services are guaranteed to reduce your parcel and LTL shipping costs by 10 to 30 percent, with no disruption of current operations. Our team of experts has more than 200 years of carrier pricing experience. We have negotiated thousands of FedEx, UPS and LTL contracts – saving our clients an average of 19 percent.