Why Free Shipping is Not Free

Etsy CEO, Josh Silverman 7/9/19

Today, Etsy CEO Josh Silverman sent out an email to all shop owners that listings with “Free Shipping” will be given priority in searches. The justification? “Online shoppers expect free shipping everywhere they go. Etsy is no exception.” Sadly, this is becoming truer every day. What shoppers don’t realize is that they are actually paying MORE when purchasing listings that offer Free Shipping. There are winners with the free shipping scenario, but it’s not the shopper and usually not the seller. Here is why….

First, let’s separate the perception of value with free shipping and the actual math. Everyone loves a deal. This is why concepts like “Sale”, “We Pay the Sales Tax”, “Discount” and now “Free Shipping” give the buyer the perception of scoring some kind of shopping win. It’s that feel good moment in the transaction that gives the shopper comfort that they received a better value for their money. However, the reality, and math, does not support this perceived value.

To get real, no seller absorbs the cost of shipping and takes that hit to their profitability. It’s not a sustainable business model to eat, what is often one of the largest, expenses of operating an online store. The cost of getting that purchase to the customer is either charged separately or factored into the price of the product. However, how shipping costs are passed along to the shopper effects the final price paid by the consumer. Here is the math behind why.

Here is the scenario for a simple online purchase. Let’s start with and use round numbers for simplicity.

Susie finds a cute gift idea for a friend’s birthday online. It’s perfect! Item X is available for $20. Shipping is a flat $5. Sales tax is 8%. Not too shabby, but she is hesitant because she has to pay for shipping and feels that shipping should be free because that’s what Amazon offers. Here are the costs for the transaction if she decided to proceed.

Now, here is the same purchase with shipping rolled into the price of the product so that “Free Shipping” can be offered. Notice that the taxable subtotal is higher, meaning that the entire purchase is now subject to sales tax. This results in a final cost to the shopper being $.40, or 1.5% higher compared to the transaction with shipping separated. All because of what total sales tax is calculated while projecting the illusion of “Free Shipping”.

Here is the side by side comparison.

Don’t worry, it does get worse. With a purchase that includes multiple items, that 1.5% increase can easily become 5%, 10% or more!! The why is a two-part explanation. First, the taxable portion of the purchase is larger as explained above. However, the biggest hit comes from the absence of discounted, or combined, shipping for additional items. Typically, a seller charges a flat shipping fee for the first item, then for each additional item a small increase in shipping. So, it if costs $5 to ship one item but you want to purchase two, the seller will give you a discount on shipping that second item in the box. For example: $5 for the first item and $2.50 for each additional item on the same transaction. Shipping cost for two items is $7.50, not double. However, with shipping rolled into the purchase price, the shopper can’t realize that multiple item shipping discount. Here is the comparison for a three-item purchase.

So, free shipping is not free and, in most cases, costs the shopper more. Yes, there are a million variables that can affect the calculation. Sales tax state, no sales tax state, is sales tax applied to shipping costs or not, will a seller eat all or part of the shipping costs, sales, discounts and whatnot. Regardless, in the end, someone is paying for shipping. It all comes down to who and how much. Chances are it’s the shopper whether they know it or not.

Who is the real winner with Free Shipping? It’s not hard to deduce that the shopper is not the true winner here. So, who is and why have large online retailers really been pushing this concept for “Free Shipping”? That’s easy, money. For every online sale there are three entities benefiting from this additional sale amount.

#1 – Selling Platforms. Transaction fee, or a % of the total sale going to the online platform. Be it Etsy, Amazon, Ebay or others. The higher the final cost for the sale, the more the selling platform makes.

#2 – Payment Processors. Payment processing fee, or a % of the total payment processed for the transaction. Again, the higher the final cost for the sale, the more the payment processor makes.

#3 – Sales Tax States – Most state sales tax rates are only applied to the purchase price, not the shipping. But when shipping is rolled into the purchase price, then the entire amount is taxable. More money for the state.

True, for Susie’s purchase, a % fee on the extra $.40 is a pittance. But charging the fees on that additional amount over millions of transactions or hundreds of millions of $$… well you do the math.

Author: Jef Spencer, Owner/Craftsman of Refined Pallet. Shops on Etsy, Amazon and Ebay.

Tips for Selling Online – Make Money from Your Expenses

FINAL - Expense to CashThere are many…. and I mean many good practices to employ when running your online business that lead to successful sales. I have found there is no one “magic bullet” that a shop owner can implement to realize success. It takes time, dedication and testing to see what works for your particular shop or products to stand out with your target customer. However, as you massage your marketing, shop appearance, product pictures and everything else you can think of to get your stuff noticed, keep these tips in mind to increase your profitability along the way.  It’s only natural that as you sell more, your expenses increase and that’s a good thing. Your business is growing so why not turn your expenses into extra income?

Today I wanted to pass along some of the ways that I have made extra income from my expenses. Yes, you can make money from your expenses! It takes a little creativity, sometimes a change in perspective and of course discipline to avoid some potential pitfalls. In the end there are some ways to harness your expenses to generate additional cash.

Rewards Credit or Debit Cards.

Tip #1 – Never ever pay for your shop expenses directly from your bank account. Whenever possible, pay for your expenses using a rewards credit or debit card. Something with a percent cash back or credit to your monthly bill. A prime example that most online sellers may already have is a PayPal Debit Card linked to their PayPal Business Account. With the PayPal Debit Card, you are paying with real cash, not credit, so you can avoid the pitfall of racking up charges on a credit card and paying finance fees. You get 1% of your spending back as a cash deposit back to your PayPal account every month. However, there are many true credit cards with rewards that will earn you 1% and sometimes more in cash equivalent rewards. Some as a rebate check monthly or quarterly, others as a credit on your outstanding balance every month.

  • Etsy Specific – So all you Etsy sellers out there. Never pay your Etsy bill from your Payment Account!!! Use this method to cover all your Etsy Monthly Expenses: Transaction Fees, Listing Fees, Advertising, Payment Processing, and the biggie…. Postage purchased through the Etsy Shipping Service.
  • Amazon Specific – This is a toughie since this platform takes its fees from your sales and you miss out of the opportunity to charge to your rewards card. However, use that card as the backing for your account in case you end up owing more than what is on account, like in the case of a period with heavy returns.

creditrewards-blog480Tip #1 Part 2 – Supplier specific rewards cards. Every handmade crafter out there needs to purchase raw materials, parts and other supplies to actually craft your final products. Chances are you have a favorite supplier that you purchase the bulk of your material from. See if they offer a rewards credit card. I’d bet that if they do it will come with an extra incentive to use it for purchases from their store. That 1% cash back on a generic rewards card could turn into 3%, 4% or even 5%. Spend $1000 per year at that store and you are looking at an extra $50 bucks in your pocket in the form of cash, credits or gift cards. Some quick examples**:

  • Do you sew? Jo-Anne Fabrics offers a Mastercard with a points system. It equals to every $200 you spend in their store, receive a $10 Gift card. That’s a 5% payback! (Also 1% on all other purchases)
  • Woodworker? Try Woodworker’s Supply Mastercard. 3% back on all purchases made in their store or online.
  • However controversial, do you shop at Hobby Lobby? They have a Visa that for every $500 spent in store gets you a $25 gift card. That’s 5% back on your supply spending.

Tip #1 Part 3 – All your other business expenses. Chances are whatever rewards card you settle on will offer the bonus % on purchases made from their business and something like 1% on all other purchases. So, you are spending the money anyway. You may as well get cash back or points from your business purchases on:

  • Mailing & Shipping Supplies
  • Office Supplies
  • Postage Purchases
  • Advertising/Marketing
  • Web hosting and domain services
  • IMPORTANT – Major equipment purchases like a new computer or tool for your business
  • Wireless and/or home internet bills
  • Utilities
  • Business Insurance
  • Just about any business expense that you can charge to a credit card!!

Pitfall to Avoid: Running a balance on you credit card and getting hit with finance charges. PAY IT OFF! The best practice is to pay the balance off every week or whenever your sales income is transferred to your working bank account. (Etsy is Weekly; Amazon is every two weeks)

Reward Credit Card Summary – Individually your expenses may be insignificant, but it’s the long term game you are playing. Over the year your expenses can be collectively substantial and as your business and sales grow the expenses will increase. You can easily spend into the thousands on basic everyday supplies and administrative costs running your business. Even at the 1% rebate level it can make it all worth while. Just make sure you never carry a balance on a credit card.

Shop Waste and Leftovers

Tip #2 – Sell your crafting or manufacturing “waste”. Look, no matter how efficient you are in your process for making products, you have scraps left over. If you sew I’m sure you have a basket of remnants. Are you a wood woodworker with boxes of end cuts? Maker if jewelry with tins of bent headpins, miscellaneous beads and charms? Come on, you know you have a stash of leftovers that you intend to “make something with it someday”. Realistically it’s never going to happen, and it shouldn’t. You should be spending your time making the things that actually sell. Not trying to recycle what won’t. As the (modified) adage goes, “One crafter’s trash is another crafter’s treasure”. Sell that scrap and either reinvest the cash back in the business or take it as profit. You would be surprised what you can sell through various outlets. Someone out there has the desire and talent to do with your scraps what you don’t have the time to do yourself. Resist the urge to hoard what is useless to your business and list it for sale on one of the many available outlets. Just be reasonable as to what you “think” the actual value may be and don’t price it as to recover your investment. You did already by making whatever you messy-craft-room-1024x768make. Selling the scraps is gravy. Places to sell you garbage:

  • Craigslist
  • Ebay
  • LetGo
  • Local Online Bulletin Boards
  • Facebook Crafter Pages
  • Upcycle Clubs (Local or online)

Gift Card Promotions

Tip #3 – Bonus Gift Card Purchases. Not everyone has the opportunity to take advantage of this one but if you can it could become a triple whammy in terms of cash benefit. Let’s say that your favorite supply vendor runs a pre holiday shopping season special on their store gift cards. Buy $100 in gift cards and get a $10 bonus gift card. Look at what you are spending at the store and make the call to purchase as many gift cards as you will realistically spend to purchase your supplies for a given period time. Say three months. You are going to spend the money so you may as well get a little extra for it. Here are the potential Whammys!!whammy-two

  • First Whammy – You just got a reward (free money) for spending what you would have spent anyway.
  • Second Whammy – When you spend those “bonus cards” you can still claim the full purchase on your taxes as expenses.++ (Even though you paid for it with free money) You have a receipt, it’s an expense.
  • Third BONUS Whammy – If it is allowed to purchase the gift cards with your rewards credit card, well that could be an additional 1% to 5% coming back to you just like a regular purchase. (Most gift cards must be paid for with cash or cash equivalent like a debit transaction. Hint – Some credit cards that can be run as debit cards still have at least some reward attached to the transaction)

Holy Whammys Batman!

The Final Opportunity

Tip #4 – Donations! Alright, so you tried to sell off your scraps or “failed” items. By “failed” I mean either items that don’t meet your quality standards to sell in your shop or quite frankly, items that just don’t sell…. period. This is the last stop and you can either allow these things to pile up in your workspace and hinder your productivity and efficiency to move ahead with your business, or get them out of the way. Donate the piles of stuff to a local charity or goodwill. How does this add to your bottom line if you are just giving it away? That happens at the end of the year at tax time in the form of a deduction or write-off. In effect lowering your profitability on paper so you end up paying taxes on a smaller portion of your realized profits. So if you made $1000 in profit for the year but “write off” $100 in donations you will only be taxed on $900. Just make sure you claim what is realistic in losses or donations and verify with your tax professional as to what is legal according to your local tax laws. (Claim your material costs, not retail price of the products you could have made from them. See Disclaimer ++ at the bottom of this article)

Another note on the rewards you receive and the taxes you claim at the end of the year. Make sure you note my disclaimer on taxes at the end of this article, but…. any rewards, cash back, credits or gift cards that you realize may not have to be claimed on your taxes as income. You can declare the full paid price of any purchases for your expenses. Example: You purchased $100 in supplies but got 5% cash back from your credit card. The receipt says $100 so you can claim the full expense of the purchase on your taxes. The $5 you received back does not need to be declared by either lowering you expenses or increasing your income. It just goes straight to your pocket, tax free.

Closing Notes

While it is best to minimize your expenses to help maximize your profit margins, expenses will happen. It’s a fact of life when running a business. Instead of cringing every time you open your wallet, change your perspective and realize that you could actually be making money when you spend it. With some creativity and cash management skills in place it becomes routine. Every reward that comes back makes running your business a little more rewarding.


** Sample Reward Card offers at the time of article publication. Terms change so check what’s currently offered.

++ I am NOT a tax professional. Please verify the validity of the statements made in this article for yourself as they apply to your federal, state or local tax laws and regulations. Every region is different and tax laws/practices change.

Author: Jef Spencer, Owner/Craftsman of Refined Pallet. Shops on Etsy, Amazon and Ebay.