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 – One Day, $315 in Profit Without Selling Anything

Today I instantly made $315 in profit without selling anything. It was accomplished by implementing a combination of two smart business practices. With a good handle on your business cash flow and practices you can realize this type of results too.

  1. Using “Spendable Reserves” to take advantage of an unexpected opportunity – Read here on Building Your Reserve.
  2. Harnessing regular business expenses to make extra profit. – Read here on tips to Make Money from Your Expenses.

Here is how I did it utilizing the two tips above:

One of the suppliers for the materials I utilize to make my products ran a Black Friday special. For every $50 gift card purchase, get a bonus $10 gift card. (That’s a 20% return). I calculated what I would be spending on supplies from this source in the foreseeable future based on historical patterns. I settled on three months’ worth of expected expenses which works out to around $1500.

So, I purchased $1500 in gift cards netting an additional $300 in bonus gift cards. As an added bonus, I purchased the gift cards utilizing some of my spendable reserves in a PayPal Debit Account which pays a 1% back on all purchases. That 1% cash back was another $15 credited back to my PayPal balance. (1% of $1500)

So, I “prepaid” $1500 in expected expenses and netted a total $315 in FREE MONEY or pure profit back to my business. That’s a return on 21% on money I would have spent on my business anyway. Not too shabby to make $315 in profit without selling a single item from my Etsy, Amazon or Ebay shops.

I hope that you can find ways to be more profitable in your home business, however creatively you can.

Author: Jef Spencer, Owner and Craftsman of Refined Pallet. Selling online since 2007 with shops on Etsy, Amazon and Ebay.

Tips for Selling on Etsy – Building your Reserve

Building Your ReservesI opened my first shop on Etsy in 2007 and after many successful years I switched my product line enough to warrant opening a second shop.  Now I’m starting up a third! The “Why” behind managing separate shops is for another story. In this article I want to share with you a practice to employ to protect your business. I owe part of being successful to being prepared to handle the unexpected without interrupting my business cash flow.

Today’s Tip – Everyone knows the age old adage “You have to spend money to make money”. But what if you don’t have the money to spend to take advantage of opportunities or respond to problems as they arise? Well let’s tackle that one first, building your primary reserve.

I’d be the first to admit that the first year was the hardest. You have all those start-up costs and very little cash to work with so when you make that first sale it’s time to celebrate, right? Absolutely! Reward yourself but don’t get too crazy. Now is the time to get into the practice of taking part of that sale and putting it aside to build your “primary reserve”. How much? I suggest 10% of the sale (Not including taxes or freight collected). Depending on the products you sell, this could be pennies or it could be a few bucks per sale. In any case, put it somewhere safe and separate from your regular working account.

In the beginning that primary reserve account will not have much in it, but the point is to build it slowly over time. Feed the account, a little bite of every sale until you hit your target reserve amount. What has worked well for my Etsy business is striving to always have a reserve available that equals 10% of my annual sales. So, if you sell $1000 of stuff a year you should strive to have at least $100 on hand in primary reserve. When you increase your success to $12,500 per year you should strive to have $1250 on hand and so on. Believe me, you won’t miss that small 10% when socking it away. But you will miss having that reserve on hand when you really need it, and you WILL NEED IT.

As your first year of building that reserve progresses you can adjust how much to sock away to hit that end of the year reserve goal. If your goal is to have 10% in reserve, stashing away 10% of each sale will organically get you to your goal. This will be an exercise is self-control to resist the temptation to dip into what you have saved up, but look forward to year two when things get a lot easier. That’s when you can scale waaaay back on what you are skimming off the top to set aside which equals more money in your pocket from profits to spend as you need or want.

Year 2 – Congratulations! You successfully built that reserve, but why? We’ll get into that in a second. For argument’s sake you let’s say you sold $2100 worth of stuff in that first year and you now have $210 in reserve, yeah! You can stop socking away portions of each sale and keep that extra smidge of money to do with whatever you wish. Or, you can continue to squirrel away that 10% and give yourself a reach goal by creating a secondary “Spendable Reserve”. What is a “Spendable Reserve”? These are funds that you give yourself permission to spend on whatever you wish without hurting your business. Preferably spend these funds on something that benefits your business like a new tool, upgraded computer or even a faster internet connection for your home business. Whatever you save up in the “Spendable Reserve” you can shell out without the worry of depleting your primary reserve. But what happens when your sales increase? That’s easy! Evaluate your sales trends and project out what your annual sales will look like at the end of the year. Then plan to sock away smidgens of each sale to meet that new year end primary reserve goal. This can be as easy as continuing to take 10% off the top and putting half to your primary reserve and the other half to your spendable reserve. Your savings habits haven’t changed but you are still accomplishing your reserve goals.

Now on to the “Why?”. When I have given out this tip in the past I get these regular responses: “This is my primary source of income so I need that money to live.” Or, “I worked hard on my business and I should be able to spend the full amount of the profit as I see fit.” Both of these are very valid and real responses. To these I come back with “Don’t you want to protect all your hard work building a business and future income streams that can come from it?” It would be a shame to have to close shop due to missed opportunity or even worse, an unforeseen hurtle.

Having a primary reserve on hand serves two main purposes. First, to cushion the blow when something goes really wrong that can stop your business in its tracks. Things like having to replace a major tool needed to manufacture your products. Or having the computer for running your online business blows up. There can be any number of things that are critical to keep you either making or selling your products. Having the funds on hand to correct a major, business stopping problem and getting back on track and selling as quickly as possible is something you’ll be grateful for when you need it. There is not much worse than being shut down during the holiday shopping season or when trying to fulfill a major order with no resources to get going again.

The second purpose of a primary reserve is being poised and ready to grab onto any major opportunity that may come your way. Here is one of many scenarios: You get a convo message from a customer that loves your work and wants to purchase a large quantity of items. Way more than you have available or even have the supplies to make. It’s going to be nice to know that you have $$ on hand to purchase additional supplies without hurting your cash flow. I can’t tell you how many shop owners I have seen in the forums complaining about losing a substantial sale because they could not meet the needs of the opportunity presented due to lack of available funds. (Getting payment from a customer either before or after a custom order or substantial sale is another topic altogether)

Lastly in regards to building your primary reserve, make sure you maintain it! If you do dip into the reserve to recover from a business stopping disaster, make replenishing it a priority. Even if that means forgoing a larger chunk of your profits from subsequent sales until you recover. In the case of utilizing those reserves to capture an unexpected sales opportunity, take the profits from that captured sale to replenish the reserves. (And maybe sock a little extra away into that Spendable Reserve) You should have made more than enough from the sale to cover what you needed to purchase the materials to make it happen.

Note: Even if you have been selling on Etsy or elsewhere online for a while, but don’t have any reserves, now is the time to start. You will be at an advantage compared to a newbie since, hopefully, you have already covered your startup costs along the way. You should have a larger pool of profit funds to pull from to sock away and build those reserves.

Protect your business people! Worst case scenario, you have built a cushion that can save your business. Best case scenario, you have a nice little bonus to cash out when you decide to call it quits or if you are really successful, sell your business to someone else.

Author: Jef Spencer, Owner and Craftsman of Refined Pallet. Selling online since 2007 with shops on Etsy, Amazon and Ebay.