Amazon is a household name today, but at its inception in 1994, it was little-known and operating out of its founder’s garage. Within a couple of months, the success of that startup was clear, as it began earning $20,000 per week. Now the retail giant employs roughly 154,000 full-time employees and enjoys annual revenues that top $178 billion. What’s more, the company has completely transformed the way that people shop and think about the retail experience.
Brick-and-mortar store foot traffic has decreased by as much as 50 percent since Amazon’s debuts as fewer people venture out to shop, and more open their laptops or mobile devices instead. Amazon has completely changed how, when and where people shop, and the results are known as the “Amazon Effect.” But what is this phenomenon, and how exactly does it impact retailers?
Understanding the Amazon Effect
Before Amazon existed, the shopping process was much different. A customer might have a specific need – for example, to purchase a blender. After identifying that need, he or she might have considered a specific store to visit in order to purchase that item. Sometimes price comparisons were more difficult, and the customer would visit multiple stores. If the shopper was having difficulty finding the right product, an afternoon could easily be wasted. Amazon has eliminated the waste from the shopping process, but it has also amplified customer expectations.
Customers now shop from a variety of devices, including laptops, tablets, smartphones, and even voice-activated personal assistants such as Amazon Echo’s Alexa. This creates a streamlined shopping experience and, as a result, minimizes friction during the shopping process. But it also intensifies expectations, which is typically what the Amazon effect describes. When shopping is easy, expectations change and customers expect everything about the process to be simplified, including shipping.
Free and Prime Shipping Are Transforming Expectations
More customers shopping online has resulted in more shipments on the road. In fact, 40 percent of U.S. internet users say they purchase items online several times a month. Furthermore, 20 percent of users say they purchase items and services online on a weekly basis. A couple of decades ago, these customers would have expected to pay shipping costs, but today, due to the Amazon effect, this has changed.
In 2005, Amazon launched a new service called Amazon Prime, a new concept that offered customers unlimited, free two-day shipping on Prime-eligible products for an annual fee. Customers positively responded to the concept, and the company quickly onboarded about 2 million Prime members. As the word spread and Amazon continued to promote the idea, membership grew to 100 million.
Before Amazon launched Prime, the company was already “selling” the perk of “free” shipping by offering it on orders of $25 or more. Now, with both shipping models in play, the company is capitalizing on a psychology principle that is well-known to marketers: the use of the word “free.”
For example, in one marketing experiment, chocolate creator Hershey’s offered two types of chocolate: a Hershey’s kiss and a Lindt chocolate truffle. The kiss is an inexpensive treat, but the truffle is arguably tastier and costs more than a kiss. The first experiment offered study participants a truffle for 15 cents, and a kiss for one cent. Nearly three out of four subjects selected the more expensive truffle. However, in the next version of the experiment, the price of the truffle was reduced to 14 cents and the kiss was free. Even though the price differential was the same, the behavior of participants drastically changed: More than two-thirds of the subjects selected the free chocolate kiss over the truffle.
The same principle applies to retail and shipping. Even when the price to ship is low, free shipping is a much more powerful motivator for driving purchases. But for retailers, this creates a new challenge – one that has the potential to impact the bottom line: They must figure out how to offer customers free shipping while preserving their profit margin.
The Amazon Effect and Shipping Prices
Shipping costs in the United States are at record highs, and a strong driver behind the current levels is the Amazon effect. This increased demand is seen in many places, including the number of trucks on the road.
By the year 2023, the total population of trucks in the U.S. is expected to grow by 26 percent. Total miles driven are also expected to increase by 38 percent, and total tonnage carried is expected to increase by 26 percent. And since more transportation will be required to ship all these packages that customers purchase online, there is also expected to be a spike in the demand for long-haul drivers, forecasted to grow by 44 percent by 2040.
Thanks to the Amazon effect, the types of packages that customers ship are also changing. Since shipping is free, customers are more likely to purchase smaller items, which are covered in bubble wrap and boxed, taking up transportation space but with a low overall weight. Yet customers still expect free shipping on these items, and if shippers still charged only by weight, they would lose money.
So, the Amazon effect has driven shippers to change the way they charge, such as the idea of dimensional weight pricing – taking into account the volume and weight of each box. These changes were reflected in a price hike that FedEx announced a couple of years ago. Dimensional weight pricing, which was considered in a price increase by UPS, was a method designed to urge shippers to package items efficiently and reduce packaging materials.
As customer behaviors change and expectations become higher, especially around the area of shipping costs, it forces retailers of all sizes to evaluate their shipping practices and costs. How can companies keep up with the Amazon Effect and get customers the free shipping they demand, without sinking the bottom line? Some carriers are providing an answer that helps retailers manage this competitive climate.
The Demand for More Efficient Shipping Options
The rising cost of shipping is driving retailers to seek more creative shipping options. The old approach isn’t always efficient when a business is considering the Amazon Effect and the need to decrease shipping costs. One approach that retailers are using to cope with the Amazon Effect is focusing on the most expensive part of a shipping journey: the last mile.
The last leg of the shipping journey, whether it’s a few blocks or a few hundred miles, is the most expensive, which is why it presents the perfect opportunity to reduce costs. Major carriers such as FedEx and UPS create services that target these last miles and also reduce costs by using an established carrier: the U.S. Postal Service. The USPS already delivers to most addresses in the U.S., and by leveraging this carrier, FedEx and UPS are able to drive down costs.
Cost savings using this method can be significant. In fact, “last-mile shipping” can account for up to 28 percent of a shipment’s costs, and it’s estimated that savings under this new arrangement may be as high as 20 percent. This can be a game-changer for retailers looking to stay flexible and meet the evolving demands of customers.
Technology has also evolved in such a way that retailers can quickly determine where they are overspending on shipping and thus save additional costs. For example, invoice auditing software allows retailers to submit shipping invoices and uncover the exact places where overspending is occurring in order to further drive down costs. Leveraging data to increase visibility is key to making the right cost-saving decisions.
The Future of the Amazon Effect
The future of retail in the age of Amazon isn’t certain, but by keeping up with customer demands, you can strengthen your retail business and get an edge over competitors. Already, Amazon has disrupted customer expectations, and these effects will only evolve and amplify in the coming years. Below are a few areas to watch in the future.
Instant gratification. Prime creates a “stickiness” with customers because they can complete a purchase within minutes and have the product at their doorstep in two days or sooner. Amazon is even moving the experience away from the computer to personal assistants, such as Echo products. In fact, last year, one in five U.S. shoppers made a purchase using voice-based technology. This instant gratification environment will put increased pressure on shippers and create less friction in the buying experience.
Creation of hybrid experiences. One trend that could also affect retailers and shipping is the hybrid experiences that Amazon is developing. For example, the company is leveraging brick-and-mortar locations with lockers that allow 24-hour access for order pickup and returns. This could streamline shipping and further reduce those last-mile costs.
Faster shipping times. Right now, many customers are willing to wait longer to take advantage of free shipping. But as more customers become accustomed to quick delivery, they may demand not only free shipping but fast shipping as well.
The Amazon effect isn’t set in stone. It’s constantly evolving as new innovation is added into the mix and customer demands change. For example, with the launch of Prime Air, it’s possible that the future may include customers receiving shipments via drone within 30 minutes of purchase. UPS is also experimenting with drone delivery, which may provide additional options for retailers. The key is to keep your eye on the trends and plot the best way forward.
Moving Forward With Greater Efficiency
A few decades ago, customers paid a high premium to get package delivery rushed in two days. This was considered “expedited shipping,” and in most cases, customers were willing to absorb the extra shipping costs themselves. But today, the paradigm has shifted as Amazon has changed the game and created a level of convenience that wasn’t available to previous generations. Demands will only continue to grow as technology advances and convenience continues to improve. With technology getting smarter, retailers will more efficiently be able to meet demands and manage costs.
The key to future success is not only having data, but also having the tools in place to use it and glean important insights. There is never a shortage of data, but knowing what to do with it is the key that unlocks success. Using the right software and tools allows you to efficiently determine how to manage and reduce shipping costs while improving the customer experience and fostering valuable loyalty.
Shipware delivers intelligent and innovative distribution solutions and strategies to volume parcel and less-than-truckload shippers. Whether you ship with FedEx, UPS, the USPS or regional carriers, our invoice audit and contract negotiation services are guaranteed to reduce your parcel and LTL shipping costs by 10 to 30 percent, with no disruption in current operations. Our team of experts has more than 200 years combined of carrier pricing experience. We have negotiated thousands of FedEx, UPS and LTL contracts – saving our clients an average of 19%.