Sunday, March 20, 2011

Another Look At Free Shipping

We sell stuff on eBay, and  for a long time now eBay has been encouraging sellers to offer free shipping on items they sell.  They've done this through various incentives and other passive means, but it's still to the seller's financial advantage to NOT offer free shipping. Besides charging a listing fee, eBay also charges a final value fee (FVF) based the items selling price.  Currently eBay does not include the shipping and handling charge in the FVF  calculations.

So right now you have a strange situation in which sellers asking the same amount of money for the same item will be charged different fee amounts based on the shipping and handling charged, with those charging the most for shipping and handling paying the least in fees and thus making more profit.

For Example:  Seller A, B & C have an identical items they are selling at a fixed price. 

Seller A asks $5.99 with free shipping; Seller B asks $4.00 with $1.99 S&H; and Seller C asks .99 with $5.00 S&H.  They all sell their items.  Currently Seller C is only charged the FVF on .99, while seller A is charge the FVF on the entire amount.  The buyer has paid $5.99 in each case, but seller C has made the most profit, because his FVF was less.  In the current structure I think Seller A is charged a $0.72 FVF on the sale, while Seller C is only charged a $0.12 FVF on the sale.

That's about to change.  eBay announced earlier this week that they are going to start charging FVF on the entire sale price, including the shipping & handling charge. (I think in July). This means that in the example above, all the sellers would pay the same amount of FVF - there's no advantage for a seller to add a shipping and handling fee.  In fact, that change coupled with the the other incentives for free shipping makes it advantageous for a seller to NOT charge a shipping and handling fee.

For the most part we sell postcards and various sorts of antique photos.  For a year now we've offered free shipping on our postcard sales.  We still charge a fee for the photos, because they require more expense in packaging & shipping.  We may re-evaluate that, we'll have to see.

So far it's worked out well for us. Our postcard sales have increase quite a bit over this time last year, our photo sales perhaps a little bit, but not as much as the postcards.  That may simply be because we have more postcards for sale.  I'm not sure.

Shipping is a major expense for us, we track our shipping costs to the penny and there is nothing free about it.  When sellers offer free shipping, most of the time they will ask a higher price for the item, and frequently it is higher than the previous asking + shipping combined.  This is because the seller not only has to cover the cost of shipping, but has to account for the extra cost in fees.  In our case, before we started offering free shipping on postcards we had many postcards starting at $0.99 with $1.25 shipping & handling, for a total of $2.24 for the card.  When we converted to free shipping, we asked $2.99 for the same cards, which means someone who bought the card with free shipping paid $0.75 more than they would have with the $1.25 shipping charge.  As sellers we didn't really see that extra $0.75 - pretty much all of it and then some went to the post office for shipping costs and to eBay in the form of a higher FVF.

FVF takes a good sized chunk out of a seller's profit, by the way.  For the category most of my sales are in, the FVF for a fixed price item sold out of an eBay store is 12%.  So if I sell an item for $10.00, eBay gets $1.20 of that.  Believe me, it adds up.  I think eBay is going to lower their FVF to 11%, with this change, but that's not much.

When eBay announced these changes I smiled and thought there's going to be a holy uproar on the discussion boards.  Of course it wasn't like that was a major prediction or anything.  There is always an uproar on the discussion boards about one thing or another.  For the most part I stopped reading the boards, it doesn't do me any favors and there is very little good or reasonable advice there.  I expect eBay to make changes, and I expect the changes they make will benefit their bottom line as a corporation.  I expect to pay attention & adjust.

Since we sell most of our items with free shipping, this change doesn't really bother us that much.  Speaking for myself only, it doesn't bother me at all.  In fact I think it's advantageous for our little business because we've adjusted to free shipping (and having an FVF charged on the entire sale price) for a over a year now.  We've figured it out and are doing fine with it.  I'd like to say I predicted eBay would eventually make this change but I didn't, we just thought offering free shipping might give us a competitive advantage if we did it right.  We work hard at being competitive.    

I will make a prediction though.  I don't know if it will be correct and I don't really have the capability of determining if it will be or not.  But my prediction is that prices are going to rise on eBay, by at least 15%, probably more, very quickly.   I'll be keeping a close eye on my competitors.


linlah said...

I'll look forward to your prediction coming true, although I'm guessing it wun't be an advantage for you.

Heather said...

I never knew that there was fees involved with each item posted. I thought it was a monthly fee for using thier site. I guess that is why I run across ONE skein of yarn for the total price of 7 dollars, when buying straight from the store is 3 dollars. I just thought they were crazy and didn't research the yarn value. Now I know why..Shipping and fees.

Hope these new changes are kind to you.

A Valdese Blogger said...

linlah: It'll be an advantage for us in one since because because everyone will be charged on the entire sales amount, regardless of s&h. I predict people will raise prices to cover the extra cost which will make us more competitive. I reckon.

Heather: There is a listing fee, a final value fee, a subscription fee for the type of online store we have, and PayPal charges a fee on money we receive. The fees associated with selling on eBay are our largest monthly expense. For us it comes to hundreds of dollars every month. Second largest expense? Shipping costs.