Peanut butter and jelly. Batman and Robin. Mario and Luigi. In contemporary retail, the dynamic duo consumers have come to expect is e-commerce and free shipping.

Amazon popularized free shipping in the early 2000s, and in doing so, shaped the expectations of online shoppers. The allure continues two decades later, with a 2021 study revealing that 59% of consumers consider free shipping a deciding factor in purchasing decisions. With online competition just a click away, retailers have played the game to offer free and increasingly faster shipping options.

But the pandemic threw a major wrench into the e-commerce retail and shipping landscape, with massive spikes in demand as consumer spending shifted from experiences to goods, and from in-person to online formats. The sharp growth in parcel volume shifted parcel markets in favor of carriers, with the TD Cowen / AFS ground parcel index reaching a new high of 27.4% in Q2 2022 and then setting another record high in Q1 2023 at 31%.

With parcel costs rising to such a great extent, retailers set their sights on major cost-cutting goals to take back control of shipping costs as the bullwhip effect of the pandemic era waned. With corner offices setting savings targets of as high as 25%, the longstanding but costly e-commerce staple of free shipping fell squarely in the crosshairs.

Free Shipping – with an Asterisk

Free shipping is becoming a nuanced conversation. Such offers now come with important strings attached, such as minimum purchase amounts or some sort of annual fee. To get access to the fastest free shipping benefits, online shoppers may have to pay for a membership and even so, those offers still may require a minimum purchase. Or, if customers are willing to wait longer for merchandise to arrive, shipping may be free without a required minimum purchase amount. No matter the exact policy, the general trend is that free shipping that prioritizes all-out delivery speed is taking a backseat as retailers seek to take control of shipping costs that have spiraled in recent years.

Of course, while shippers changing what they offer customers can make a meaningful difference on the balance sheet, that’s only half the equation. Carriers have complex, sophisticated pricing schemes designed to prioritize volumes that are most efficient for them to carry, while making shippers pay up for parcels that are not.

The Ground Shifting Beneath Shippers’ Feet

Aside from demand-side pressure driving up rates during the pandemic-era parcel boom, pricing movement comes from more subtle actions by carriers, often targeted at certain kinds of freight delivered to certain types of destinations. Bulky packages are a common example. Large, bulky items are harder and more costly for carriers to move through distribution centers, as they often don’t fit through the automated conveyor and sorting infrastructure, and can be difficult to efficiently load into vehicles for delivery. Carriers also recognize more revenue delivering packages to commercial destinations compared to residential addresses.

A particularly undesirable package for parcel carriers would be a large, awkwardly sized parcel like a picture frame or TV destined for residential delivery. Such a parcel would be subject to oversize surcharges and a litany of additional handling surcharges based on dimensions, weight, and packaging – not to mention demand-based surcharges that originated during holiday peak season, but are now active year-round. Over time, carriers have adjusted the criteria for which these charges apply, so that a wider range of parcels are subject to them. Take the additional handling surcharge as an example. In 2014, it applied to packages with dimensions of 60 inches or greater for the longest side. But in 2017, carriers announced changes that lowered the minimum length to 48 inches, added an extra additional handling surcharge for peak and lowered the dimensional weight divisor to drive a higher billed rate. In 2022, carriers made another change, making the additional handling surcharge based on zone.

The combined impact of these changes can make the same parcel more than four times as expensive to ship in 2023 compared to 2014. For a ground shipment with dimensions of 50 x 5 x 7 inches, the combined impact from general rate increases (GRIs), adjustments to the dimensional weight divisor and surcharge changes pushes the total cost to ship from $11.21 in 2014 to $48.98 in 2023.

But bulky, oversized items are not the only parcels on the receiving end of significant increases. Consider the compounding effect of annual GRIs. Every year, carriers decide that parcel rates will rise 4.9%, 5.9% or 6.9%, and each increase is applied to a higher “principal,” meaning the existing rates that were increased last year, and the year before, and so on. This quickly adds up to a dramatic effect. With the latest 5.9% increase taking effect in January 2024, the cost of shipping common one-pound packages like clothes or a paperback book is over 22% higher compared to just 25 months earlier.

In a Softer Parcel Market, Are Generous Free Shipping Policies on the Horizon?

Carriers have reported softer volumes in recent quarters, and in the competition to keep trucks and planes full in the face of limited demand, they have exhibited a willingness to discount. According to the TD Cowen / AFS ground parcel index, rates are down year-over-year for the third straight quarter in Q1 2024. But while the parcel pendulum is swinging back to a shippers’ market, does that mean looser free shipping policies from retailers are back on the horizon?

Freight is a notoriously cyclical industry, and making major decisions like free shipping policies requires a longer-term, more comprehensive approach than the fleeting tailwind of a favorable market cycle. To limit the cost pressures that ultimately dictate decisions on free shipping, shippers can take steps like shifting from premium to lower-cost services, employing a rigorous audit function to stave off excess charges or even re-configuring logistics networks.

Regardless of how shippers approach limiting parcel costs, the decisions they make are part of a high-stakes game, with key rules that evolve quickly. Not only do the consequences of these decisions affect the bottom line, they influence the viability of offering a critical perk that influences purchasing decisions - according to 2023 research, extra fees like shipping costs are the most common cause of online shopping cart abandonment.

Mingshu Bates is Chief Analytics Officer, AFS Logistics.

This article originally appeared in the March/April, 2024 issue of PARCEL.