Hidden costs of online retail
Shipping charges often outweigh the ease and
convenience of Net shopping
February 5, 1999: 4:47 p.m. ET
NEW YORK (CNNfn) - The Internet is changing the face
of retail, but one thing remains the same: shipping and
handling.
It may have rendered the store and the mail-order
catalog nearly obsolete, but it hasn't eliminated the
delivery boy.
With the Internet emerging as a ubiquitous and
powerful sales tool, companies are rushing headlong into
cyberspace to find new customers and boost sales.
And for good reason: online sales are exploding. In
1998, total purchases in the online retail market were $9
billion. That number is expected to jump to $17 billion
by 2001. Online sales during the holiday season in 1998
totaled $2.3 billion, more than twice the $1.1 billion in
online sales reported for the 1997 holiday season.
Many consumers are drawn to the Internet for the
potential savings of buying direct. Net retailers tout the
cyber-adage of cutting out the middle man and passing
the savings on to the customer. Amazon.com and
barnesandnoble.com, for example, offer a 20 to 40
percent discount on all of their books.
But these discounts often don't translate to actual
savings. The reason? You guessed it: shipping and
handling.
Online discounts unraveled
Consider: a friend recommends a book. You go
online, punch up Amazon.com, find the book, and get
ready to place your order.
The discount seems impressive. You would have paid
$11.95 for this paperback in the store, but Amazon.com
offers the book for $9.56 -- a saving of $2.39, or 20
percent! However, you'll also pay an additional $3.95 for
shipping and handling -- $3 per order plus 95 cents per
book.
You end up paying $13.51 for the order, a $1.56
premium, or 13 percent over the conventional bookstore
price.
On the other hand, the more you buy, the more of a
savings you actually get. If you add two more books to
the order, one that retails for $9.95, and another that
retails for $13.50. You'd have paid $35.40 for the three
books in the store. Amazon.com will save you 20
percent, or $7.08, for a total of $28.32.
The shipping and handling charge for the order will
be $5.85. Your actual saving is $1.23, or a whopping 4
percent.
So unless you're placing a large order, or buying
hardcover best-sellers at a 40 percent discount, the
savings are elusive. You can never fully realize the
advertised savings because the shipping and handling
charges will always take a bite out of the actual discount.
And if you have your order sent express, you can
forget about savings altogether. Amazon.com charges $6
per order, plus $1.95 per item for 2-day shipping. Next
day air costs even more -- $8 per order plus $2.95 per
item.
According to Amazon.com spokesman Bill Curry,
shipping and handling charges just aren't a major factor
in the minds of customers. "The numbers speak for
themselves," he says. "We added 1.7 million new
customers in the fourth quarter of last year. Are these
customers turned off by shipping charges? Obviously
not."
The company has also added a new distribution center
in Fernley, Nev., to expedite shipping to its exploding
customer base.
A barnesandnoble.com spokesman said that the
consumer is well aware of shipping and handling charges
from the outset. "The consumer is a smart animal," said
Ben Boyd.
"Our customers understand the convenience of going
online and having books delivered to their door. Many of
our them are experienced catalog shoppers - we're
certainly not the first company to charge for shipping
and handling," he added.
The Tax Factor
Despite the high cost of shipping and handling,
Internet retail presents a clear advantage in a major area:
taxes. The Internet Tax Freedom Act passed in 1998
prohibited new taxes on all forms of electronic
commerce and computer network communications for at
least three years.
In areas with high tax rates, such as New York City,
ordering online can help customers avoid paying state
and local sales tax. A customer from Manhattan who
places a $50 order with Amazon.com saves $4.12 in
taxes.
The tax issue is particularly relevant for consumers
who use the Web for major purchases, such as electronics
or computers. Purchasing a $3,000 computer online will
save you $180 in sales tax at a 6 percent tax rate.
Even if the shipping and handling charges total $30,
you're still saving $150, or 5 percent.
Caveat Emptor
In some cases, ordering online presents a clear
advantage. For rare and out-of-print books, as well as for
hard-to-find imported compact-disk titles, the benefits of
shopping online far outweigh the costs of shipping and
handling.
Quite often, an imported CD that may fetch $25 or
more in the store can be had for as little as $9.95 from an
online retailer such as Amazon.com or CD-NOW.
More often than not, however, buying CDs online
often presents no more of a discount than buying books
online. Once again, the shipping and handling charges can
wipe out the advertised savings completely.
Consumers need to be informed before they place
online orders. Many online retailers do not divulge
shipping and handling prices until the very last stage of
the order, after the customer has filled out all of the
order information and entered all of his or her credit
card information.
Also, consumers should be aware of state and local
sales tax and should consider the savings offered by
potentially tax-free online ordering. Keep in mind that
the state in which an Internet business is located --
Washington and Nevada, in the case of Amazon.com --
are required by law to charge sales tax on orders placed
by customers living within that state.
Before you place an order online, be aware of
shipping and handling charges from the outset. Know
exactly how much a company is charging for the
convenience of having products delivered to your door.
Consider how much you're willing to pay for this service
-- formulate a personal cost/convenience ratio -- and plan
your purchases accordingly.
If you're not careful, "handling" can translate to
"handing", as in "handing over all of your money."
-- by staff writer Campbell Foster |
