Legal Definitions - freight absorption

Freight absorption occurs when a seller chooses to pay for some or all of the transportation costs (freight) involved in shipping goods to a buyer, rather than passing those costs entirely on to the buyer. This strategy is often employed to make products more competitive in distant markets, to match a competitor's pricing, or to expand a seller's geographic reach by effectively reducing the final delivered price for the customer.

• Example 1: A specialized machinery manufacturer based in Michigan wants to sell its equipment to a factory in Texas. Shipping large, heavy machinery across state lines is very expensive. To make their product's overall cost competitive with a rival manufacturer located closer to Texas, the Michigan company offers to cover half of the shipping expenses. By doing so, they make their product more attractive to the Texas buyer, who sees a lower total price.

  Explanation: The Michigan manufacturer is engaging in freight absorption by paying a portion of the shipping costs that would normally be borne by the Texas buyer. This allows them to compete effectively in a distant market.

• Example 2: An online retailer selling artisanal cheeses from Wisconsin wants to expand its customer base nationwide. To encourage purchases from customers on the East Coast, where shipping perishable goods can be costly, the retailer offers "free shipping" on all orders over $75. This means the retailer covers the cost of insulated packaging and expedited delivery for qualifying orders.

  Explanation: The online retailer is absorbing the freight costs for orders meeting a certain value threshold. This strategy makes their products more appealing to customers who might otherwise be deterred by high shipping fees, thereby expanding their market reach.

• Example 3: A lumber mill in the Pacific Northwest is bidding on a large construction project in Arizona. A competing lumber mill is located much closer to Arizona. To win the contract, the Pacific Northwest mill calculates its production costs, adds a desired profit margin, and then factors in the substantial shipping cost to Arizona. Instead of adding the full shipping cost to the buyer's invoice, they reduce their profit margin slightly and quote a price that includes delivery, effectively absorbing a portion of the freight to match or beat the competitor's delivered price.

  Explanation: The Pacific Northwest lumber mill is absorbing some of the freight costs to make its bid more competitive against a closer rival. This allows them to secure business in a market that would otherwise be economically unfeasible due to high transportation expenses.