Ever since I started this project, I have been wondering how merchants make money selling items for under a dollar with free shipping. It seems impossible. This out of the way post from Travis’ Blog of 2012 provides some intriguing explanations.

Hopefully the gods of chance do not change the exchange rate and postal agreements! Or perhaps this is an inherently irrational arrangement that we will undermine by buying copious quantities of miscellaneous nonsense, thus bringing order to the universe. Only time will tell.

Travis himself writes…

Let’s assume items are posted from Hong Kong, Hong Kong Post offers a bulk postage rate of $2.30 (Hong Kong Dollars) for a 20 gram item or $95 (Hong Kong Dollars) for unlimited items to the same destination (Country and City) not exceeding 1 kilogram.

The current (26^th October 2012) exchange rate of 1 United States Dollar is 7.75035 Hong Kong Dollars. So to put the above postage costs into perspective, you can post 1 kilogram of items for $12.24 United States. If you were sending 20 gram packets, it would cost 25 cents each. The envelope to post the item weighs around 8 cents and the actual item from 2 grams to 30 grams.

The exchange rate today has not changed much, $1 USD = $7.77 HKD. Surprisingly enough many of these deals might be the result of China’s policy of devaluing it’s currency, keeping it artificially low in order to stimulate exports.

But why does an international letter from Hong Kong cost less than it costs us to send a domestic letter? There a number of contributing theories,

• High degree of automation, have you ever seen a hand written envelope arriving from Hong Kong? Probably not. The seller has already entered all the details online, the postal service just needs to scan the barcode, there is minimal human involvement.

• Reciprocating postage agreements, countries have agreements with other countries on the basis of ‘you deliver our mail and we will deliver yours’. Now when was the last time you sent a package to Hong Kong, and now when was the last time you received a package from Hong Kong. There a significantly more received parcels, who pays to deliver these parcels, your local post office, how do they afford to deliver these parcels to your letter box, by increasing the costs to send parcels. Now you know why our postage rates are so much more expensive?

• Bulk postage, Hong Kong is an aviation hub, owning the record for world’s busiest airport by cargo traffic. That small envelope you received was probably sharing the same plane with thousands of others destined to your city.

The reciprocating postage agreement theory is an interesting one I hadn’t seen before. It certainly is strange that a package from China to New York would have much lower postage than a package from California to New York. Especially since the former might be routed through California! Then again agreements between countries can have some funny results.

It seems to me that at the very low end the only thing that can account for the prices is the exchange rate and postage agreements. Bulk postage and automation only get you so far. USPS has rates as low as 15 cents per item, but these only apply to bundles where you are shipping thousands of items to one ZIP code. Some sort of bundling might account for the long shipping times. Typical wait time is 4-8 weeks. Merchants likely wait in order to bundle lots of shipments going to the same area. However I doubt anyone but newspapers and advertisers have the volume to drive down shipping costs below 30 cents. The prices only make sense because of the currency and perhaps the postal agreements. They only make sense because the packages are from China.