First of all you don’t have to offer “Free” shipping. Most sellers who offer “Free” shipping add it to the cost of the item. In your case you might want to try $11.99 with “Free” shipping instead of $8.99 plus $3.65 shipping.
If your competitors are seller their items at $8.99 with free shipping and you can’t compete then you will have to find a way to buy your inventory cheaper.
I buy my inventory from collectors or other dealers who want to move excess inventory. I pay no more than 30% of what I can sell something for. Some collectors thinks I’m trying to rip them off. I tell them you can always try and sell the items yourself.
