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How much do you pay for free shipping?
When
it comes to online purchases, no two words are more likely to require a
calculator than “free shipping.”As with music and frequent flyer miles,
consumers like their shipping free. But when they do the math, they
realize that free shipping is often an oxymoron. Somebody has to pay
for all of those Styrofoam peanuts.According to a recent survey by
online retailer trade group Shop.org, 75 percent of online shoppers
said that free shipping was important to their decision-making process.
At the same time, many online retailers have upped the ante on free
shipping by requiring higher price thresholds and other conditions.It
seems that retailers have studied up on a 2005 report by Wharton
Business School professor David Bell and two colleagues from other
business schools. After analyzing purchase patterns at retailers such
as Amazon.com, Bell and his colleagues found that given the choice,
online shoppers prefer a free shipping offer that saves $6.99 versus a
$10 discount.”It’s counterintuitive,” said Bell. “If a company offered
$10 off an order, they got more people ordering, but by offering free
shipping they got an even bigger response.”Bell’s study also found that
shoppers became indifferent when choosing between a high price with
free shipping or a low price that requires paying for shipping. Those
who paid the high price ended up shopping less frequently. When
Amazon.com lowered its free shipping threshold to $25 from $50, Bell
said, the company found that shoppers ordered in smaller volumes but
shopped more often.Small specialty online retailers who might not be
able to afford to offer free shipping have experimented with limited
offers.Frontier Angel, a Grass Valley-based Internet retailer
(frontierangel.com), found a shipping solution that encourages local
customers.”If someone lives right down the street, I just consider it a
local discount,” said company owner Diane Longacre. Frontier Angel
ships hand-made soaps free to buyers in surrounding Zip codes 95959,
95949 and 95945. Longacre said that she adopted the policy after
learning that it’s standard practice in her industry.Understanding how
attractive free shipping is to potential customers, Longacre said that
she occasionally offers free shipping with a price threshold of $15.
During a two-week period in October, this limited offer drew an
increase in sales of 35 percent.THe Nevada City body care
retailer, V’tae (vtae.com) linked its Web site to UPS a year and a half
ago. UPS totals the cost for each individual order.V’tae president
Alanna Haley said that the company switched from using a table rate
because it “seemed absurd” that a customer buying a product for $4.99
would pay $4.95 for shipping, the lowest shipping price.While switching
from a table rate to UPS didn’t raise the sales, V’tae occasionally
rolls out a free shipping offer to boost sales.”Shipping is very
expensive, so we try to do [free shipping] as a special every once in a
while,” Haley said.The bottom line is that somebody has to pay for free
shipping, and fewer online stores are willing to take the hit. But some
do and see it as a key differentiator.Truly free shipping rare but not extinct
While
the days of Kozmo.com delivering a 60-cent package of M&Ms for free
by bike messenger have long disappeared, some companies have managed to
transform free shipping into big profits.One such company is
Miami-based Databazaar.com, an online retailer of printers and printer
supplies. When Databazaar.com began offering free shipping with no
conditions or minimums five years ago, sales spiked 20 percent. With
2005 sales figures totaling $31 million, CEO Oney Seal remains
committed to what he calls “truly free shipping.””We’re making a
smaller profit than our competitors,” said Seal, admitting that the
decision to lower the price threshold from $50 to zero was difficult.
“Shipping remains one of the biggest items on our P&L.”Seal said he
tries to cut costs in other ways, like increasing efficiency. In the
world of Internet price aggregators, he claims shoppers comparing
apples to apples (such as an ink jet cartridge) are more likely to
click over to Databazaar.com in search of free shipping.Not only does
truly free shipping attract more eyeballs, but more repeat business, as
well, according to Tony Hsieh, CEO of the Las Vegas-based Web shoe
retailer Zappos.comSince offering condition-free shipping both ways
(deliveries and returns) seven years ago, Zappos.com’s sales rose from
$1.6 million in 1999 to a projected $575 million in 2006.”In the short
run, it means less profit, but I think it’s definitely connected to the
growth,” said Hsieh of the company’s free shipping policy.”Our site is
driven by word of mouth and repeat customers. Every time we do
something to improve our service, we see repeat numbers go up.”Free shipping in some form is here to stay
In
the hyper-competitive world of online retailing, consumers can probably
count on free shipping in some form for the long term. In some
categories such as shoes, dominant retailers like Zappos.com have
forced their competitors (grudgingly, no doubt) to offer truly free
shipping.”As a retailer you almost have no choice,” said Scott
Silverman, executive director of Shop.org “It almost becomes a cost of
doing business. I don’t mean to sound flippant, but retailers don’t
have a choice in the matter if they want to be competitive.”
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