Is Offering Free Shipping Still A Good Strategy?

by Guest Blogger

There are few Internet merchandising strategies that are more widely recommended than an offer of free shipping. The support for these recommendations comes from a study by Wharton Professor David Bell that indicated a free shipping offer that saves a customer $6.99 is more appealing to many than a discount that cuts the purchase price by $10. However, ground delivery charges have increased by so much since the 2006 publication of this paper that in 2011 only lightweight products can still be shipped for $6.99.

Cost of Shipping Via Commercial Ground Delivery

If you run a typical business and pay published rates, shipping a 2 pound package the 50 miles from Chicago to Gary via UPS costs over $8.00, and that is if it is sent to a commercial address. Add in another $2.50 for delivery to a residential address. Sending that same 2 pound package to Savannah, GA (home to my mother) adds another $2 to the cost of freight.

Consumer Perception

If the cost of shipping for a package exceeds $10, and the potential for price reductions on an item is decreased by $10 or more due to covering the cost of free freight, then the research into free shipping no longer applies. Among shoppers that do not take the time to calculate net cost, a competing Internet merchant that discounts the price rather than the cost of free shipping may have a perceived advantage once the differential exceeds $10. In comparing two products, one for $79.95 plus freight and another for $91.95 and free freight, the lower priced product may seem like the better deal to a shopper even if the net costs are equal. If an Internet shopper only compares published prices, and is drawn to the site with the lower posted price, the user typically inputs quite a bit of information into most shopping carts prior to a shipping quote being displayed. While the shopper may have sticker shock when they view the net cost including shipping, they are already invested in partially filling out the form and may complete it. At the very least, they are likely to return to the partially filled out form if they conduct comparison shopping and determine that the net costs are equal.

Free Shipping versus Low Price

While testing is required for different categories to determine whether an offer of free shipping or a reduced price point generates more sales, it would be unsurprising if $10 and 10% turn out to be magic numbers. Once the differential in price becomes more than $10 or 10% of the price of the product, a lower price may be more appealing to shoppers than free shipping. Research by consumer package goods firms indicates that a price reduction or a coupon had to be 10% or more of the value of the product in order to generate significant incremental sales. It is a bit of a leap, but this research provides a basis for a theory that at about the 10% level a price reduction becomes more compelling than free shipping to consumers.

Factors That Determine The Profitability of Free Shipping

Free shipping in 2011 may be difficult to justify for all but the merchants that enjoy a high ratio of profit margin to cost of shipping. There are five key factors come into play in play in determining the profitability of a free shipping offer: 1) the cost of shipping; 2) the price of the item for sale; 3) the profit margin on the item; 4) the incremental sales resulting from an offer of free shipping, and 5) whether free shipping is offered as an ongoing benefit or just as a short term promotion. The first two factors are easy to determine, the third factor, profit margin is often straightforward to calculate for a distributor, the fourth factor, incremental sales, can typically only be determined through testing, and the final factor, time frame, is at the discretion of the merchant. Ultimately, the profitability of a free shipping offer comes down to whether the perceived and actual benefit to the consumer generates enough incremental sales to produce net profits. While the impact and profitability of free freight may vary significantly based on whether this tactic is offered during promotion periods or as an everyday benefit, promotional offers of free freight are certainly more measurable.

Uncontrollable Impact On Profit Margins

An offer of free shipping makes the profit margin variable on each order depending on the distance the product is being delivered. Orders from locations close to a warehouse are more desirable. Spikes in orders from a geographic region can even have an impact on overall profitability. Further, profit margins take a hit every time the package delivery services impose a price increase, the timing of which is out of your control. The January 3, 2011 4.9% across the board price increase damaged the profit margins of all Internet merchants that offer free freight, and was particularly ugly for merchants that ship oversize boxes.

Conclusion

The increases in freight rates over the past five years have led to free shipping becoming an expensive merchandising tactic. If the cost of free shipping exceeds $10 per order and is being offered on a promotional basis or as a volume purchase incentive, consideration should be given to testing price reductions as a replacement tactic. If free shipping is being offered on an everyday basis, it may be appropriate to test eliminating it from specific products or categories and testing reduced prices as an alternative.

About the Author:
Randy Pickard is the editor of Internet Marketing Remarks and President of Exceptional Shopping Sites. He recently launched Shopping Baskets Plus, an online supplier of shopping baskets to retail stores.