With holiday season promotions escalating into top gear, the term “free shipping” is popping up on many e-commerce sites. While the promotions do attract the attention of consumers, the meaning of the term and the impact of such promotions on retailers’ sales are decidedly mixed at this stage.
Shipping has become a hot button in the e-commerce marketplace. In fact, many retailers view it as the most significant deterrent to sales because many customers abandon their purchases once the shipping charges pop up on their screens.
“Often, companies cannot calculate shipping costs until customers finish placing their orders, and many times these charges scare them off,” explained Ted Vaughan, assurance partner at the tax consulting and professional services firm BDO Seidman. A poll by Harris Interactive buttressed this point: Fifty-one percent of online buyers opted for retail store purchases just to escape online shipping and handling charges, and 49 percent reduced their purchases at certain online stores because of unexpectedly high or hidden shipping charges.
Aware of the problem, companies are trying to attract gift-givers and move them from window shopping to purchasing by plastering the words “free shipping” on their wares. Such promotions do attract attention: Ninety percent of the participants in the Harris survey said free shipping would draw them to a site; this was the No. 1 enticement, followed by online discounts (69 percent), free or “no-hassle” return policies, (64 percent), free gift wrapping (27 percent) and gift certificates (24 percent).
Free Shipping Everywhere
So, it is not surprising that free shipping promotions have become common this holiday season. To increase sales, 60 percent of retailers will use free shipping upgrades, 53 percent will offer discounted shipping and 41 percent will offer free shipping without conditions, according to a survey BizRate Research conducted for Shop.org and Shopzilla.
L.L.Bean is one retailer running a major free shipping promotion this Christmas season. The company began its campaign in September and is offering free shipping for orders no matter where they are placed: the Internet, call center or in-store.
While they understand that free shipping attracts customer attention, many merchants have determined that such promotions represent a catch-22, one that sometimes drives up revenue but negatively impacts profits. Offering free shipping, which often costs US$4 to $6 on a $2 item, makes no business sense. Consequently, while companies advertise free shipping with their products, this amenity often comes with an asterisk stamped next to it.
The most common contingency is the size of the customer’s order. “Many companies have a minimum purchase price, usually starting at about $25,” Ellen Davis, senior director of Shop.org, told CRM Buyer.
There is also correlation between the size of an item and its shipping cost. As a result, companies often limit the type of products eligible for their free shipping promotions, for instance, the L.L.Bean campaign does not cover beds, couches, canoes or other heavy items.
Sometimes retailers include free shipping only as part of another promotion. One common ploy is offering free shipping if a customer takes out or pays for an order with the company’s credit card.
Another variation on this theme is offering customers the lowest form of shipping — something that may take a week or more for delivery — for free and then giving them the chance to upgrade to higher speed shipping options. Some customers do not mind waiting a few days or even a week to receive their products, but others want them yesterday.
Hitting the Bottom Line
The reality is free shipping is not free for the retailer who needs to recover the shipping costs somehow. “Most retailers do not like running free shipping promotions but feel compelled to do it to keep up with competitors,” Davis told CRM Buyer. Ideally, the free shipping promotion would lead to increased sales, which would offset the shipping charges but, with so many merchants offering such promotions, that objective becomes difficult to reach.
In many cases, the shipping charges get lumped into the purchase prices. Consequently, free shipping is easier for companies that never tried to make money off of customer shipping charges than those who artificially jacked up those prices in the past. Historically, certain businesses viewed artificially inflating their shipping and handling costs as a way to boost their profits. This marketing approach may have worked in pre-Internet times. Now with the emergence of the shopping comparison sites, customers are better able figure out the ruse and that knowledge kills retailers’ chances of getting repeat business or any positive word-of-mouth advertising.
Recovering the shipping costs means raising product pricing, a step that retailers are typically loathe to take. “The Internet has made markets more competitive than ever before so retailer try to avoid increasing prices if at all possible,” BDO Seidman’s Vaughan told CRM Buyer. As a result, the number of retailers offering free shipping promotions is expected to drop from 83 percent in 2006 to 79 percent this Christmas season, according to the BizRate survey.
All merchants’ eyes will be focused on the outcome of this season’s promotions. Even though e-commerce has become a common way for shoppers to buy Christmas gifts, they continue to experiment with different free shipping options in search of the model that makes the most sense for their business. Perhaps that formula will be slipped into their stockings this year.