Consumers Factor Shipping Into Cost Comparisons
In a study conducted by ForSee Results, more than one-third of consumers said free shipping was the most influential factor in their decision where to shop online.
Patti Freeman Evans, a senior retail analyst at Jupiter Research, told The Wall Street Journal, “Retailers are still experimenting and learning what works in this environment and that’s why you’ll see a vast number of strategies. What’s different now is more retailers are using free shipping very aggressively.”
Retailers from Amazon.com to Sears have recognized the draw that free shipping has with consumers and many have developed their own nuanced programs with the intent of turning more web site visits into purchases.
Amazon and others offer free standard ground shipping on items after a price purchase point has been met.
Circuit City offers free shipping on purchases of $25 or more.
“It is a very competitive environment, and we are determined to be competitive in the marketplace with our various offers.” said Jim Babb, a spokesperson for the chain.
Circuit City’s main competitor, Best Buy, rotates the items it will ship for free on a weekly basis.
Sears doesn’t offer free shipping as a rule, but it will occasionally offer a rebate coupon for consumers equal to the shipping cost.
Larry Freed, chief executive of ForeSee Results, said Sears may be being penny wise and pound foolish in its approach. “They’re playing on the fact that not everyone’s going to mail it (rebate) back in. From a financial perspective, you can see it, but from a consumer standpoint, it starts to degrade customer satisfaction.”
The one major exception to the free shipping rule is Wal-Mart. The retailer maintains that free shipping results in higher product costs.
“We focus more on offering our customers the best value on all merchandise at Walmart.com rather than special offers or discounts,” said spokesperson Amy Colella.
While Wal-Mart has not offered free direct-to-consumer shipping, the chain has experimented with free shipping to stores where consumers can go to pickup the items they purchased.
Discussion Questions: How important is free shipping
in the overall purchasing decision process? Is it still possible for a retailer
to differentiate with a free shipping program or has the feature become something
that most consumers expect?
Retailers are just as capable of comparison shopping as consumers. There is no reason not to know whether you can or should offer free shopping. If one third of customers say that it’s important, it means that two thirds don’t really give a hoot. UNLESS it is the one thing that makes the decision a no brainer after due comparison. Otherwise, as Ryan rightly points out, if you have to spend up to get free shipping, it really isn’t a great incentive.
If I’m a hundred miles away from a decent bookstore, I don’t think Amazon will have a problem charging me for shipping. And, if I’m buying five extra books to get “free shipping,” it isn’t exactly free, is it?
This study (and most retailers) overstate the importance of shipping charges. If you ask people about shipping, they will always say that it’s very important. But this is the wrong way to assess its true importance. It is a “trade-off” attribute, not one that is particularly focal on its own. The majority of consumers have no clue what they pay for shipping — even moments after they complete a transaction.
From a long-term profit standpoint, retailers are making a very big mistake by calling any attention to shipping charges. It heightens consumer awareness of it, and makes them feel like they are losing something when they have to pay in full. It’s no different than ordinary coupons or other short-term promotions. Study after study shows the negative impact that these tactics have on profits.
Obviously, retailers shouldn’t gouge consumers on shipping, nor should they make it difficult for consumers to see these charges. But they shouldn’t go too far the other way by turning it into a focal attribute, which can lead to unhappiness as easily and often as it leads to happiness on the consumer’s part.
It would be awful if the ForSee headline was “Customers Are Not Stupid.” A very big controversy over Amazon’s sales results relates to free shipping. Years before the internet, the printed LL Bean catalog had no shipping charges. For direct retailers (used to be called “mail order retailing”) shipping costs (used to be called “postage and handling”) are often equal to the net profit margin. Every non-luxury retailer faces the same decision every minute: volume versus profit. You can’t have one without the other, but they’re always in conflict. Great management finds the sweet spot that maximizes long term profit dollars. Retailers in crisis can’t seem to reach that magic combination so they intermittently sacrifice one goal for the other.
A wise consumer should always include shipping charges in considering the competitive price. I have seen many instances where a catalog or television offering boasts a lower price than traditional retail. After adding a generous shipping & handling charge, the price issue became a significant advantage for the retailer.
Shipping should be included in the asking price. Paying for shipping is akin to paying an extra fee at the checkout for services the retailer provides the consumer during the shopping experience. Customers see the retail price and understand that the markup includes the store’s expenses.
Smart consumers compare costs and look at the total bill: cost of product plus cost of shipping and handling before making a choice. Smart retailers know that costs have to be recovered — if the purchase of a certain number of items creates a margin that covers shipping costs and generates a profit, then “free shipping” is a reasonable offer. If that total package delivers the bundle of products for less money than from another company, the consumers are happy. However, consumers can make choices among a slow shipping method for free and a faster shipping method for payment. The balance between covering the costs and offering an attractive package to consumers is critical for long terms success.
Shipping is the drug that keeps on giving for retailers. Most retailers know that it is a lever they can pull when sales seem soft and pulling it will generate a volume increase. Much like the mouse in a cage pulling the lever to get sugar water, retailers pull the shipping lever to get volume hits (and, as Professor Fader points out, each pull of the lever delivers a shock to the customer in the form of a negative hit).
Breaking out shipping charges calls attention to a point of differentiation between online and brick and mortar sales. Retailers would be better off eliminating a separate charge, and flexing their online price. Customers will pay a bit more for the convenience of online shopping versus going to the store and will perceive that cost difference as the value of convenience. With no shipping charge, it makes the comparison easier for the customer without the negative associated with the shipping concept. The question, then, is how much more will a customer pay for convenience? The answer, of course, varies depending on retailer, product, price point, and other factors.
Retailers also would be better off to emphasize the value a customer gets online (e.g., more product info rather than just package shots) as a reason to shop online.
Shipping charges are acceptable to most consumers when they are reasonable. What turns consumers off are “handling” charges, which are often inflated and may be a retailer’s thinly disguised profit center. Large mail order operators have a great deal of leverage with shipping companies and can get amazing rates by bidding out their business. Buy.com, for instance, advertises books at 10% below Amazon.com.
Consumers wanting the very best value have more opportunity today to compare retailer offers than ever in the history of man. There must be 25 FREE Internet shopping services that will compare cost on any given item, including freight, and provide the shopper with the lowest delivered price . The lure of free shipping doesn’t go very far with our “plugged in” consumer.
Direct marketers can accurately read the efficacy of these programs with a “split test” that offers a promotion (such as free shipping) to one set of customers and nothing (or other promotion) to another, equal-sized, undifferentiated set of customers. When the results come in, they can accurately gauge which offer was more profitable.
Retailers should try to emulate the ‘Netflix’ shipping model – not just free shipping but free returns or at least a coupon for the shipping value of the returns. Any retailer selling any item over a minimum price of say $25 should be able to offer this…
In my mind, the monetary loss would more than be made up with the additional volume, the positive mindspace and marketing/advertising potential.
Well if free shipping is so important, why are Amazon and Sears in their present state, or having problems with sales, including on-line?
Smart, savvy shoppers know the free shipping proposition is built into the price, or the seller on-line is paying through selling fees to Amazon.
Point of difference has evaporated with many, many more on-line companies giving discounts or free shipping, if you want to call it that. Hmmmmmmm