Free Shipping Series #1: Consumers love free shipping, do online retailers?
Online shoppers are on the hunt for deals. One of the favorite ways consumers like to save on their online purchases is by searching for free shipping offers. How important is free shipping to consumers? Incredibly important. Check out the recent research:
- Free shipping (95%) and sales/specials (83%) top of the list of what influences online gift buying. e-tailing group, October 2008
- The No. 1 customer reason for not buying more online is the high cost of shipping (78%). e-tailing group, October 2008
- 75% prefer to shop with online retailers that offer free shipping. 58% claim that shipping prices deter them from shopping online. Forrester Research, October 2008
As you can imagine, this data is not lost on the marketers at ecommerce sites. The National Retail Federation's Shop.org, says eight out of 10 online retailers offered free shipping during the past two holiday seasons, up from about 60% back in 2004.
Free Shipping Deals Can Cut Both Ways
So consumers love their free shipping and retailers are obliging. However, ecommerce websites should not offer free shipping deals without careful consideration. Sure the offers are attractive and help conversions, but free shipping can quickly destroy already paper thin margins and may even erode key value propositions.
The margin equation is simple. An ecommerce site's shipping costs are usually a fixed cost. Eliminating the offset charge by giving free shipping directly reduces profit margins. Or as Troy Brown of Timberland said in a post on shop.org:
Finally, keep in mind that a $1 of lost shipping income is 100% pure bottomline USDA Grade A profit. There are no "offsets" to $1 of shipping income, unlike $1 of product sales when COGS and any volume-driven variable operating expense must be deducted. You might be left with .20-.30 of every $1 of product sales to cover fixed costs and provide an acceptable profit. But if you lose $1 of shipping income, you lose $1 of bottomline profit. Don't squander it.
Free Shipping is a Tactic, Not a Strategy
The other major risk for online retailers is that free shipping becomes their value proposition to their customers. Free shipping is a tactic, not a strategy or your value. Look to drive a certain behavior with a tactical offer, like increasing conversions, boosting average order size, promoting more profitable products, or countering an aggressive competitive campaign.
If free shipping becomes more than an offer and evolves into an expectation or the primary value, an online retailer has put itself in a precarious position. In most cases, the financial pressure of lost margins is not sustainable and competitors can easily respond and counter this tactic.
Worst of all, online shoppers who are hooked on free shipping are likely to simply go away if the offer is removed. In a November, 2008 comScore study, 72% of consumers said that if an ecommerce site eliminated free shipping, they would use another ecommerce site that did offer free shipping. Reversing that level of expectation is difficult to overcome once it is set. So if you dare to make free shipping your strategy, and not a tactic, you have to commit and be able to sustain the financial pressures of lower margins.
Over the next few weeks, I am going to writing posts related the impact of free shipping offers to your online sales and how to effectively maintain your valuable margins. Here are links to all the Free Shipping Series posts:
Free Shipping #1: Consumers Love Free Shipping, do online retailers?
Free Shipping #2: Do the Math for Profitable Free Shipping