The state of free shipping offers

Feb 01, 2010 10:30 PM  By

Multichannel merchants continue to have a love/hate relationship with free shipping promotions: They love the lift they see with these offers — and they hate the effect free shipping offers can have on margins.

F. Curtis Barry & Co. tracked hundreds of catalog-, e-mail- and Website-based free shipping promotions this past fall/holiday season, and we found nearly double the number of companies offering more than twice the number of free shipping offers of some form.

This isn’t an objective measure because rather than a statistical approach, we used primarily offers that came into our postal and e-mail mailboxes as an indicator. But more than 30% of the companies for whom we tracked free shipping promotions last year (mostly smaller companies) did not have free shipping offers this year when we followed up this year.

We also interviewed dozens of executives about their free shipping strategies. Many said they were trying to show restraint in using free shipping for holiday 2009.

Some folks said they only resorted to the tactic only when order levels were below plan. Judging from the number of offers we saw, many marketers were struggling to make plan.

What else did we see and hear? As usual, we saw a wide array of free shipping and handling conditions, order levels and dated promotions. Most offers were tied to minimum orders, while many were in conjunction with “percent off” merchandise.

And like last year, we found that free shipping expiration dates for e-mails tended to be much shorter than for catalogs — usually less than seven days.

A number of offers were limited to “selected items,” not the entire merchandise assortment. Several multichannel companies we interviewed said they do not use free shipping across all promotions, but just for segments of their house file.

Along the same lines, some merchants we talked to said they were struggling with whether to offer free shipping in all channels or just online, since the Internet had a lower fulfillment cost.

And a few we interviewed said that free shipping promotions just do not get the results that they used to for their businesses.

Paying the price

From a strategic objective, many companies try to cover not only the outbound shipping carrier cost, but also some of the fulfillment cost of picking and packing with the shipping and handling (or shipping and processing) fee.

So merchants do lose a retail dollar amount any time they give away standard delivery shipping and handling. Our research shows that the percent of the minimum order that the lost S&H for standard delivery constitutes averages nearly 12%.

Outbound shipping is the top fulfillment expenditure for most merchants, which mean free shipping — even with whatever conditions a business puts on its customer benefit — is expensive. Our estimates from consulting with multichannel businesses is that typical shipping costs are 6% to 8% of the average order.

Worse yet, shipping and processing has been driven upwards by record freight increases and carrier accessorial charges. As these charges get to 15% and higher, we believe that they become a negative and suppress sales, as most customers take into account the total order cost — shipping plus merchandise.

So should you bury shipping costs in product costs? Several merchants talked about researching whether it was better to build the shipping costs into the cost of goods sold. This approach can be problematic for two reasons.

For one, if the product is on the open market and not exclusive, it will create a higher retail price that could become a problem if the customer comparison shops, which most do today. And from a legal perspective, the customer is not really getting free shipping but paying for it through hidden product costs.

Time to test and audit results

Naturally, several merchants said they were concerned about how free shipping offers affected their profitability. And with good reason: We’ve found that too many marketers conduct insufficient testing to plan/project outcome and then test to understand the effect on profits.

The economic conditions are not helping matters: There is a tremendous pressure by management to meet the sales plan — even though everyone in the company understands the negatives.

One gift merchant we interviewed felt his company needed to be more assured of meeting its sales plan in 2009. He designed all its August through December offers with “free shipping” in relationship to their average order, and also extended free shipping from Internet-only in 2008 to include catalog/phone orders this past year.

The problem? The company didn’t do enough research, and picked the free shipping dollar limit to be 15% below the average order value.

More than 50% of this gift marketer’s orders are single-item orders, and shipping and handling has no effect on results. As a result, its average order value will finish 2009 about 2% below 2008. While the company met its order count sales plan, free shipping will hurt profits.

So be sure to research well and test offers. Test free shipping using control groups, and also the results with and without free shipping on the customer’s responsiveness and lifetime value.

Other businesses found that when they offered free shipping in some form, sales improved. When they didn’t offer it, they didn’t meet plan. As a result, the sales curves became “spikey” from the “on and off” approach.

Those companies that did test free shipping offers reported a 5% to 30% increase in productivity. Depending on your maintained gross margin, you probably need an increase of 10% to 20% in average order value to make free shipping pay off.

Coming up with a pro-forma estimate and measuring results is key. Lower gross margin businesses need a bigger lift to make free shipping work profitably.

Does your business really need free shipping to get its top line growth? It might, but be sure you do the legwork before you start or continue these offers. We’ve found that many companies need to do more testing and be analytical about the most profitable approaches to promotions.

Curt Barry (cbarry@fcbco.com) is president of F. Curtis Barry & Co., a multichannel operations and fulfillment consultancy.

Conditioning customers to expect promotions

Aside from eroding profits, the biggest single concern marketers have about using free shipping offers is that they are training customers to expect them. And many customers today won’t buy without these promotions.

The CEO of a $30 million home decor products business noted that “we have run these promotions for over five years, and without free shipping, we do not meet our sales plans.”

Another concern expressed by many merchants we spoke to was that if the customer responded opportunistically to the offer and never shopped again, not only did they lose the customer acquisition cost of typically $10 to $25, but also the shipping cost.

Many businesses need two or more customer purchases to make money. Since many businesses have 50% to 70% of customers who are one-time buyers and never buy again, this is a very real concern.

Several executives said that they feel that offering discounts of 20% to 25% off merchandise provides the same lift as free shipping. Either way, though, businesses are giving up significant dollars to get the order.— CB