The Price of Free S&H

In their battle for customers, online superstores Buy.com and Amazon.com have been using shipping and handling as a weapon. Amazon.com began offering free shipping and handling on all orders of more than $99 in January. Then in June, Buy.com began offering free shipping and handling for all its books. Amazon fired back twice, lowering its free shipping minimum order to $50 in June, then to $26 in late August.

But it appears that most catalogers haven’t been drawn into the fray. No doubt they’ve learned from the lessons of the late ’90s dot-com boom, when scores of heavily financed online marketers went broke offering free shipping, among other costly inducements, to lure customers who didn’t provide a subsequent return on investment.

Of course, some catalogers, such as Super Duper Publications, offer free shipping — but that’s always been part of their positioning. And other mailers, such as Blair Corp., periodically offer free S&H on orders of a certain size — but as part of a long-term reactivation or upselling strategy.

Philadelphia-based Movies Unlimited is one of the few catalogers that admits it offers free shipping primarily in response to the competition. “Most everybody in the video industry offers free shipping or lower shipping than we do,” says Ed Weiss, general manager of the video and DVD cataloger. At press time, Movies Unlimited was about to begin offering its Web customers free shipping using the U.S. Postal Service’s low-cost bulk rate Media Mail service. For customers who order by phone or mail, Movies Unlimited charges a flat $3 rate for S&H, also using the economy postal shipping service.

Media Mail is a slower postal service that, unlike Priority Mail, doesn’t have tracking or guaranteed delivery times. Weiss has found that a parcel that would take two or three days to arrive via Priority Mail could take nearly two weeks via Media Mail.

But Media Mail, part of the postal classification formerly known as fourth class, costs less than half of the price of Priority Mail. For instance, a 1-lb. package that would cost $1.42 to send by Media Mail costs at least $3.85 to send via Priority Mail, depending on the zone.

“We had made customers spend $50 to get free shipping in previous promotions with Priority Mail or UPS,” Weiss says. “But now we can lower that threshold to $25 — or we might not have a minimum order at all.” At press time, Movies Unlimited was finalizing its shipping and handling offers for the holiday season and had no results to report regarding the effect of free S&H on sales.

Free shipping all the time

While Movies Unlimited relies on free S&H to remain competitive, special-education materials cataloger Super Duper Publications uses free shipping to differentiate itself from the competition.

The Greenville, SC-based marketer dropped its 10% shipping and handling charge back in 1997. “We’re in the educational market, serving mostly teachers,” says chairman/CEO Thomas Webber. “They often purchase a lot of their materials with their own money. So it occurred to us that a teacher would rather spend on products than on shipping costs. By having the free shipping, we hopefully will sell more products while building customer loyalty over time.”

To keep shipping costs down, Super Duper negotiated a deal with its primary carrier, Federal Express Ground, in which its rates are comparable to those of the Postal Service’s Parcel and United Parcel Service’s ground rates.

Webber doesn’t know how much of a lift — if any — the free S&H has given Super Duper. “I just look at our overall sales and profit,” he explains. “I know we have a shipping cost that varies depending on whether we have small or large orders — and we get a mixture of both. But it’s hard to quantify how much we’ve lost or gained by this. We simply look at it as part and parcel of what we are.”

Passing the test

Like the $16 million Super Duper, the $580.7 million Blair Corp. can’t quantify the effectiveness of its S&H promotions. The Warren, PA-based apparel and home goods cataloger has been offering free shipping to prospects “since we started printing catalogs in 1995 and even before that [with its loose-sheet mailers] as part of our customer acquisition programs,” says Bob Crowley, senior vice president of menswear, home, and marketing services.

“It certainly drives response,” Crowley says. “That’s the main reason we do it. Not too many catalogers make money prospecting, so anything to enhance response is worthwhile.” But Blair hasn’t done extensive testing comparing free shipping to shipping charges for prospect mailings.

It may in the future, though. “If postal rates continue to go up, it’s an issue we’ll have to address,” Crowley says. “We will have to evaluate the free shipping offer.”

Women’s apparel cataloger/retailer J. Jill Group advocates testing offers across all segments of your house file before rolling out any S&H promotions. Free shipping and handling “is an expensive promotion,” says John Hayes, president of J. Jill Direct, the catalog and Internet arm of the Hingham, MA-based company. “The incremental response must be there for the campaign to be considered a success. For us there has to be a 10% increase for the campaign to be considered a success.”

J. Jill recently offered free S&H for orders exceeding $150 placed before Aug. 31. The company typically uses such promotions in the spring and the fall. J. Jill measures the success of each campaign by the sales per catalog, which includes response rates and the average order.

Window treatments cataloger Smith + Noble recently ran S&H tests too — though the company was trying to determine if it could afford to charge for shipping. Throughout its nearly 20-year existence, the Corona, CA-based mailer has offered free S&H, says company consultant Bob Perkowitz. “Customers in the custom window treatments industry are used to not having to pay for S&H,” he says. “Typically, manufacturers build the freight into the price of the product, and we just went along with the industry practices.”

When Smith + Noble did run a small A/B split test this past spring, charging for S&H for the first time, response plunged. “We tested to see if it would have a negative impact, and it did — a significant decrease in response,” Perkowitz says. So the company immediately bagged the idea and went back to free S&H.

A potential profit center

Consultant Jim Alexander, managing director of Princeton, NJ-based direct marketing investment bank Tucker Alexander, agrees that the periodic use of free shipping and handling as in the J. Jill promotions is frequently worth exploring. Catalog promotions declaring, “We haven’t heard from you…here’s an offer for free shipping and handling,” Alexander says, can stimulate sales from prospects and encourage inactive customers to make another purchase.

But Alexander cautions against offering a steady diet of free shipping and handling because you risk losing margin if you’re not able to significantly boost response. In a typical catalog profit-and-loss statement, shipping and handling accounts for 6%-12% of all costs, depending on the products’ weight and size. “That’s a pretty hefty cost,” Alexander says.

Hefty or not, most catalogers manage to cover their shipping and handling expenses. According to the 2001 Catalog Age Benchmark Report on Operations (March 15, 2001, issue), only 19% of catalogers charge less than their costs for shipping and handling — thereby taking a loss. On the other hand, 44% of respondents said they break even on S&H, while nearly 38% of respondents said they charge more than the costs — effectively making a profit.

Multititle home decor and kitchenware marketer Williams-Sonoma falls into that third category. The San Francisco-based cataloger/retailer showed S&H profits of about $800,000 for the quarter ended Aug. 4. The company, which mails the Pottery Barn, Hold Everything, Chambers, and Williams-Sonoma catalogs, reported direct-to-customer shipping fees of $30.7 million, or 6.25% of revenue. If Williams-Sonoma decided to permanently offer free shipping, the company would have to somehow make up that $30.7 million by raising prices or finding somewhere else in the profit-and-loss statement to close the gap.

Thing of the past?

For some mailers, such as $138.5 million gifts and home products cataloger Miles Kimball, steadily increasing parcel shipping rates have made free S&H offers a thing of the past.

“The ‘free’ offer has become more of a hurdle to overcome through increased merchandise sales — not to mention the cost of working capital for inventory to support the free shipping offer,” says Mike Muoio, chairman/president/CEO of Oshkosh, WI-based Miles Kimball, which also mails the Exposures photograph accessories title. “The bottom line on free shipping and handling is lifetime value and whether the free offer improves or enhances it.”

‘Free’ Shipping Sampler
CATALOG MERCHANDISE OFFER RESTRICTIONS EXPIRATION DATE?
American Blind and Wallpaper Factory/Decorate Today wallpaper and window treatments none no
Babystyle apparel and gifts minimum $75 order yes
Camping World camping equipment $1 shipping charge yes
CCS teen boys athletic gear minimum $90 order yes
Health Links natural health remedies flat $3.50 charge for orders under $40; free for larger orders no
J.B. Dylan jewelry minimum $150 order no
J. Jill women’s apparel minimum $150 order yes
Lerner women’s apparel minimum $100 order yes
Michael C. Fina tabletop items and gifts first order only no
Movies Unlimited videos and DVDs flat $3 charge for Media no
Mail shipping; free shipping for Web orders only yes
Old Pueblo Traders women’s apparel none yes
Smith + Noble window treatments none no
Super Duper Publications special-education materials none no

The last S&H deal Miles Kimball offered was in June and July of this year “to drive away the summer doldrums” Muoio says. The company awarded free shipping on orders of $40 or more. Such orders would ordinarily cost customers $7.99 in shipping and handling, Muoio points out, “so to break even we would have to sell about $16.00 more to cover the cost at a 50% gross margin.”

For Lynchburg, VA-based hardware cataloger McFeely’s Square Drive Screws, offering free shipping is just about impossible. “We sell heavy but inexpensive products,” explains president Jim Ray. “Trying to ship our product is like shipping lead bricks. If we offered free shipping, the cost would far exceed our annual profits.” McFeely’s sometimes ends up taking a loss on S&H, Ray says.

Besides, offering free S&H doesn’t guarantee additional orders — as gifts and home decor marketer MyTambo.com learned the hard way. When the three-year-old Internet start-up launched a print catalog in April, it offered free shipping on offline orders of at least $75, in hopes of building a customer file. “We wanted to see if we could get print buyers because we were getting up to 700 catalog requests a month,” says MyTambo.com president Sandro Squadrito.

The San Jose, CA-based marketer promoted the offer on the front cover of the 24-page catalog. But the promotion didn’t help convert catalog requesters into buyers. Squadrito would not give results, but he says the promotion did so poorly that the marketer is scrapping the catalog altogether for the rest of the year, though it will revisit mail order in 2003.

“I can’t put my finger on it,” Squadrito says as to why the offer failed. By comparison, MyTambo.com’s Web orders during the period quadrupled, even though the site didn’t offer free shipping and handling.

For the most up-to-date industry news, posted every weekday, or to sign up for a free weekly e-newsletter, visit www.CatalogAgemag.com.

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