How To Solve the Free Shipping Challenge

As ecommerce grew, e-tailers began charging extra fees to ship products to their customers to protect profit margins, and while these fees were industry standard, they differed among competing companies. This became just one of the myriad variables that consumers faced when making purchase decisions. Besides product features, availability and price, the cost to ship the product became increasingly significant.

In the ever-changing economic environment, price pressure on retailers continues to mount as consumers look to save money. Online shoppers have, and always will, prefer to pay as little as possible for shipping. According to Forrester Research, shipping costs are the most common reason for online shopping cart abandonment. Shipping remains a weak link in the checkout process due to price. While just 6% of online buyers abandoned their carts because they thought it would take too long for the product to arrive, 44% balked at the price of shipping and ditched their virtual carts.

E-tailers are getting the message, and the trend has been for more companies to offer free shipping, especially during the crucial holiday season – 40% of all ecommerce transactions include free shipping, according to comScore. Of course, this is down from a peak of 49% in Q4 2010, but free shipping offers tend to peak during the holiday season.

With free shipping as the new focus for online consumer activity, e-tailers have no choice but to figure out how, when and to whom to offer free shipping, while at the same time staying profitable by increasing revenue, trimming costs and delivering great customer service.

From my vantage point, there is not a clear cut “one size fits all” strategy that will allow every company to solve the free shipping challenge. There are a lot of elements that make up a cost-effective free shipping strategy, including supply chain, appropriate packaging and the correct logistics partners.

Knowing that there are back-end operational challenges to solve, however, here are a few examples of the more popular shipping perks and strategies that we’ve seen:

E-tailers can offer free shipping to customers that pay an annual fee. Amazon.com has a membership program (Amazon Prime) that gives consumers unlimited fast shipping, such as free two-day shipping and one-day shipping for $3.99 per item on all eligible purchases for an annual membership fee of $79. Barnes & Noble has introduced “Unlimited Free Express Shipping” to all of its members ($25 annual membership fee) for orders placed online and ship-to-home orders placed in store. All Barnes & Noble members’ orders will be automatically upgraded to Free Express Shipping and will arrive in three business days or less, with no minimum purchase required and no limits.

E-tailers can lower the purchase amount threshold for free shipping. In the past, e-tailers used a formula by which the amount of the order size and the corresponding profit margin was calculated to cover the cost of shipping. In many cases, loyal customers know exactly what the threshold price is. By lowering the threshold, existing customers see and appreciate this value and perk, even though the free shipping remains constant.

E-tailers can offer free ship to store. In hopes of using their stores as a wedge against web-only rivals, chains Sears, Roebuck & Co., and Wal-Mart Stores, along with specialty retailers like Jos. A. Bank, offer free ship-to-store or other forms of in-store pickup of online orders. This strategy also is helpful in producing incremental sales as online customers arrive at stores and spend on extra items.

Lower shipping charges to 10% of the transaction value. According to Forrester, 57% of web buyers deem standard shipping costs of up to 10% of the transaction value as reasonable. E-tailers can change their purchase funnel to allow the consumer to see updated shipping costs earlier in the process as items are added to the cart, versus waiting until the end of the transaction.

While these are just a few of the common strategies being used, it is customer experience and satisfaction that have to ultimately remain the top priorities. If delivery delays or poor service from less trusted carriers lead to customer dissatisfaction and departure, then the profits from increased sales will be null. When facing the free shipping challenge, e-tailers should strive to provide customers the right mix of monetary and service value—often best achieved by transparency. Consumers will be more willing to pay $15 flat rate shipping that was communicated before the ‘Checkout’ button was even clicked than $9.99 shipping sneaked in seconds before ‘Complete My Purchase’.

The free shipping challenge will continue to evolve over time as competition and price pressures mount. But having a sound strategy in place always keeps you a step ahead.
Dave Fazekas is an associate partner, consumer products and retail, at marketing agency Rosetta.

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