A Database Marketer’s Perspective on Free Shipping

Most of the promotions this past holiday season contained a common phrase: “Free Shipping.”

We tracked hundreds of promotions that arrived in our postal and e-mail mailboxes from August through December, and polled dozens of multichannel businesses on their free shipping strategies. What we found was an unbelievable array of opinions, conditions, restrictions and timetables. What we didn’t find was any kind of consensus on whether free shipping is a strategy that works. Results will appear in the February issue of Multichannel Merchant.

To get a fresh perspective on free shipping, I interviewed database marketing consultant Kevin Hillstrom, president of MineThatData. The consultancy helps CEOs understand the complex relationship between customers, advertising, products, brands, and channels using a methodology Hillstrom developed. His retail experience includes serving as vice president of database marketing at Nordstrom, director of circulation at Eddie Bauer, and manager of analytical services at Lands' End. What follows are excerpts from the interview.

CB: I’ve spoken to dozens of executives from different companies, and they say results of free shipping are all over the place. What’s your experience?

KH: Results are all over the place, and are completely dependent upon the customer that the business caters to. Businesses that are trusted get less benefit from free shipping than businesses that are trusted less. Free shipping means more to an online startup that nobody has heard of than it means to L.L. Bean.

CB: What kind of lift do you need for it to be worthwhile?

KH: Free shipping seems to give a 5% to 35% bump in productivity. Depending upon each element of the profit/loss statement, you’ll probably need a 10% to 20% increase in sales in order to make free shipping profitable; and a key point: low gross margin businesses need a much bigger bump in performance to make free shipping work.

If you’re running margins in the 15% to 40% range, you need a big bump in performance; if margins are in the 50s or 60s, you don’t need as big a bump. Coming up with pro-forma estimates and measuring actuals is key.

CB: Is there sufficient testing being done to know whether it’s working? What kind of testing?

KH: Not many folks are doing testing. The folks that are doing testing tell me that their business becomes “spiky” when they do on/off free shipping promotions. In other words, in test/control groups, you see that free shipping gives you a +20% when the promo is on, then gives you a -10% when it is not being offered, then goes +20% and -10% again as it is put on/off over and over and over.

We train the customer to only buy when free shipping is offered -- and therefore, we increase the number of free shipping promotions, further causing these positive/negative spikes. If the test/control group is done over a six- or 12-month period, we don’t see much of a total increase; in other words, the negative spikes offset the positive ones, yielding little long-term benefit.

Some companies are building shipping/handling into product costs and then offering free shipping. One retailer went from the standard $14.95 shipping to $5 shipping in 2005 and saw a two- to three-month bump, but then business basically flattened out. That $5 shipping gave a bump in performance that didn’t really hold up over time. One of its competitors increases the price of comparable items $3, then offers free shipping -- so when you buy two items, shipping at either company is essentially the same.

CB: Are we conditioning customers to wait for free shipping?

KH: I believe we have conditioned customers to expect promotions. Long-term, I believe the model that offers the most benefit is either free shipping with increased prices, or cheap shipping coupled with free shipping over a certain level. I believe we’ve taken the focus off of merchandise, and that is a really bad thing long-term for catalog/online brands.

Curt Barry is president of F. Curtis Barry & Co., a multichannel operations and fulfillment consulting firm with expertise in multichannel systems, warehouse, call center, inventory, and benchmarking.
 
For more from Curt on free shipping, look for the February 2009 issue of Multichannel Merchant.