Trends in S&H offers

Feb 01, 2009 10:30 PM  By

If you looked at all the catalogs and promotions out there this past holiday season, there’s one phrase they have in common: free shipping.

My company, F. Curtis Barry & Co., tracked hundreds of promotions that arrived in our postal and e-mail mailboxes from August through December 2008. We also 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.

Revenue from shipping and handling, or shipping and processing, is considered by most companies to cover not only the outbound shipping carrier cost, but also some of the fulfillment labor costs in picking, packing and other shipping functions. Outbound shipping cost, with its accessorial charges, has become the highest individual fulfillment expenditure in most companies.

The Survey of Catalog and E-mail Free Shipping chart on page 33 shows the various offers presented by several multichannel businesses that used free shipping. Here are some of my observations:

  • The majority of the offers were tied to minimum orders. These minimum orders are shown in the “Free shipping minimum” column with the dollar value required.
  • The “Conditions” column of the chart gives the terms and expiration dates of the offers. For the print catalogs, the expiration date was often a few weeks from receipt, though some extended through December or early January.

    Is free S&H worth it?

    The free S&H expiration dates for e-mails were shorter than for catalogs — usually less than seven days — with one or more e-mail reminders that the free shipping offer was running out. Often a few days later the businesses started a new free shipping promotion with a short time frame.

  • Several businesses, including Cabela’s, Collections Etc. and Abbey Press, changed approaches throughout the season, probably testing shipping and handling rates.
  • The column “Standard delivery lost S&H” shows the retail dollar amount lost by giving away standard delivery shipping and handling (per the amount under “Free shipping minimum”). The percent of the minimum order that “Standard delivery lost S&H” constitutes is shown in the column “Minimum order-% total.”
  • The “Minimum order-% total” column shows how high up shipping and processing has been driven by record freight increases and accessorial charges. As these charges get to 15% and higher, they likely become a negative factor and suppress sales. That’s because customers take into account the total cost — free shipping plus merchandise. We also see more direct businesses with retail stores offering store pick up.

As the season began to wind down, use of free shipping in some form picked up even more. Many offers were in concert with discounted pricing to push out the product and avoid huge after-Christmas inventory positions, which may be harder to liquidate.

In the end, we believe that 80% or more of all major businesses will have offered free shipping in some form during the fall and holiday seasons. Most merchants added and subtracted free shipping from their sites many times though the period.

When you look at what mailers are charging and giving to the customer for a higher than average order, it looks like a significant inducement on the surface.

But the success rate among our clients in the use of free shipping varies widely, and the shipping and processing offset that you have to give up is very expensive in a time when sales are soft anyway. Most of the merchants we talked to aren’t convinced free S&H is working.

Test to gauge success

You have to take into account if free S&H gets the response lift, if it’s worth losing the offset from shipping and processing, and if customers are just being opportunistic for that one item and the free shipping.

Then again, many catalogers may feel that the downsides to free S&H probably beat getting stuck with the unsold merchandise and having to suffer the markdowns.

Marketing consulting firm Marketsmith saw a generally heavier use of promotions among its clients for the holiday, says executive vice president Susan Pizzano. But none of its clients is using free shipping as a promotion this season or in the spring. “We feel it does not provide the lift it once did,” she says.

Conditioning the customer

Marketsmith advises clients to do promotions that are a call to action, offers with a reason to buy, such as a percent or dollar amount off tied to a greater spend, Pizzano says. “We work with our clients on the language they use to make sure it focuses on the client’s need for the product or the product relevancy to the season. The goal is to create a ‘have to have’ reaction by the customer.”

Be aware that setting a free shipping limit can be tricky. Most businesses are still pegging qualification for free shipping to a high order value. Are these dollar order levels something that the customer will realistically reach? If they are set too high compared to your average order, they are probably meaningless.

As marketers condition customers to expect free shipping, many are requiring the customer to read the fine print about when free shipping applies and when it expires. “Free shipping” may be on the cover, then some conditions on an inside page (often page 2,) with the remainder of the restrictions on the order blank.

Without thorough testing, it’s impossible to determine the lift in response and the downstream effects that free shipping has on customer purchases. But to do a credible test, you must have a control group to which free shipping is not offered. Are most companies doing adequate, sufficient testing on free S&H offers?

Probably not, says Kevin Hillstrom, president of database marketing consultancy MineThatData. Not enough mailers are conducting tests of free S&H, and those that do will see a lift when the promo is on, then a decrease when it is not being offered.

Catalogs train customers to buy only when free shipping is offered, Hillstrom says, “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 of time, “we don’t see much of a total increase; in other words, the negative spikes offset the positive ones, yielding little long-term benefit.”

Conditioning the customer

Indeed, there is a lot of concern in the industry that free shipping is conditioning the customer to expect never to have to pay shipping and processing. Yet we keep offering it because we’re afraid otherwise we will not get the order. We wonder if the consumer will take another offer because of the cost difference.

In general, 50% to 70% of most businesses’ customers are one-time buyers; they don’t shop a second time. When you consider the initial acquisition cost for customers, and then add in free shipping if used in prospecting, this is bad news. Is there any end to this slippery slope into poor or no profitability?

The predominant sentiment I heard from the companies I spoke to was, “We wish we could all agree to not use it.” I don’t hold out much hope of that ever happening — especially when merchants such as Coldwater Creek, Lands’ End, Woolrich and L.L. Bean have upped the game by offering free shipping with no minimum order value.

Outerwear and gear merchant Backcountry.com picked up the pace further this past holiday season by offering not only free shipping, but also free tax and a price match on all orders.

The reality is that some multichannel merchants will always include a free shipping promotion. And many businesses continually start and stop free shipping offers in their catalogs, e-mail blasts and on their Websites.

Particularly in this business climate, and considering the number of companies using free shipping, you may find that you can’t afford not to offer it.

There is always one way to avoid the free shipping trap: Offer unique merchandise. If customers want the product assortment you have, and if they can’t find it elsewhere, they will live with reasonable shipping fees.

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

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