Doing the Time Warp

Sep 01, 2002 9:30 PM  By

Book buyers may be partying like it’s 1999, but is Buy.com’s free shipping policy a good idea?

You can’t download dog food.

If we learned nothing else in the dot-com era, we should have learned that no matter how your direct-marketing customer orders your product, it’s hard to make money delivering 20 pounds of puppy chow for free. Even Yuppie chow can be problematic, as Kozmo.com discovered when it tried to make money on free deliveries of ice cream and videos — and sometimes orders reputedly as small as a can of Coke or a single packet of M&Ms — to lazy Manhattanites.

So why did Buy.com begin offering free shipping on books and other things this June? Some analysts say it’s a way for the Aliso Viejo, CA, retailer to position itself as a contender against Amazon.com. And on that count, the promotion has succeeded in putting the company back on many radar screens, according to online retail consultant Geoff Wissman, a vice president of Retail Forward in Columbus, OH. But Wissman says he doesn’t see how this present combination — a promise to undercut Amazon.com by 10% on book orders and offer free shipping on books and many other goods — can last.

The problem is that the cost of shipping usually amounts to 5%-10% percent of the typical catalog order — about the same as the order’s profit, according to Chris Merritt, a consultant at Kurt Salmon Associates in Atlanta. While a free shipping offer is an effective way to acquire customers, he says, it also means that you’re “basically giving up a lot of your end-of-the-day margin to provide free shipping.”

How long can Buy.com keep this up? Chief operating officer Brent Rusick’s response is only slightly more tempered than it might have been back in 2000, when the now-private company was worth $3 billion. “Right now, it’s such a successful program that it will run indefinitely,” he says. “We don’t have any plans of changing it, right now. I won’t say we’ll run it forever, but at this point we don’t have any plans to change it.”

“Right now” may be the operative phrase. Analysts say it’s unlikely Buy.com will keep up its New Economy-style promotion to infinity and beyond, but Rusick insists that he could. “We have enough margin in the cost of the product to cover the cost of shipping,” he says.

This is because his company has a “very efficient business model,” Rusick explains. “We’re completely virtual in that we don’t own any of our own inventory and we use world-class distributors for all the products that we carry. Our cost structure is very low and quite a bit different than [that of] a retailer who owns warehouses and their inventory, and has to manage all of that on their own.”

Another element of Buy.com’s thoroughly modern supply chain may play an even more important role: Rusick says that Buy.com ships its books and CDs through the U.S. Postal Service at the Media Mail rate. Media Mail, which visitors from the 20th century may remember as book rate, permits you to send a pound of media anywhere in the U.S. for $1.42. Even 70 lbs. will only set you back $22.84.

All-time high

Although free shipping might seem like an idea that’s gone with the Webvan, some Internet retailers say it’s still an important tool. A December 2001 survey of 63 e-merchants by Shop.org, a trade association for online retailers, found that 45% planned some kind of free shipping offer during the Christmas rush, a 17% hike from December 2000.

But marketing analysts talk about free shipping as though it were an addictive drug: At some point, your sales stop reacting, and yet you can become so dependent that it hurts to quit. “Once you start doing this, it’s very, very difficult for there to be an applicable exit strategy that’s not going to damage you in some way,” says Wissman. “The problem [with Buy.com's gambit] is that it’s just not a long-term viable strategy, and consumers are very fickle. We’ve learned that from the dot-com shakeout — you can be as generous as you want up front, but when you pull back, consumer loyalty on the Web is more or less nonexistent.”

Offering free shipping above a minimum order is a popular compromise. KBToys.com COO Michael J. Wagner says that this tactic provides an incentive for all his customers: “I would rather give the customer free shipping than have to run a sale on specific items because free shipping covers everybody that comes to the site.”

Still, if consumers love free shipping so much, why not just build those charges into the cost? For one thing, Merritt says, you would tend to overcharge, since the first item is typically the most expensive order to fill. And if you’re shipping a heavy, low-ticket item, adding that cost can make your prices look noncompetitive compared to the prices offered by other sites.

One site that began with a free-shipping model back in the heyday of e-commerce has flipped the model in a different way. Chris Satovick, vice president of business development at Overstock.com, an online discounter headquartered in Salt Lake City, says his company was initially reluctant to drop free shipping because surveys indicated that customers loved it. But executives decided to try a flat fee of $2.95, regardless of order size.

Satovick claims that Overstock experienced no adverse reaction to this move. “We saw no change in the business, no negative feedback, and the customers were very understanding,” he says. That $2.95 doesn’t cover the entire cost of each order, he adds, but it does cover the bulk of the cost and keeps Overstock.com’s prices competitive.

Other direct retailers refuse to play the game at all, and continue to try to make shipping a modest profit center. “Traditionally, for catalog retailers, shipping and handling was always a profit center for the majority of them,” Wissman says. Established apparel sellers, for instance, often charge an extra dollar or two over cost, he adds, partly to offset higher return rates for clothing.

No one is betting that free shipping as a promotion is going away anytime soon, but Pyrrhic victories are definitely passé. After liquidating the inventory of 27 dead dot-coms in the past few years, Overstock.com executives are as skeptical of marketing for the sake of market share as any old-line cataloger. “We build our brand and our business in such a way that it supports itself,” says Satovick. As they say in the movies, it’s a crazy plan, but it just might work.

Bennett Voyles is a New York-based business writer who writes frequently on finance and operations issues. He can be reached at benvoyles@yahoo.com.