Pros and Cons of Making Free Shipping Standard

Mar 30, 2011 10:40 PM  By

When L.L. Bean announced it would offer free standard shipping to all U.S. and Canada addresses starting March 25, it caused uproar in the direct marketing industry.

Other catalog marketers are wondering now they need to follow suit. And the finance and fulfillment folks would have to weigh the affect of standard free shipping would have on the operation.

So should—or can—merchants try to compete with free standard shipping policies? Debra Ellis, president at Wilson & Ellis Consulting doesn’t think so.

“Merchants are already reticent to invest in improving customer service because operations are considered an expense,” she notes.

This latest move towards free shipping will result in a reduction of services, Ellis adds, “because shipping income and costs are typically allocated to the operational budget. In the past, an efficient operation could be a profit center, but not anymore.”

Shipping is the second largest cost center for most direct merchants, with labor being number-one, says Bill Kuipers, president of operations consultancy Spaide, Kuipers & Co. But if a merchant has a handle on its shipping contracts, it can make such free shipping offers work, he says.

“There’s a balancing act involved as companies look to eliminate or reduce shipping costs,” Kuipers says. “If they can manage their carriers tighter and make some other budgetary sacrifices, they can offer free shipping without a lot of internal damage.”

A $1 billion-plus merchant like L.L. Bean will have better leverage with its parcel carriers to offer free shipping than most, Kuipers says. Though merchants generally sign contracts of two years or longer with carriers, the carriers are usually willing to work to renegotiate terms of the deal if it benefits both parties.

But merchants can also use less-expensive delivery services, such as UPS Basic, as a way to absorb some free shipping costs, Kuipers says. That service is primarily used as an alternative to the U.S. Postal service, and UPS in most cases acts as a zone-skipper and delivers those packages to the USPS for final delivery.

A retailer like L.L. Bean will be able to recoup the costs of offering free shipping in a number of ways, says Luke Knowles, cofounder of free shipping advocacy FreeShipping.org. For one thing, Bean “should expect sales volume to go up because of less abandoned shopping carts,” Knowles says.

The merchant can also expect a decrease in marketing costs, because free shipping on all orders will become its promotion “and it will spread via word of mouth and public relations,” Knowles says. “We’ve already seen a lot of great publicity for L.L. Bean because of this move to free shipping all the time.”

And catalogers should remember that free shipping doesn’t necessarily mean everything ships for free, Kuipers says. Just about every merchant offers several levels of shipping, and in a world where consumers want instant gratification, they are willing to pay a premium to get their item faster.

In fact, L.L. Bean spokesman Carolyn Beem says that the outdoor gear and apparel merchant tested free shipping offers during the past holiday season. It found that most customers who received the offer chose to upgrade to two-to-five-day business shipping.

But that’s to be expected, given it was the holiday season, Knowles says. “Many shoppers would have upgraded to faster shipping to make sure their items arrived in time for Christmas,” he notes. “L.L. Bean probably won’t see those types of results earlier in the year.”