The Fulfillment Doctor on… The Price of Free Holiday Shipping

Oct 31, 2007 8:09 PM  By

Question: I am the operations manager of a large multichannel hardgoods and apparel merchant. My rough shipping and processing calculations for our company in Q4 this year would have been: 1) $70 million – $72 million gross revenue collected from shipping and processing, 2) $52 million – $54 million outbound shipping expenses, and 3) $18 million – $20 million net profit attributed to shipping and processing.

I say “would have been” because I just found out that we have started offering our customers unconditional free shipping and processing to entice holiday shoppers to start buying now. So my company is willing to pay out roughly $54 million in shipping fees as well as lose the estimated $20 million in net profit.

What are the underlying reasons behind offering free shipping and processing to customers? Is this common practice in other companies in the multichannel industry? Can anything positive come from giving free shipping to our customers?

Answer: You’re correct that shipping and processing costs tend to be a rather large percent of sales. It is typically 6% to 8% of the average order, while shipping revenue is usually between 8% and 10% of the average order. So yes, the VP of Marketing is making your company cover the shipping and processing costs this holiday season as well as giving away revenue in order to get sales.

That’s not necessarily a bad idea, however. We hear the complaint about free shipping from fulfillment and operations managers and directors all the time. Merchants must balance the use of free shipping and processing against the reality of the overall retail environment.

If your company is healthy, and you have a high average order value, you can afford to offer free shipping and processing. Other factors have to be in place for this enticement to work; such as having inventory available, adequate profit margins, productive and efficient operations, and deep outbound carrier discounts. What you really need to do is consider what the alternative might be.

We received an e-mail not long ago from a large, high-end multichannel women’s apparel company offering 60% off all items. That’s right: 60% off everything—in October. This is a clear indication of the kind of pressure multichannel businesses are under heading into the last two months of the year.

What’s more, the order curve has been moving closer and closer to Christmas ever year, shifting a couple of days every year for the past 10 years. Peak weeks used to be in October, then shifted into November, and currently are in early December. This shift affects everybody, from forecasting to staffing. The fulfillment and distribution workforce that used to be packed up and home long before Christmas are now all working up to Dec. 23 to get the product out.

The reason for this shift? Customers are waiting until later in the season to get the best deals, as they know that retailers are going to start dropping their prices as it gets closer to the holiday. Those retailers who offer free shipping early on are trying to jumpstart orders and get the customers shopping earlier.

The idea is to attempt to move that curve back. If you get the customer shopping earlier, you’re essentially taking dollars out of the holiday pot that they’d be spending elsewhere, because there’s only so much money that’s going to be spent in the holiday season.

Fulfillment and operations managers have just as much interest in moving that curve back as well. You want to get the shipping started early as well, so you don’t have the influx of orders and having to cram six weeks of shipping into two weeks.

Though free shipping and processing seems a big chunk of money you’re losing, it may be necessary to get those sales, get the shipping started, and spread that shipping out over the fourth quarter of the year.

Look at the example we used of the large women’s apparel company, and ask yourself: Isn’t free shipping and processing better than losing 60% of the revenue of the item itself? It really is a balancing act for each company that goes down the road of free shipping and processing.

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; Learn more online at: http://www.fcbco.com