UPS, Forrester Research Reveals Free Shipping Trends

Free shipping promotions are ubiquitous in the ecommerce world. But what affect do these offers have on the front and back end of a retailer’s business?

Parcel delivery giant UPS commissioned Forrester Research to do a study on retailers and free shipping offers. Forrester Research principal analyst Sucharita Mulpuru and UPS marketing manager Kiel Harkness released their findings last week at IRCE 2011.

NEXT PAGE: The five key findings of the report, “Smarter Strategies For Free Shipping.”

PAGE 3: Mulpuru and Harkness discuss the findings in exclusive MULTICHANNEL MERCHANT video.

Here are the five key findings of the report:

1. Retailers find value from free shipping, but they’re often reluctant to provide such offers.
While some retailers view free shipping to be a competitive advantage that wows shoppers, most retailers interviewed perceived free shipping offers to be a “necessary evil” of the ecommerce world. Several retailers specifically said they offered free shipping to “stay competitive” and tried to avoid offering it whenever possible because it eroded their already thin margins. These retailers typically only offered free shipping during their key shopping periods such as during seasonal holidays or for businesses merchants during trade shows.

2. Free shipping sometimes results in unexpected costs beyond subsidizing the shipment.
While the cost of delivering the package itself was the key component associated with free shipping, retailers also noted other problems: would-be shoppers being conditioned to wait for free shipping offers, increased labor and customer service costs associated with free shipping order “spikes,” and greater IT costs when free shipping offers must incorporate exclusions or product restrictions.

3. Product category was the biggest driver of the “effectiveness” of free shipping.
While all retailers reported gains in sales, some did have more profitable experiences with free shipping than others. Those with the best results were retailers who had generous margins on their products (usually due to the fact that they were selling unique merchandise) and had products that were easy to fulfill (e.g., small items like flash drives, low-weight items like clothes).

Another factor in the effectiveness of free shipping promos was the location of the retailer’s distribution center: Merchants with multiple distribution centers or those that were centrally located were more frequently able to offer free shipping because they were able to take advantage of lower shipping rates overall.

4. Many retailers have found creative workarounds to offering free shipping.
Many marketers look for ways to drive sales without losing margin. Some executives noted that they found tactics like premium shipping clubs, flat-rate shipping, and incorporating shipping into the cost of the product particularly effective in offsetting free shipping offers.

5. Where “free shipping” resides on a P&L can significantly impact how frequently retailers offer it.
Most retailers identify any shipping-related costs or expenses within their transportation line items. But some merchants allocate them under marketing expenses, because free shipping is such an effective driver of incremental sales. Those retailers that consider free shipping a marketing expense also tend to offer free shipping more frequently, and generally did not “rate shop” (i.e., downgrade shipping service levels to save money).

NEXT PAGE: Here’s what Forrester’s Mulpuru has to say about retailers’ attitudes towards free shipping offers, and what UPS’s Harkness has to say about budgeting for free shipping.

Here’s what Forrester’s Mulpuru told MULTICHANNEL MERCHANT about retailers’ attitudes towards free shipping offers:

Here’s what UPS’s Harkness told MULTICHANNEL MERCHANT about budgeting for free shipping:

PREVIOUS PAGE: The five key findings of the report, “Smarter Strategies For Free Shipping.”