Free shipping: Online shoppers love it (especially around the holidays), but is it a golden ticket for online retailers?
According to some industry analysts, nearly 50 percent of carts are abandoned due to high shipping costs; however, the introduction of free shipping is virtually guaranteed to drive more completed purchases. So, the path is clear for retailers: Just offer free shipping, and the sales will come, right?
Not exactly. It’s a complex puzzle with many moving pieces and factors to consider before taking the leap. How does the psychology of free shipping work, and how can retailers employ it in a way that doesn’t undermine their profits?
A study by Retention Science found that when offered the choice between a percent discount and free shipping, nearly twice as many people jumped at the free shipping offer. But why? It all comes down to what is called Perceived Value Theory.
Basically, a customer determines the value of a purchase by doing some quick subconscious math, weighing the costs and benefits associated with it. If you were to write it out as an equation, it would look like this: Value = Benefits / Costs. By bringing down the costs (free shipping, price discounts) and offering the same benefits, then the customer perceives a higher value in the purchase.
So, why does free shipping win out in this scenario? It may be that customers perceive the costs of shipping to be higher than they are or that there is an added benefit in not having to deal with choosing between various shipping methods based on price, thus streamlining the process and adding another benefit into the transaction. Either way, free shipping makes customers happy, and happy customers tend to spend more.
It’s important to note that free shipping is most effective when introduced in the right phase of the buying cycle. As the abandoned cart statistics show, these offers are most effective when introduced in the buying phase, when customers have already selected items, entered card information and are ready to complete their order.
Free shipping is also an effective measure when employed for a limited time only through targeted marketing campaigns. An email in someone’s inbox with “free shipping until Dec. 15” is likely to pique the interest of holiday shoppers. Introduce free shipping too late or too early and the efficacy is likely to be diminished.
If the math is right on perceived value and customers are happy with free shipping, how can retailers ensure the numbers line up for them to keep profit margins where they need to be? There are a few factors that can be manipulated in order for retailers to keep revenues where they need them to be, despite shifts in shipping strategy that may vary seasonally.
As Kissmetrics points out, there are a few things that online retailers can do to make sure free shipping remains profitable: creating thresholds that require a minimum order value required to receive free shipping; setting restrictions and offering free shipping only on select products where it is profitable; and enacting price increases across product offerings to compensate for the loss taken on free shipping are all worthwhile tactics.
Amazon has also (nearly singlehandedly) proven the theory of a membership-based free shipping model, displaying how requiring shoppers to join a retailer’s mailing list, subscribe to a newsletter or become a loyalty member in order to receive free shipping can pay off. If positioned correctly, retailers can even test a paid membership, like Amazon has done with its Amazon Prime program. For a $99 annual fee, members qualify for free two-day shipping on all Prime-eligible purchases 365 days a year, plus other perks, such as free streaming on select TV shows and videos on the Amazon platform. Amazon has also added a digital library of over 600,000 eBooks for no additional cost, unlimited photo storage and a music streaming service that rivals Spotify.
Although Amazon tends to keep its metrics close to the chest, analysts estimate that the Amazon Prime program has between 40 million and 50 million members worldwide, according to an article in Fortune. But as the outlet points out, all those perks add up, and Prime, in all likelihood, has cost the online retailer billions in the 10 years it’s been in existence. Before the introduction of Prime, items on the site typically took as long as a week to arrive on the purchaser’s doorstep.
With Prime, Amazon expanded quickly and aggressively, increasing the number of items available in the program from 1 million to 20 million and expanding into international markets, including Japan, the U.K., Germany, France, Italy and Canada. The online retail powerhouse used the program to leverage its emerging video streaming services, more than doubling its share of North American viewership from March 2013 to Sept. 2014 during peak hours (7–11 p.m.) from 1.27 percent to 2.6 percent. That still pales in comparison to Netflix, which accounted for over one-third of Web traffic during the same period; however, Amazon has also steadily increased its production of original series, with programs like “Transparent” becoming a critical success in the past year and a half.
Amazon Prime may have not only transformed Amazon’s business overnight, but it has created something of a “race to the bottom” among competing retailers who have been forced to offer free shipping just to keep up with the eCommerce giant. So, while the fate of free shipping may not be written in stone, it doesn’t appear to be going anywhere soon … as online shoppers expect expedited service and increasing perks from competing retailers all fighting for attention and dollars.