One Retailer’s View on Why Not to Offer Free Shipping
August 22nd, 2008 by David Bolotsky, Founder and CEO, UncommonGoods Posted in Marketing & Consumer Trends | Shop.org Events
UncommonGoods has never offered free shipping and I have a pretty strong view on the subject that I’d like to share.
Shipping a product to a customer’s home (or to the home a gift recipient) is a huge convenience that can save the customer nearly an hour (especially if the store is out-of-stock at the time of the visit). This should have a value of $25 or more to our average customer (the average hourly wage is $18 nationally) for the time savings, plus the gas/wear and tear on the car, etc. Therefore a $5-$10 shipping cost is a modest price to pay. Furthermore, customers tend to be very focused on product pricing - it is largely a zero sum game - if the customer does not pay for shipping, the retailer could try to make it up with a higher product price, which is not going to help an online retailer compete against a store. While it is tempting to offer free shipping, I think it is generally bad for the direct-to-consumer industry to give away something of such value - as consumers, we tend not to fully appreciate things that are free. I am also skeptical of research that indicates that free shipping is highly valued by shoppers - if a choice were included for free merchandise, I suspect that would score even higher.
In my former life I was a research analyst covering the retail industry for Goldman Sachs and spent a lot of time on these types of issues. My experience was that promotions are like drugs - they create dependencies - customers will certainly respond, but will also defer purchases in order to take advantage of the special offer - i.e. wait for the sale. Consequently, once you offer it, it is difficult to take away. Amazon has taken a more intelligent strategy than most - they pay a sharply discounted shipping rate on many of their shipments because of the US Government’s subsidy on “media mail” via USPS - they also offer the discount all the time and have it tied to an attainable pricing threshold - given the millions of products they offer, their customers have a relatively easy time finding things to buy to surpass the threshold. They also sell name-brand merchandise that is heavily promoted by the manufacturer, therefore demand already exists and Amazon does not need to spend much money on advertising - price is a major customer motivator, so free shipping would work.
At UncommonGoods, we sell items that most people have never seen before and do not need. They are often handmade or recycled, they are not found many other places and have no vendor/manufacturer advertising, so price is not the primary motivator for our customer. For these reasons, we have not offered free shipping.
I do think rising fuel costs will make free shipping much more expensive for online retailers this holiday season and will likely limit the amount of offers or lead to an increase in the dollar threshold level. Even so, the slower spending environment may cause more retailers to promote more aggressively and this is certainly a promotion that generates a response. In spite of the increases that we have paid in shipping costs, we have not raised our shipping prices in years and have no plans to either raise our shipping prices or offer free shipping this holiday season. We will work to attract customers the old-fashioned way - with great merchandise that they will not find elsewhere, combined with outstanding service and competitive prices.
Note from Shop.org: At the Shop.org Annual Summit, Timberland’s Troy Brown will be moderating a related roundtable titled “Free Shipping: Customer Centric or Lost Profit?” scheduled for Wednesday, September 16 at 2:30 PM in Islander Ballroom G. If you haven’t registered for the Summit yet, what are you waiting for? Go to http://www.shop.org/summit08.
This is an interesting take, David. If you sold goods that were commonly available in physical stores, would you have the same position on free shipping?
The other point, which Mr. Bolotsky does not address is the marketing value of a free shipping offer.
If you’re average order is $50 and you offer free shipping for orders over $100, the additional revenue may well exceed the increased shipping expense.
Mr. Bolotsky’s business model seems unique enough to have limited application to most retail operations.
Mr. Bolotsky is 100% correct. Given the premise that one understands that time has value, B2C shipping is a bargain! Additionally, nothing is really free. There is always a cost for somthing that is represented as free….the only question is who ends up paying for it. The reality of free shipping is that very few consumers really have or take the time to comparison shop. They see the word free and assume it is. As a retail veteran of some 30+ years….trust me when I tell you that it is not free. It’s built into the cost of something, somewhere…..and consumers pay for it. Retailers who consistently flaunt the “free” word are banking on the fact that consumers are too busy to do the due dilligence about prices….and most of the time, they won’t. Free it is not!
I do agree with Mr.Bolotsky on his argument in regards to free shipping. It is a wide spread practice and i guess because of this, puts pressure on the etailers to follow. But i never show any “brick” store to offer to its customers “gas and parking” vouches in order to drive traffic, even if they trade on commonly available products.
I believe that this was a “phase 1″ approach in marketing when etailers were trying to convince shoppers to convert to online shopping. As the general costs keep going up, unless you’re Amazon there will be a point that it will be accounted as a loss. In my experience the times we have offered a “Free shipping” promotion, the conversations accounted for the price conscious customer were the total order was not that big. Where the serious customer, even at times of a Free basic shipping promotion, they were still purchasing the more expensive “Next Day delivery”.
It only falls into the “lost profit” bucket if the cost of shipping would exceed the cost of “store” overhead in a customer centric comparison.
After all, customers may only choose to buy on-line vs in-store if free/low price shipping is available. Since a merchant still has to provide the convenience of a brick-and-mortar location somewhere in the competitive equation, the consumer decision to weigh shipping/travel alternatives makes this a function & cost of marketing.
I agree that free shipping shouldn’t be a “standard” offered with every purchase. If you have a loyal customer looking at a unique good, and they trust your service, they will see the value in that.
We have found that free shipping can be effective in convincing local shoppers not to leave their house, however. If an item isn’t in stock at a nearby store, free shipping (and returns) is often enough to get them to switch retailers AND buy online. We have a lot of data from stock checks across the US that shows this is the case, particularly in apparel, shoes, and jewelry.
IF you have products that won’t be price shopped or are unique, than free shipping isnt needed to drive them to your website as your website won’t compete with B&M to get traffic to your site.
but if you offer the same products as B&M, and don’t have a large consumer database purchasing from you, offers like free shipping can drive traffic to your website that you can later market to in other ways even if they did not purchase.
Free shipping is not always about the offer, and sometimes its about the merchandising value of driving new traffic or increase traffic to your website to see what is new on your site.
Great post, David!
In my experience, “free shipping” offers out-pull equivalent promotions expressed as percentage or flat dollar off. In other words, if your AOV is $100, and shipping is $10, then there’s no difference between free shipping, 10% off, and $10 off. But psychologically, free shipping trumps the others.
But does it lift performance enough to pay for itself? Why do it? Three reasons, all doubtful:
Free shipping promotions MAY lower your marketing cost more than the cost of the shipping you’re giving away: You give away $10 per order in shipping revenue, but the effectiveness of the promotion lowers your ad spend (pay-per-click, or catalog, radio or whatever) $15 per order.
Free shipping tied to a minimum order value MAY raise your AOV — and boost your profits. Again, this is a function of decreasing your ad spend, and perhaps your fixed costs, as a percentage of total revenue.
Lifetime value may be compelling enough to lose money on the initial order. Yeah, we’ve heard that one before! Be careful with this one . . .
Your point about the danger of “training” your customers to wait for the sale is a HUGE one!
As a consumer who does 90% of my shopping online I disagree with your comments. I spend an inordinate amount of time doing price comparisons between websites trying to find the best deal. The disparity between sites that offer free shipping and those that don’t is very aggravating. I would prefer that all sites offer “free shipping” which would make an apples-to-apples comparison easier. To constantly have to go through the purchase process just to find out what the total amount (including shipping) is going to be is a complete waste of my time and I generally will stay away from any site that does not offer “free shipping”.
[...] Bolotsky offered a well-argued stand against promotions back in August (see One Retailer’s View on Why Not to Offer Free Shipping). Yes, Dave sells uncommon goods, items not easily found elsewhere. But that detail doesn’t [...]
Is the moral to this post do not offer free shipping? Or just merchandise unique & exclusive products that are not available anywhere else? I would have liked to have seen David’s response to Ray Heyob’s question. Would your opinion of free shipping be forced to change if you were selling commodity items?