Shipping Charges

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What is the best shipping policy? Is free shipping an effective marketing tactic? Consider this case history from our research files:

A merchant, whose average order was $192.17, tested a free shipping promotion. Every order over $100.00 received free shipping.

During the two weeks in which the free shipping was offered, the average order DROPPED to $154.70.

The wrong shipping policy can cost you sales and profits. In this brief, we examine three approaches:

1. Low Prices with High Shipping Charges
2. Average Prices with Free Shipping
3. Free Shipping as an Incentive

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Finding

These policies were evaluated by Aaron Rosenthal, an analyst here at MarketingExperiments.Com. Aaron has degrees in economics and finance and his job at MEC is to measure the financial impact of various marketing decisions.

Tactic 1 – Low Price With High Shipping Charges

Purpose: To attract the customer with “the lowest price” (often near wholesale cost) and then to make a profit with the shipping charges.

This approach is popular with eBay merchants and it often works. However, with an online store, this approach can seriously diminish the repeat orders a customer will place over time.

In most retail operations, you pay a significant price to win a new customer, and your true profits come from winning repeat business.

Tactic 1 may capture a first-time customer but it will probably not capture a repeat order. Still, if you are in an industry where repeat orders do not matter, Tactic 1 could still work for you.

Also, you may want to consider this shipping service. Its packaging does not separate the shipping costs from the handling charge.

http://www.endicia.com/

Tactic 2 – Average Prices With Free Shipping

Purpose: To establish competitive advantage by giving the customer an extra reason to purchase from you.

To understand the value of this tactic, you need to understand customer priorities. Customers typically evaluate your offering first on PRICE. Then they check for secondary concerns such as shipping.

The average customer is not so gullible as to be fooled by a merchant with a low “landed price” (total cost) but a high purchase price.

You must also consider that customers often underestimate true shipping costs, and may perceive LESS value than you are really offering.

Still this tactic can work well. Here is the approach that we recommend:

KEY POINT: Offer free shipping, but keep the total landed price less than your major competitors. Then offer a “rush order upgrade”. This would NOT be an upgraded shipping service; it would be an upgraded “handling” service (i.e. from 48-hour order processing to same-day order processing).

Tactic 3 – Free Shipping as an Incentive

Purpose: To gain the marketing advantage of offering free shipping, while at the same time gaining a PROFIT advantage.

“Jupiter Research found that 89 percent of the respondents to its annual Retail Consumer Survey Report indicated that free delivery and handling was the promotion most likely to encourage their online purchases.” (*1)

Further, the research discovered that 51 percent of online buyers opted for retail store purchases just to escape shipping and handling charges. Another 49 percent reduced their purchase amount because of unexpectedly high or hidden shipping charges.

Clearly, there is value in offering free shipping. But if you are not careful, this value will be to the customer only.

How can you make a free-shipping offer pay for itself?

We have already suggested offering a shipping upgrade, but there may be an even better way. This would be to offer free shipping only on orders over a specified dollar total or “Free Shipping Threshold”.

The concept is not new, but it is most often poorly executed. It is important to establish the right threshold price.

Here are four guidelines that we have learned through our research:

1. Do not set the threshold price too high. For example, if your average order is $47, do not set your free shipping offer at $250.

   We often see this mistake. Consider this example from our research files:

   A merchant selling health goods needed a way to differentiate his offer from competitors’ offers. The average order was slightly under $50. So the merchant promoted free shipping on all orders over $250.

   During the five weeks in which this program was tested, not a single sale qualified for free shipping. The free shipping incentive was not great enough for individuals to quintuple their order.

2. Do not set the threshold dollar amount for free shipping too low. For example, if your average order is $165, do not offer free shipping at $150.

   Consider again the case from the opening of this brief:

   A merchant, whose average order was $192.17, tested a free shipping promotion. Every order over $100.00 received free shipping.

   During the two weeks in which free shipping was offered, the average order dropped to $154.70.

3. Make certain that your customers are clearly aware of your free shipping offer. It must be displayed on every potential “landing page” (not just your homepage).

   KEY POINT: If possible, automate a system that notifies customers, as they are checking out, that if they spend X more dollars they will receive free shipping.

4. Consider setting up a “Clearance Item” area, where you offer (high-margin) discounted products. Shoppers will often use this area to increase their order total.

   Chris Chenault, an MEC research partner, suggested this tactic. It has proven to be very successful for his site. The sale of these high-margin items has actually paid for his cost of shipping.

So how do you choose a free-shipping threshold price?

1. Use whole numbers that are easy for customers to visualize.
2. Set a threshold that is perceived as “just a bit more” than your average order.
3. Calculate a level that makes economic sense.

Here is how to “do the math”.

Suppose your average order is $47, your margin is 40 percent, and it costs you an average of $3.50 to ship a package.

By setting your free shipping threshold at $50, you are losing $2.30 on every order. Here is the formula (but you do not have to understand it):

$50 – 47 = $3 —— $3 * .40% = $1.2 —— $1.2 – 3.5 = ($2.30)

But if you set the free shipping threshold at $60, you can make an additional $1.70 on every order.

$60 – 47 = $13 —— $13 * .40% = $5.2 —— $5.2 – 3.5 = $1.70

The moral of the story? There is a right way to offer free shipping. But you must make it work for you, not against you. Tactic 3 allows both merchants and consumers to receive a benefit from free shipping.

Note: To learn more about our research partnerships, click here.

(*1) Source:

http://www.internetnews.com/stats/article.php/2221061

Jupiter Research:

http://www.jupiterresearch.com/bin/item.pl/home

Credits:

Editor — Flint McGlaughlin
HTML Designer — Cliff Rainer
Contributors — Brian Alt & Aaron Rosenthal