To ‘Free’ or Not to ‘Free’

Free shipping. Not that long ago, those two little words could practically guarantee a boost in sales for any online retailer. But then the question arose: If the enticement of occasional free shipping would drive sales, what would happen if it were free all the time?

It’s a direction more online retailers are moving in a variety of ways. But there are many factors that affect long-term results, not the least of which are increased transportation costs resulting from rising gas prices. Conversely, the very same pain at the pump may also be driving more consumers to shop online.

“There has been a significant increase in the consumer’s desire to comparison shop and buy online, and we believe rising fuel prices are a key reason for that,” says Al Sambar, a retail strategist with consulting firm Kurt Salmon. “After spending $100 to fill up their cars, many people will think twice about driving down to the local big-box chains to just shop around, particularly if they can get what they want online with attractive shipping charges and taxes.”

Free shipping is a “strong behavior mechanism,” Sambar says — and one that is no longer contained to the holiday season. “As everyone offers free shipping, it becomes the expectation.”
In March, L.L.Bean launched everyday free shipping, regardless of order size — a throwback to founder Leon Leonwood Bean’s promise of “post paid” in 1912 catalogs — as a way of marking its 100th year.

While Zappos is significantly younger than L.L.Bean, free shipping is well-entrenched there, as well. It initially helped the Las Vegas-based shoe and apparel e-tailer overcome the hurdle of online purchasing and was a powerful driver in customer satisfaction, says Aaron Magness, senior director of brand marketing and business development.

“We’ve all shopped online and found a $50 item with $13 to $14 in shipping charges,” Magness says. “We know that frustration. We know that’s not providing the best possible experience.”

As Zappos has added apparel and accessories, free shipping — and free return shipping — has only enhanced the appeal. “As you’re looking to plan for a gathering, you can look at a few different dresses with different heels,” Magness says. “You can really take this entire dressing room experience — which is not a great experience in-store — to your bedroom and try 10 different items on and send back what you don’t want without it costing you anything.”

Apples to oranges
Even though Overstock touts $2.95 shipping on most items, it too receives a boost when it runs $1 or free shipping promotions.

“It takes purchases out of the future and pulls them into the present,” Overstock CEO Patrick Byrne says of such promotions. “Once you turn off the free shipping, you get a crash. … [There is] a rush in sales, but as soon as they stop, sales drop back to where they were, then even lower. When you measure the valley to the hill, I’m not sure there’s much of a gain.”

That’s why Overstock plans to move its marketing away from free shipping specials and toward membership in its Club O, which includes free shipping on all orders and 5 percent cash back. Club O costs $20 per year – a fee club members can recoup with three average-size orders of $130.

“We think $2.95 is a great deal, as it is,” Byrne says. “For our best customers, our committed customers, we’ll offer the year-round free shipping through Club O.”

Byrne thinks that most online retailers will have to move to free shipping eventually, even if it is offered through a loyalty program. And, he believes, it ultimately will be better for consumers. “If we’re going to send you a chair that we’ll sell to you for $100 and we know it costs $30 to ship it via UPS, why not just tell you that it costs $130?

“It has perturbed us that other [retailers have similar items] up there on comparative shopping engines at $125. They look less than us, but they’ll charge an extra $40 to ship it. When they compare prices, consumers don’t always compare apples to apples.”

Replacing shipping revenue
If most retailers move to free shipping at some point, those who have offered it for a while may lose a powerful way of differentiating themselves. That’s one of the reasons Overstock launched a carbon-neutral shipping program for all of its Worldstock products in late April. The company plants trees to mitigate carbon dioxide emissions produced by the trucks that deliver items purchased from Worldstock Fair Trade.

If it proves popular, Byrne says the company may expand the program to all of its deliveries. “We’ll see how much consumers care,” Byrne says. “It really takes a small, incremental lift for us to be able to pay for it.”

Not everyone is on the free shipping bandwagon, and for some the switch will be difficult, especially those that view shipping charges as incremental revenue drivers. A large retailer “may be making $100 million off of shipping,” Magness says. “To say ‘We’re going to offer it for free,’ they have to sell enough at full price so that the margin equates to $100 million.”

Free shipping also has the potential to reduce basket size. “There is zero inhibition to make that purchase now,” Sambar says. “I don’t need to wait until I get three other items. It increases the frequency of purchases and the value of that customer. But the discussion is, ‘Are you profitable doing that?’”