Is Free Shipping Really Free?
By Jill Bauerle
When it comes to online purchases, no two words are more likely to require a calculator than "free shipping." As with music and frequent flyer miles, consumers like their shipping free. But when they do the math, they realize that free shipping is often an oxymoron. Somebody has to pay for all of those styrofoam peanuts.
According to a recent survey by online retailer trade group Shop.org, 75 percent of online shoppers said that free shipping was important to their decision-making process. At the same time, many online retailers have upped the ante on free shipping by requiring higher price thresholds and other conditions.
It seems that retailers have studied up on Free Shipping and Repeat Buying on the Internet: Theory and Evidence, a 2005 study by Wharton Business School professor David Bell and two colleagues from other business schools. After analyzing purchase patterns at retailers such as Amazon.com, Bell and his colleagues found that given the choice, online shoppers prefer a free shipping offer that saves $6.99 versus a $10 discount.
"It's counterintuitive," said Bell. "If a company offered $10 off an order, they got more people ordering, but by offering free shipping they got an even bigger response."
Bell's study also found that shoppers became indifferent when choosing between a high price with free shipping or a low price that requires paying for shipping. Those who pay the high price ended up shopping less frequently. When Amazon.com lowered its free shipping threshold to $25 from $50, Bell said, the company found that shoppers ordered in smaller volumes, but shopped more frequently. The bottom line is that somebody has to pay for free shipping, and fewer online stores are willing to take the hit. But some do and see it as a key differentiator.
Truly Free Shipping Is Rare But Not Extinct
While the days of Kozmo.com delivering a 60 cent package of M&Ms for free by bike messenger have long disappeared, some companies have managed to transform free shipping into big profits.
One such company is Miami-based Databazaar.com, an online retailer of printers and printer supplies. When Databazaar.com began offering free shipping with no conditions or minimums five years ago, sales spiked 20 percent. With 2005 sales figures totaling $31 million, CEO Oney Seal remains committed to what he calls "truly free shipping."
"We're making a smaller profit than our competitors," said Seal, admitting that the decision to lower the price threshold from $50 to zero was difficult. "Shipping remains one of the biggest items on our P&L."
Seal said he tries to cut costs in other ways, like increasing efficiency. In the world of Internet price aggregators, he claims shoppers comparing apples to apples (such as an ink jet cartridge) are more likely to click over to Databazaar.com in search of free shipping.
Not only does truly free shipping attract more eyeballs, but more repeat business as well, according to Tony Hsieh, CEO of the Las Vegas-based Web shoe retailer Zappos.com.
Since offering condition-free shipping both ways (deliveries and returns) seven years ago, Zappos.com's sales rose from $1.6 million in 1999 to a projected $575 million in 2006.
"In the short run, it means less profit, but I think it's definitely connected to the growth," said Hsieh of the company's free shipping policy.
"Our site is driven by word of mouth and repeat customers. Every time we do something to improve our service, we see repeat numbers go up."
Free Shipping in Some Form Is Here to Stay
In the hyper-competitive world of online retailing, consumers can probably count on free shipping in some form for the long term. In some categories such as shoes, dominant retailers like Zappos.com have forced their competitors to (grudgingly no doubt) offer truly free shipping.
"As a retailer you almost have no choice," said Scott Silverman, executive director Shop.org "It almost becomes a cost of doing business. I don't mean to sound flippant, but retailers don't have a choice in the matter if they want to be competitive."