Is free shipping a gimmick? When it first entered the scene, online shopping was heralded as the game-changer that would spell the death knell for traditional retail. E-commerce pioneers like Amazon and eBay were supposed to crush their large unwieldy physical counterparts and have them for breakfast.
While, these two and all the others that followed, have made a dent in the total earnings of traditional retail, it has not been anywhere close to as catastrophic as it was predicted to be. Even in the most developed retail markets in the world like the USA and the UK, e-commerce only accounts for 11.6% and 13.5% of total retail sales annually.
Even though e-commerce got rid of the various layers and middlemen in traditional retail (each with their own profit margins) and removed the cost of retail space and display, there was another looming cost that made up for all these miscellaneous expenses that held back traditional retail. This was the cost of shipping the purchased items to the buyer, wherever they may be.
The Problem of Shipping Costs
1. Shipping costs really squeeze retailers’ margins
‘Free shipping’ is never really ‘free’. If the buyer doesn’t, the seller has to shell out for shipping costs.
Shipping costs ranged from 5% to 20% of their total revenue, so any free shipping offer forces companies to absorb this expense. ~ UPS & Forrester Shipping Study 2011.
2. Absence of free shipping puts your business on the back foot
With almost 50% of all e-commerce players now offering free shipping in some form or the other, consumers have come to EXPECT free shipping when they shop online.
According to a ComScore study, at least 61% of users are likely to cancel their entire purchase if they eventually find that free shipping is not offered. ~ ComScore
3. Free shipping makes people buy more online
The UPS and Forrester research study quoted above, also showed that online retailers that do not normally offer free shipping see a lift in sales of about 10% to 20% as a result of the free shipping offer.
5 Ways to Solve the Shipping Problem
1. Subscription Model
Many online retailers have successfully developed a free shipping via subscription model, where the repeat purchases per month through the subscription, make up for the loss incurred by the retailers on free shipping. The marketing costs that would have gone into leading the user to make a repeat purchase, is saved in a subscription model and plowed back into subsidizing shipping costs.
JewelMint and JustFab are just two of the hundreds of e-commerce sites out there that are using the subscription model to offer free shipping. Amazon Prime’s model is another take on the subscription based free shipping concept.
2. Minimum Purchase Requirement
Set a minimum purchase requirement on your site, say, $50. Any customer who makes purchases of $50 or above would be eligible for free shipping. Amazon, Walmart (online), Target (online), Old Navy and a bunch of other leading online retailers follow this model.
According to a Deloitte study of holiday shopping habits of over 5000 shoppers in 2012, they found that 63% of shoppers planned on changing the way they usually shop in order to save money. Of these 40% of shoppers were ready to shop more items to qualify for free shipping and save money on it.
By extrapolation, this means that 25% of all shoppers would buy more products to reach the minimum purchase requirement and qualify for free shipping. What could be better news for online retailers?
3. Flat Rate Shipping
Instead of full free shipping to any place under the sun, offer an extremely low flat rate for shipping any item on your site to any place domestically.
Negotiate a good deal with your shipping partner for better rates by promising higher volumes. Utilize the great flat rate option that USPS provides. With USPS flat rate boxes, you can ship items as heavy as you like, just as long as they fit into the box.
4. Free Shipping as a Promotional Offer
If you cannot afford free shipping as a year long activity, at least offer free shipping during periods of low activity or during highly competitive periods like the end of the year holiday season.
As mentioned earlier, promotional free shipping offers, lead to a minimum of 10-20% growth in sales during the offer period.
5. Build shipping cost into product cost
This is one’s a double edged sword and should not be resorted to unless you have no options left.
One of the largest benefits of e-commerce is the power in the users’ hands to compare prices of the same product across multiple sites at the click of a button. If you build in the cost of shipping into your initial listed price for the product, you are essentially setting the stage for the user to buy from a seemingly cheaper competitor who did not bundle shipping cost into product costs.
However, this strategy would work with more mature online shoppers as they will see through the fact that shipping costs are additional on your competitors’ sites and will continue shopping with you.
The Final Word
Free shipping is here to stay. Whether we like it or not, we need to figure out ways that suit our businesses best to offer free shipping if e-commerce has to live up to its destiny as the future of all retail.
Know of any creative ideas to reduce shipping costs / offer free shipping? Share your ideas with us in the comments below.
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