Conquering the Free Shipping Conundrum: How to Make Money Without Forfeiting Margins
Millennials are discount-hungry. Blame it on the economy in which they launched their careers or attribute it to their digitally savvy shopping habits. Either way, a new report from Mindshare North America shows that this generation will do just about anything to buy goods at the lowest possible cost. Just look at these stats for proof:
- 47% of millennials will purposely leave items in their shopping cart in hopes that the retailer will reach out with a promotion.
- 39% of millennials clear their online search history to get better prices from online sellers.
- 26% of millennials have purposely entered a fake birth date to receive a discount.
- 70% of millennials search for promo codes online before purchasing.
Another study conducted jointly by Forbes and Elite Daily mimicked similar findings, and found that 57% of millennials report they will not change their spending habits.
Millennials Move Towards Mobile
But there’s more: Millennials are also depending on their mobile devices as necessary comparison tools when shopping both in-store and online. Continuous access to the internet allows 59% of shoppers to simultaneously search competitor’s product listings or even access barcode scanner apps to find the same product for the cheapest possible price online. And, with 66% of millennials using new mobile payment services, the process of mobile purchasing isn’t only seamless — it’s becoming commonplace.
This shift in consumer shopping habits (increasingly ecommerce, and even within that segment, increasingly mobile), has forced many retailers to pivot their pricing and marketing strategies. And top of the list for most online stores is free shipping –– and the ability to offer it, or not.
The Free Shipping Question
For many retailers, free shipping simply cuts too far into their margins, eliminating any possibility of profitability. Even Amazon is among those –– the company reported net shipping costs were more than $1 billion per quarter in 2014. Amazon made a strategic decision to subsidize shipping heavily as part of their growth strategy.
And in the ecommerce industry, when one behemoth brand does something the consumers like, most others must follow suit. Indeed, consumer perception of shipping costs now weighs heavily on their purchasing decision. Pitney Bowes published their 2015 Holiday Shipping Survey and it makes for an interesting read. Here are some of the more relevant and poignant points:
- 93% of consumers say shipping options are an important factor in their online shopping experience (up a massive 24% from 2014)
- 88% said that free shipping with 5-7 day delivery time is more attractive than paying a fee for 1-2 day faster delivery
- 3 in 5 consumers have increased their total spend in the past to qualify for free shipping
- 68% have used a free shipping coupon code
In all, free shipping has essentially become a marketing tactic to help you close sales. Below are tips from shipping expert Karen Baker on how you can use free shipping as a marketing channel, while still maintaining your margins.
1) Consider Your Industry
As a merchant, you need to think about your market sector, your competition and the space in which you play. You might not need free shipping. This is especially true in the B2B space, where what might be more important is accurate dimensional based pricing.
If you have loyal customers, they will appreciate you passing on your negotiated rates to them and giving them the choice over urgency of delivery. If you are competing based on product price, then it may be that you have no ability to absorb free shipping costs. It’s all about information accuracy, and using multiple carriers where required so you can offer the best and cheapest service.
Be transparent, be honest. Customers appreciate it.
2) Offer Free Shipping to Limited Regions
As a starter, in the U.S. you should limit free shipping to the U.S. 48 contiguous states. Alaska, Hawaii, Puerto Rico –– sorry, you are out of luck. People in those places expect to pay extra for shipping.
APOs and PO Boxes are other areas for which you can switch off free shipping. If you take a look at Jet.com, they follow this policy. Copy it.
3) Surcharge Your Expedited Rates
We know how this works. We go to a store advertising free shipping. We shop. Then, we get to checkout and find out it’s going to take 10 days to deliver. Amazon is the master of this. They will purposely hold the shipment back for a few days if its free.
The reasoning is that, by this point, we are committed to the sale. We’ll then think, “Oh, another $10 bucks I could get this faster.” This is where your opportunity lies. Surcharge the expedited. There will be a segment of customers (especially as the holidays get closer) that will pay extra to get it faster. This surcharge can offset the free shipping you are offering other customers.
4) Take a Monthly View
Some merchants want to look at every single order and ensure they make a profit. In some cases, that’s necessary. In most cases, taking a monthly view is a better option.
You win some, you lose some. It’s an iterative process. You should understand your shipping rules and be able to correlate what’s happening with your charges against your own policy. At the end of the month –– are you happy with the results?
5) Show Delivery Time
People are becoming more and more impatient. And, more and more used to having readily available information. Having an estimated number of delivery days, or an expected delivery date, is becoming more important.
Once you have that, you can then have more leverage around upselling faster services. Remember: people are much less tolerant now, and they have greater choice to shop elsewhere.
6) Offer Free Shipping After Conditions Met
Try pushing up your minimum order price to qualify for free shipping. Does it affect sales? Maybe. Run an A/B test to see what the impact is.
You can advertise free shipping on your site, but qualify that it only applies on your small goods, a certain category or maybe you want to just offer it on your big ticket items. Free shipping on your site doesn’t have to be universal.
7) Use Promotions
We all love a promotion. Does it need to be free shipping? Maybe you publish list rates for UPS, but then offer 20% shipping discount to your returning customers via an email campaign. Or, just charge shipping on the highest value goods. For example, if I buy a kayak, I might pay shipping for that, but any other goods in the store ship for free. There are many, many combinations you can do here which give customer reward and encourage a higher dollar price.