Merchant Spotlight:
The Case for Free Shipping: Is it Profitable?
April 26th, 2011 by Darby Williams
Free shipping has been around for ages (at least the eCommerce age). You would think it’s been fully studied and every online merchandiser knows the quantitative impact on their business. But it hasn’t, and they don’t. They know a lot about it, but not always whether it’s profitable!
Summary Conclusions
Our Case Study on TheFind’s new Quick Promotion tool shows a 23% traffic uplift for retailers running Free Shipping promotions on TheFind. Industry research suggests that free shipping on reasonably-sized products could be a profitable way to grow traffic, sales and loyalty. The trend among most retailers it to offer some form of free shipping during key selling periods (like Holidays and Mothers’ Day). The trend for more and more influential retailers is to offer unconditional free standard shipping (but that may be more strategic than profitable). Free shipping clubs is a great way for smaller retailers to reap some of the shipping economies large retailers enjoy, and make Free Shipping (with a minimum order size) profitable.
Case Study on TheFind
We started by understanding the impact of Free Shipping on driving traffic to your site – from TheFind. On March 20th, we launched a “Quick Promotions” tool in our Merchant Center. With this tool, merchants can quickly set up an across-the-board Free Shipping promotion for every product that meets a specified price range. A key feature of the tool is that Free Shipping is boldly displayed in the product tile on our search results pages.
Since March 20th, 113 Merchants have initiated Free Shipping promotions on TheFind using this tool. We measured both clicks and impressions for a 2-week period just prior and just after starting the Free Shipping promotion. We analyzed Click-Through Rates to normalize for changes in demand during this period. What we found was an average uplift of 23.1% in CTR from offering Free Shipping on our search results pages. Our conclusion is that “You can significantly increase traffic with Free Shipping, taking share directly from your competitors”. Makes sense in general.
Tipping Point – Commit or Lose Share:
You’ve probably noticed more articles and blog postings about Free Shipping in the last 6 months. That’s because there’s significant momentum with Free Shipping promotions – in aggregate and with notable eCommerce trend-setters. It’s hard to determine realtime when tipping points occur, but the indications look very strong that for Free Shipping promotions, the tipping point is happening now!
In aggregate during the 2010 Holidays comScore reported the percentage of U.S. eCommerce transactions that included free shipping rose to 55.1% the week of Nov 11/28/10, up from 45.6% the same week in 2009. Given the need to promote heavily during the 2009 recession, the increase in 2010 is quite significant. 57.5% of merchants offered free shipping without conditions at some point during the 2010 Holiday period, perhaps even more surprising than overall adoption percentages. 7% of the leading 100 online retailers offered Free Shipping on all orders, according to Lauren Freedman’s etailing group annual mystery shopping survey.
Trend-setting individual merchants:
Amazon – offers free shipping on qualified orders over $25; plus, Amazon Prime – free 2-day shipping for all Prime members.
Walmart – for the Holidays, offered free shipping on nearly 60,000 online items, including most electronics, jewelry and toys — with no minimum purchase requirement.
Zappos – a true pioneer in this area, offers free shipping as part of its deep-seated customer service commitment that includes free shipping BOTH ways plus 365-day return policy and 24/7 customer service.
Ebay – big push with its sellers to offer Free Shipping promotions – products sold using Free Shipping rose dramatically – from 5% in Q1/08 to 33% in Q4/10.
Macy’s – offers free shipping for all products $99 or more.
Overstock.com – offers free shipping for new customers on their first order.
LL Bean – offers free shipping with “no minimum purchase, no end date and no conditions – guaranteed”.
Free Shipping membership clubs:
Amazon Prime – free unlimited two-day shipping, no minimum order size.
Williams Sonoma Reserve – free standard shipping on most items.
Sears’ ShopVantage – free standard shipping.
Overstock’s Club O – free shipping on every order, plus 5% discount on most items
ShopRunner – free unlimited two-day shipping, no minimum purchase; plus all ShopRunner returns ship free (equivalent to Zappos).
MasterCard Marketplace – free shipping is a prominent feature with participating merchants.
Of all these trends, in my opinion the combined moves of Walmart and Amazon have impacted online retailers the most, given the breadth of their combined product coverage. Next most impactful are the “all-in” commitments of Zappos and L.L. Bean. Did we say “Tipping Point”?
The Economics:
The domino effect of these competitive moves will likely drive Free Shipping to become a “cost of doing business”. You may need to ante up to maintain share. I think we’re a year or 18 months from that point, but proactive merchants may want to take the plunge now, and be fully and permanently committed by the Holidays. In fact, you may want to purposely make this move well before the Holidays. Undoubtedly, it was very deliberate timing of L.L. Bean to commit in a non-Holiday period to make the case that it’s part of their founding commitment to customer service, not just a Holiday promotion.
That said, I’m sure you still want to know the economic impact of making a permanent move to Free Shipping. Here’s what we discovered in our research and analysis:
Increase in Average Order Value – comScore measured the correlation between Free Shipping and AOV over the 2010 Holiday period, and found a whopping 45% higher AOV on average with products sold with Free Shipping. (See chart to right) This factor clearly helps in delivering “profit contribution” to the equation, though it may not fully compensate for the added shipping cost. The key question is, of course, “that’s the average, but how much will your AOV increase with Free Shipping?”
Increase in Orders – Reason #1 – Reduction in Shopping Cart Abandonment – As you know, the Shopping Cart is where most shoppers first discover the cost of shipping. The surprise of discovering high shipping costs at that pivotal point in the shopping process is the #1 reason shoppers abandon their cart. Which is a key reason why Amazon, L.L. Bean and others state Free Shipping on their key landing pages. Perhaps our case study results, above, might shed some light on the impact free shipping on cart abandonment – 23% increase in click-through on TheFind might translate to the same ballpark drop in cart abandonment.
Increase in Orders – Reason #2 - Bringing Shoppers Off the Sidelines – a recent consumer survey found that 23% of consumers use the reason “high shipping costs” to avoid buying online. In other words, free shipping actually increases the overall size of the online shopping market. It may well cannibalize some offline sales for multichannel retailers, but I believe it’s a net increase for multichannel merchants, as cannibalization will probably pull from competitors’ channels, as well.
Increase in Lifetime Value –with Free Shipping membership clubs, like Amazon’s Prime and Williams-Sonoma Reserve, there appears to be strong evidence that loyalty increases significantly, causing members to “think twice” before buying elsewhere. The net benefit is more frequent shopping occasions and higher revenue-per-member per year, drawing share directly from competitors.
Decrease in Acquisition Cost – We hear more and more from merchants registered on TheFind that their primary marketing challenge is new customer acquisition. Even if the contribution margin of a new customer’s first shopping occasion is negative, the use of Free Shipping as a purchase motivator for first-time customers could significantly increase the open and click-through rates of email marketing and display advertising campaigns, significantly reducing their CPA. (Here again, our case study results of 23% click-through lift might be a starting point guess for CPA decline.) This is probably why Overstock has aggressively pursued the use of Free Shipping in new customer acquisition.
The Offset: The Actual Cost of Shipping – as with most of the profitability drivers above, the cost of shipping varies by product. Product size and weight. Product value. Shipping distance. Guaranteed delivery timing. So any effort to determine the profitability of Free Shipping must be modeled for each product category (or macro-grouping of products by size-weight-value). Most merchants who offer Free Shipping do so using “standard” (or ground) shipping (4-5 day shipping), bringing shipping costs down significantly. The few articles that have been published about the net profitability of Free Shipping suggest that even then, without significant AOV increases, Free Shipping is not profitable at the order level. Clearly, a full profitability model needs to be developed to really know. But the most sensitive variable in this model is the actual shipping costs. And economies of scale do exist in shipping. A recent New York Times article cites the Distribution Management Group who reported that air shipping prices for big merchants are about 70% less than for small merchants. Luckily, the rise in clubs like ShopRunner – a branded Free Shipping buying club for participating merchants – aggregates hundreds of merchants to bring much of the scale benefits enjoyed by the very large merchants to all merchants.
So, in answer to the question “Free Shipping: Is It Profitable?” – it depends… on the factors mentioned above, and it needs to be modeled for each product category in your business. I will go out on a limb and say that using best practices in how you employ Free Shipping and fully leveraging the scale economies of your company, or participating in aggregation clubs like ShopRunner or marketplaces like Amazon’s Marketplace, will likely enable you to make Free Shipping both profitable and strategic to your company, for most reasonably-sized products. (The version of Free Shipping that drives the most likely AOV uplift tends to be Free Shipping for all customers who reach a minimum order threshold.) And the sooner you do it, the more your early returns will include share increase instead of share maintenance.
Darby Williams
Darby heads up Merchant Services at TheFind, responsible for engaging the merchant community and creating merchant tools and programs that drive revenue lift. Prior to TheFind, he was the first product and marketing exec at PowerReviews, where he helped lead the creation of social commerce solutions for retailers and brands. Prior to that, Darby lead marketing and product teams for software and ecommerce companies, such as Microsoft, Active Decisions and Cook Express. Darby has an M.B.A. from The University of Chicago, B.A. from University of Virginia, and is a loyal fan of The Food Network, So You Think You Can Dance and The Washington Redskins... or any combination thereof.
