Picture yourself browsing the Internet, shopping for that perfect gift. As you compare prices, one stands out: ‘Free Shipping on orders of [insert price] or more!’ Your brain starts spinning as you think So, if I order that whirlygig for myself, that will get my order total up to the free shipping cutoff. Sound familiar? It should. The phrase ‘free shipping’ is the most successful marketing tool for many online retailers. It is Homer’s siren song of online shopping, the irresistible draw that keeps customers coming. How does this work for retailers? As a small businessperson, could this free shipping promotional tool work for you? This article explores free shipping thresholds and the companies that use them.
Fact or Fiction: Free Shipping saves customers money.
Answer: A little of both, depending on how it’s orgnized. Managers can set up shipping fees in ways that encourage customers to buy in a quantity that is most efficient for the processing and shipping needs of the company. If the company can ship higher quantities in fewer shipments, thresholds are often higher, encouraging customers to buy more for the “free shipping” prize. On the other hand, companies that need smaller quantities ordered in greater frequency might offer a lower threshold for “free shipping.”
It should be noted that if a company begins with low prices and raises the shipping threshold, prices for the product should be lowered. Conversely, prices that were high to begin with should be raised if the shipping threshold is lowered. In the first example, consumers are paying less for the product, but more for the shipping. In the second scenario, people pay more for the product, but less for the shipping. It all equals out, and rational customers will be indifferent in the end.
In short, a company needs to experiment with shipping costs to determine what appeals to their customer base. Consider what shipping offer drives the consumer to buy in quantities that can be efficiently processed.
Fact or fiction: Free shipping makes consumers feel as if they have had a transaction at the neighborhood store.
Answer: Fact. Some analysts argue that shipping fees are similar to the time and travel costs of visiting a brick-and-mortar store. However, many consumers don’t buy in to this argument because travel costs are not collected in the physical check-out line.
Fact or Fiction: As free shipping thresholds drop, consumers have less reason to make purchasing decisions on price alone.
Answer: True. This phenomenon can be explained using Amazon.com’s experimentation with free shipping thresholds. Amazon.com has tested a number of free shipping thresholds since 2002. At first, Amazon offered consumers free shipping if they spent $99, and then lowered the threshold two times that year: first to $49, then to $25.
When a $49 purchase activated free shipping, the average purchase amount of products per order was 3.31. When the threshold fell to $25, the average purchase quantity also fell to 2.53. The customers whose data was utilized made purchases when both thresholds were present. Those consumers spent $17 less per “free-shipping” order under the lower threshold, and purchased 1.82 fewer items. In Amazon’s case, we see that lower thresholds for free shipping leads to greater variation in prices for the same products.
As Internet retail continues to grow, so does the opportunity to research trends on free shipping. In the meantime, businesses that choose to take advantage of this marketing tool must find a method to support its existence.
