Why should eCommerce retailers offer free shipping?

Shipping is becoming the battleground for online retailers. Where once price was the weapon of choice when it came to squashing the competition, today it is free shipping – and more precisely free, rapid shipping – where consumers weigh up who to buy from.
One of the biggest sticking points with eCommerce is shipping. AlixPartners recently conducted a survey that found that 36% of people were put off buying something because they felt the delivery costs were too high – making delivery costs the second most important reason that shoppers abandoned carts, just behind needing to see or try the item before purchase at 37%.
With this in mind, many retailers are seeing that shipping costs are where the customer decides to buy with a retailer or not. Delivery costs and speed are also what promotes users to come back to the same retailers and to recommend retailers to others.

Why free shipping works

The reasoning behind offering free shipping are clear. Not only do consumers like to get something for nothing, but shipping costs – and options – are often where shoppers abandon their carts, baulking at additional costs and/or delays.
Adding in free, rapid delivery (next day or two working days) plays against these fears and makes your site and those impulse purchases more attractive. But free shipping offers a host of reasons why any eCommerce company should offer it.
Increased sales – put simply, free shipping can increase sales. Not only does it lead to a reduction in cart abandonment, but also leads to increased numbers of sales. This is hard to demonstrate with research: it is such a no-brainer that consumers will use something more if it’s free than if they have to pay that it appears no one has researched it.
Back in 2014, a Business Insider report showed that 58% of US consumers used free shipping options when buying things, while Stitch Labs found that retailers that include free shipping see sales grow by 10%. Given that so many retailers today offer free shipping shows that these old studies are on the right lines, but that increased sales due to free shipping are even more impressive than these suggest.
Increased ARPU – Free shipping also leads to increased average revenue per user (ARPU). As we shall see momentarily, one free shipping strategy revolves around offering free shipping on orders over a certain amount. This often leads to shoppers adding things to their cart to get it over that limit and get the free shipping.
It is a uniquely effective up-sell technique if, as we shall see, it is applied correctly. In fact, a June 2015 study from comScore and UPS said that 52% of American shoppers have added items to their ecommerce shopping cart to qualify for free shipping.
Increasing loyalty – Another upshot of free shipping is loyalty. Free shipping – whether as an option, or above a threshold cart value or as part of a loyalty or membership scheme, leads to shoppers coming back to that retailer. Witness Amazon Prime. Despite the fact that it gives access to TV content and isn’t technically free (the user pays $79/£79 per year), the fact that it allows for free delivery on some items sees those items sell more.
Again, as we shall see shortly, offering free shipping as part of a membership scheme also drives increased loyalty to the brand with shoppers prepared to sign up – so you get a load of data on them – and even pay to get ‘free’ shipping and next day delivery on goods. This not only gives you valuable data and insight into what they do, but it also tends to see them come back for more.

How to offer free delivery

So how do you go about offering free delivery? While paying for it is the obvious question (which we shall come to in a moment), what forms of free shipping you should offer is an important question – both from a practical perspective and from a profitability one.

Here are some of the key ways you can offer free shipping with some of their pros and cons.

Free shipping for everything – Some retailers will offer free delivery on everything. This is usually found on expensive but small items such as jewelry and on small cheap items. However, there are usually stipulations such as in-country only and the delivery may not be the fastest way to get hold of the goods. The pros are that it makes the shipping options simple for the user and makes them feel like they are getting something for nothing. On the downside, it is a cost that the retailer has to bear.
Free on some items – Retailers that sell a variety of goods often choose free shipping on high margin items, where the costs of the shipping can be swallowed by the margin. Again this often applies to small and either high or low-value items and usually, again only works with ‘slow’ delivery.
Free above a threshold – As we have seen, some retailers choose to add free shipping to order or basket values above a certain threshold value. This has the advantage of encouraging upsell to tip a basket over the threshold and the cost can be covered by building the cost of the shipping incrementally into all goods.
Free shipping at certain times of year – One shipping strategy is to offer free shipping at certain times of the year around certain events. For instance, Black Friday and Cyber Monday may see greater free shipping availability as that is when competition is tightest. However, this can be problematic as, at such a competitive time, margins are already really tight. More effective is to use an event, say Valentine’s Day or Mother’s Day to encourage early sales by offering free shipping if ordered before a certain date.
Member and loyalty programmes – As we have mentioned, free shipping can also be included as a benefit for customers that sign up or join a membership or loyalty programme. While this can be free – the value being in the data you procure and the repeat business you should generate – many retailers are looking at adding a small annual fee to ‘join’ and then using that to offer not only free delivery but free next-day delivery. Fashion retailer ASOS has done this to great effect.

Paying for free delivery

There’s no such thing as a free lunch – so the big question with all of this is how do you pay for it? As we have seen, offering free shipping on high margin can have the costs covered by simply using some of that margin to cover the cost of the delivery. But for most items, this just doesn’t work. So what are the options?
Bake the cost of delivery into the price – The simplest solution is to increase all your prices slightly and use the increased profit to cover off the cost of free shipping. Offering free shipping across the board with the cost baked in makes for an economical way to cover the shipping cost. However, in such a competitive market as online retail, while the price isn’t the main area of competition anymore, the price is still the initial decision point for most shoppers. They may well make their buying decision based on shipping, but you are only in the running of your price is the same as others.
Bake next day free delivery into the price – One way around this conundrum is to offer your goods at above the average price of your competitors but use that extra element to fund free next day delivery. With some goods, the customer is always prepared to pay extra to get their goods quickly. Making the basic price of the item higher, but offering free delivery, makes the shopper feel that it’s worth paying more for.
Membership schemes – As we have seen there is a growing movement to charge shoppers a low annual fee to ‘join’ a loyalty scheme. This loyalty scheme has to offer a range of benefits – access to unique content and advice, access to new items before anyone else. It can also include, as part of this, free next day delivery on goods and items. This covers the costs of delivery in direct terms, but it also gives access to consumer data that can also be monetized through either more targeted, personalized marketing or by selling data on.
It is clear that, with the race to the bottom on price now done, delivery is the new battleground. But free delivery needs to be looked at in terms of the economics of the value and perceived value of your product against the value of guaranteeing the sale. While the cost of free shipping can be baked into the price, increasingly, free delivery is becoming something that can be allied to personalization and marketing, as well as loyalty and membership.
While on the face of it free shipping seems simple – free shipping = more sales – in fact, it is part of a move to a more complex, personalized, loyalty driven play for retailers.
Are you offering free shipping? Share why you are, or are not, with us in the comments below or Tweet us!

Image credit : Eddie Lobanovskiy