In its second-largest acquisition, Amazon buys the company for $970 million.
Profit pressures are forcing retailers to recover shipping costs. The problem is that consumers don’t want to pay. What’s a retailer to do? Includes table of shipping rates at the 25 largest sites plus 15 sites representative of smaller retailers.
Everyone loves a bargain-and web shoppers are no exception. Even web marketing professionals aren’t immune. One of those who jumped on the bandwagon last month for Amazon’s promotion of free shipping on orders of five books was Jupiter Media Metrix Senior Retail Analyst Ken Cassar. With four books in his cart, he found himself browsing for a fifth one to push his order into the free shipping zone. “The Amazon promotion is smart,” Cassar says. “In the past, e-retailers didn’t use free shipping particularly intelligently.”
Amazon’s offer-free shipping with conditions - illustrates one approach retailers are using as they try to move off the increasingly sharp horns of a dilemma. Early on, many web merchants swallowed or underpriced shipping and handling charges to attract shoppers. But as the online market develops and early business models come under tighter scrutiny, web merchants are struggling with reassessing shipping charges in a way that doesn’t undercut the bottom line but still keeps customers happy.
Amazon’s approach demonstrates the targeted way that retailers are using free shipping these days. For one thing, Amazon knows its products well enough that free shipping offers no surprises. Books, a fairly standard item, don’t for the most part exceed a predictable weight and size, and Amazon knows exactly what it costs to ship them. For another, Amazon limited the offer to books in stock at the same warehouse, to avoid the added shipping cost of split orders.
But while retailers are trying to put the brakes on free shipping, plenty of research demonstrates that there are few online promotions web shoppers like better. In a Forrester Research study published last month, 43% of shoppers consider free shipping among the most powerful incentives to shopping online of the 10 they were asked to rate-second only to the 46% who ranked a flat discount of purchase price as the most compelling. Free or discounted shipping won hands down as the favorite promotion in a Jupiter survey conducted just ahead of the holidays.
Driving consumers off
And there’s also plenty of negative evidence to support the notion that frustration with web store shipping charges is a major deterrent to online purchasing and can drive shoppers off site or off channel. In a recent Yankee Group survey, shipping charges perceived as too expensive was the top reason shoppers abandoned carts prior to purchase; 56% said it was reason enough to bail out. In an Ernst & Young report, more consumers - 42% - cited high shipping costs as the reason they left shopping carts before check out than any other reason, and 53% said lowering shipping costs was the number-one improvement needed in online shopping.
So it’s true that consumers like free shipping, but the flip side of that equation is that e-retailers that underpriced shipping and handling early on to attract customers are now paying dearly for it. A total of 44% of web merchants lose money on shipping, according to research from Jupiter; the Gartner Group places it at more than half. “The land grab that happened early on was about getting the goods to the consumer at the lowest cost,” says Darren Bien, a Jupiter analyst. “Shipping was an incremental charge, an impediment that would cause shoppers to go to the store as opposed to buying online. So merchants were giving it away. But as e-retailers strive for profitability, they’re going to have to look at their losses in shipping.”
That’s one of the elements that helped bring down Pets.com. The market for commodities such as pet food is extremely price sensitive online and off, and the company couldn’t charge appropriately for shipping charges and still attract customers. So it ate a share of those charges, a practice it couldn’t sustain. While Pets.com is one of the more drastic examples, others are attempting to change course, reevaluating polices before they get to that point. They’re being more selective about free and discounted shipping, using it in a more targeted way to encourage purchasing rather than just attract traffic.
Among 40 leading Web sites studied by Internet Retailer, attaching a minimum order size to free delivery is a common strategy by e-retailers that still offer it at all. Outpost.com, for example, had offered free overnight shipping on all domestic orders starting in April 1999. But by February of this year it had ended that practice, citing not only a softening computer market, but also increased shipping costs. Within a month, Outpost reported that by limiting free overnight shipping to purchases of more than $100, it had significantly increased average order size and eliminated a large number of small unprofitable orders.
Like other e-retailers, Outpost is struggling to generate a profit. “The margins on most of the products we sell are very tight,” says Edee Wollins, vice president of marketing. “In providing free shipping, we’ve obviously been giving a value-added promotion to customers. We’re trying to figure out a better way to manage that.”
Still free offers
Because they serve the demands of small and home businesses as well as individuals, e-retailers of office machines and supplies offer free local delivery where they have stores-but only on larger orders. Staples.com provides free next day delivery locally on orders of $50 or more; so do OfficeMax.com and OfficeDepot.com. Also hanging onto free standard shipping with a minimum order size is Sephora.com, which requires a $60 or greater order; and Alloy.com, which requires an order of $75 or more. Luxury goods e-retailer Ashford got lots of attention over the holidays for offering free overnight shipping on orders of $100 and more, but the company is now reevaluating its shipping policy.