July 2, 2012, 10:47 AM

Striving To Be Free

As free shipping becomes a must-have service, retailers crunch their numbers to make it work.

Lead Photo

If you offer free shipping, will it drive up enough extra business to cover the costs of providing it?

Greg Sanders wanted to know. And after a year of testing free shipping on all orders at MyBabyClothes.com, the founder and CEO had his answer: No, definitely not.

"We were hoping that by offering free shipping, it would increase our conversion rate, and it did," he says. "But we didn't anticipate that our average order value would go down from our average of $35, which it did. So free shipping was a net loser."

Nonetheless, the test was worth it, Sanders says, for at least two reasons: It confirmed that MyBabyClothes.com's customers would respond to free shipping like their kids would respond to candy, and it forced the retailer to hone a better formula. It decided to offer free shipping only on orders of $49 or more—putting the threshold $14 above its average order value—a move that led shoppers to spend more per order to avoid shipping costs. When that free shipping strategy began driving the same conversion rate that unconditional free shipping had, MyBabyClothes.com realized it had hit its free-shipping sweet spot.

"Things changed literally overnight," Sanders says. "We immediately started seeing higher average order values. And at the same higher conversion rate as with free shipping on all orders."

Shipping deals, as many retailers well know, are one of the best methods of persuading shoppers to buy something online. But there are many ways to offer either free or low-cost shipping, and it can take a lot of testing and number-crunching to figure out what works best for any one retailer.

"We're still testing to see what works," says Sayeh Pezeshki, founder and CEO of Sorting With Style, a web-only retailer of unusual office supplies designed to spruce up dull work spaces, such as sticky notes in the shape of ice cream cones. Pezeshki sparked holiday sales last fall after she introduced $2.95 shipping on most orders on SortingWithStyle.com. But to push conversion rates and sales even more, she recently took the advice of marketing consultants to offer free shipping across the board.

She's not alone. In a survey of 147 online retailers in the first quarter of this year, research and advisory firm The E-tailing Group Inc. found that unconditional free shipping was cited by 69% of respondents as being among their top three promotional strategies. Across all respondents, that made unconditional free shipping the sixth-most cited promotional method. Even more popular among respondents, however, was conditional free shipping, which typically requires a minimum order value to qualify for free shipping. With its proven ability to drive extra sales by shoppers seeking to meet the free shipping threshold, as Sanders found at MyBabyClothes.com, conditional free shipping was cited by 89% as among their top three promotional strategies, behind only sales/specials and seasonal promotions.

Indeed, consumers are getting more accustomed to seeing free shipping offers, particularly during the peak holiday shopping season in the fourth quarter. 52% of online retailer orders during last year's fourth quarter shipped free, up from 49% in the prior year's fourth quarter, according to web research firm comScore Inc.

Another study, based on a March survey of 1,000 adults by research and consulting firm AlixPartners LLP, found that consumers like free shipping enough to wait several days for an order to arrive. 75% of respondents said they were willing to wait at least five days for an e-commerce order to arrive if the shipping were free—including 50% who said they'd wait a full week. Another 12% of consumers said they'd wait only four days for an order shipped for free; 9% would wait up to three days, 4% up to two days.

When asked the main reasons they don't make online purchases, 36% of respondents cited shipping costs.

Many forms of free shipping

In a recent survey of online retailers, Innotrac Corp., a provider of fulfillment and customer service technology and services, found that 53% offered free shipping of some kind, including 14% that offered it on all orders. The other 39% that offered free shipping provided it at the following minimum order values: $25 - $49.99, 6%; $50 - $74.99, 11%; $75 - $99.99, 8%; $100-$124.99, 7%; $125 or more, 7%.

A survey last year by Internet Retailer found a wide range of holiday season free-shipping strategies—several of them tied to express deliveries to let late shoppers get gifts delivered by Christmas. Web-only jewelry retailer Blue Nile Inc., for example, offered free overnight shipping in time for delivery by Dec. 25, which last year fell on a Sunday. The retailer accepted most orders as late as 7 p.m. Eastern time on Dec. 22, a Thursday. For orders of customized jewelry, the cut-off time was 4 p.m. the same day.

Retail chains also got in on the action. Wal-Mart Stores Inc. offered free overnight shipping for delivery by Christmas of online orders placed by Dec. 20, and it shipped orders placed as late as Dec. 22 to a Wal-Mart store for pickup by Dec. 24.

Amazon.com Inc., meanwhile, continues to put pressure on rival web retailers with its Amazon Prime program, which offers two-day shipping for no cost beyond a $79 annual membership fee. Since debuting in 2005, Amazon Prime has garnered around 6 million paid subscribers plus another 3 or 4 million consumers who use it as part of free promotions, such as through the Amazon Mom baby products program, according to Colin Sebastian, senior research analyst, Internet and interactive entertainment, at investment banking firm Robert W. Baird & Co. Amazon does not publicly disclose its Prime membership numbers. A program similar to Amazon Prime is offered by ShopRunner Inc., which has "hundreds of thousands of members" among consumers and about 60 participating retailers, with another 25 retailers expected later this year, according to chief strategy officer Fiona Dias.

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