Getting the Goods

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.”

Web merchants including Buy.com and CircuitCity.com offer shoppers the chance to skip shipping charges altogether by picking up goods ordered online at the local store. Others like Costco.com and Egghead.com attempt to take the sticker shock out of shipping costs by displaying the shipping cost per item as customers shop. And there’s talk of new models like consolidated deferred shipping, which would give shoppers a price break on shipping in return for their willingness to wait for delivery.

Of the 40 web stores that Internet Retailer surveyed, only Overstock.com continues to offer free standard shipping on all orders. The mentality in which e-retailers simply gave free shipping away is largely over as e-retailers face up to the fact that it’s not a sustainable model. For like death and taxes, shipping costs are a fact of life. The Postal Service, UPS, FedEx and carriers that retailers depend on to get packages to shoppers’ doors don’t need to stage promotions to attract their customers’ attention, and they don’t need to drop prices to compete. In fact, the discounts they offer the biggest shippers like Amazon amount only to 2% to 5%, analysts estimate. “To make money as a retailer, you have to pass that cost onto consumers,” says Christopher Kelley, an analyst with Forrester Research. “Somebody pays.”

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One need only consider airline pricing to get a notion of how complicated a pricing strategy can get. Indeed, Internet Retailer found little standardization among merchants. But the survey does suggest that between merchants who underprice shipping and handling to bring in shoppers and those whose rates more than cover their charges from carriers, straight pass-through to shoppers on shipping charges isn’t the rule. For starters, third -party carriers like UPS and the USPS charge merchants based in part on package weight. Most sites, however, present their calculations of shipping charges to the consumer based on the value of the items purchased.

“Nothing drives me crazier,” declares Geri Spieler, research director at the Gartner Group. “Why should I pay more to ship a two-ounce scarf because it cost $150 than a 20-ounce pair of shoes that cost $75?”

But generally speaking, these costs aren’t made transparent on the web site. Even for those trying to be more strategic in their use of reduced shipping charges to compete on price, setting adequate shipping is a challenge. “Sometimes, online retailers’ shipping and handling charges fail to cover even their cost of shipping, with materials and fulfillment costs compounding losses,” notes David Schatsky, a Jupiter analyst. Over time, the longer-established catalog industry has gotten better at setting appropriate shipping and handling fees: a Direct Marketing Association survey found that 55% of them break even on shipping and handling, as opposed to 22% of e-retailers in the Jupiter survey.

Many retailers could attempt to bring some predictability to shipping and handling costs by divorcing shipping charges from weight and presenting them instead to consumers as a portion of the value of goods purchased. This method spreads the cost among all customers and results in a shipping charge policy that can be depicted in one table rather than customized for multiple zones and preferences.

For attempting to display that many variables for shipping on a retialer’s site isn’t practical, says Harvey Software President Burt Hamilton. Harvey Software is one of a number of software providers that’s developed back-end technology that lets companies determine which carrier will provide the best deal for shipping each order, based on weight, size, travel distance and other variables. But it’s technology that’s visible only to the retailers, not generally to their customers. “It would be a nightmare to try to show all of that to the customers,” Hamilton says. “We’re hooked into all three major carriers, and the rates change constantly. We’ve got a whole business built around that. If it was a matter of a few tables, we wouldn’t be in business.”

Divorcing shipping charges strictly from weight also allows merchants to set charges so that shipping and handling becomes a profit center rather than a cost center. In fact, Jupiter estimates that as many as 44% of e-retailers do make money on shipping—one reason the Financial Accounting Standards Board last year required retailers to disclose income received from shipping and handling as sales revenue.

But Hamilton is moving cautiously on that front. E-retailers offering too many shipping choices to consumers could set up problems by reducing their clout with carriers. “Retailers have more clout to get better rates with more volume. If you let the customers choose, you’ve pretty much got the customer determining your rates,” Hamilton says.

So what’s an e-retailer do to? “The right approach to shipping and handling will vary dramatically, retailer by retailer,” Cassar says. “L.L. Bean would approach it very differently than would Sears. They’re both strong, established national brands, but the product characteristics vary dramatically. Then there’s Bluefly vs. Lands’ End, which sell similar products at similar price points, but vary greatly based on differences in the value proposition. There’s no one answer.”

Then there’s the consolidated deferred delivery model. Used in the freight industry with commercial clients, it’s so far little seen in retail but Spieler says it could be a potential win for all. It rewards online shoppers willing to wait up to two weeks for delivery by charging them lower shipping fees. Deferred delivery would let carriers batch deliveries for greater cost efficiency, she argues.