Sticker Shock: Retailers Swallow Shipping To Close More Sales
A customer buying a backpack, a computer case and a rolling upright suitcase from eBags Inc. this spring would have paid almost $20 to have the items shipped to their home. By summer, that cost was zero. Zilch. Nada. That's because Greenwood Village, Colo.-based eBags, a start-up e-commerce player selling suitcases, purses and other accessories online, began picking up the tab to ship its goods to consumers in June.
The free shipping promotion is a test-and the goal is to see whether shipping charges are the reason some people abandon their shopping carts rather than purchase the items inside when they get to the checkout process, says Jon Nordmark, president and CEO of eBags. At $4.95 to $9.95 per item for standard United Parcel Service delivery, shipping costs can add up fast. A customer who has selected several items and then begins to check out might see a big shipping total and reconsider whether the alternative-a trip to the mall-would save them money, Nordmark says.
A few people sent us e-mails saying they would have made large purchases if it hadn't been for the shipping charges," he adds. "So we began to wonder how many people were put off by shipping. We knew what sales we were getting, but we didn't know what sales we were missing."
Ebags plans to watch the numbers closely: Will more people follow through with their purchases if they are not getting socked with shipping charges when it's time to type in their credit card numbers? Other retailers suggest they will. Soda Creek Press Inc.'s 1bookstreet.com and Cyberian Outpost Inc. report revenue increases with free shipping policies-and that can make the cost of paying for shipping worthwhile.
Abandon ship
Shipping prices and policies vary greatly among online retailers today. A number of factors impact shipping rates, including the variable rates shipping companies charge retailers and whether or not the merchant views shipping as a revenue generator or simply a way to get products to their customers. A survey of leading online merchants by Internet Retailer shows that standard shipping charges range from as high as $28 for a 100-lb. package to free shipping . Express service can put shipping charges in excess of $200 for large items such as computers.
But to continue to win business online, retailers will have to maintain fair and competitive shipping rates. Most consumers are willing to pay for the convenience of shopping online, but they don't want to be hit with overblown shipping costs, says Seema Williams, an e-commerce analyst with Forrester Research Inc. of Cambridge, Mass.
To lure more customers into making purchases online, a growing number of Web stores are offering free or flat-rate shipping, a trend that may skyrocket as the holiday season nears. "You are going to see lots of discounted shipping to get consumers to shop online," Williams says. "Retailers can't afford to have people get lost at the shopping cart level."
Losing a customer after he or she has browsed through a Web store and placed items in a shopping cart is a common malady for retailers. Though consumers can seek out shipping policies and rates under Web stores' customer service or help sections before they shop, many simply wait until their shopping is completed to see how much shipping and handling charges add to the tally.
"Retailers know that consumers don't like the surprise at the end," Williams says. "But the problem is that they don't know how much to charge for shipping until they know who's actually receiving it, when they enter the address, and what size box they are sending."
Retailers charge for shipping in a variety of ways-by the item, by the value of the order or by the weight or size of the products. An order's final destination can affect the cost, which is usually based on how shipping companies charge the retailers. Rates between retailers and shipping companies, however, often are negotiable depending on the volume of goods the retailer sends out.
A blanket policy of free shipping is one way to eliminate that surprise and get consumers to buy. Cyberian Outpost, which sells computer equipment, covers shipping charges of up to $100 for its customers as part of its "true price" program. The Kent, Conn.-based Web retailer posts the "true price" of its products next to photos and descriptions on its site and ships them free overnight via Airborne Express and UPS.
"Free shipping eliminates any confusion that a shopper may have in making comparisons online," says Darryl Peck, president and CEO at Cyberian Outpost. "The price they see is the price they pay. We try to eliminate any questions or doubts in the customer's mind." Cyberian Outpost's offer covers most of its customers' full shipping costs, and the $100 limit is to prevent other companies from using the Web store as their supplier, he says.
The free shipping initiative, a permanent policy, grew out of research in which customers ranked shipping charges among their top five concerns, along with the ability to contact retailers and the timeliness of deliveries, Peck says.
The cost that Cyberian Outpost pays shipping companies to deliver products to its more than 280,000 customers, comes out of the marketing budget, just like any other customer acquisition expense. "We think of this as a long-term customer acquisition strategy," Peck says.
A win-win situation
Investing money to win new customers is a good idea because Internet companies are valued based on their customer acquisitions, rather than by their real estate or other assets, says Randy Gale, CEO of eNutrition, an online vitamin and wellness center. ENutrition offers free standard shipping on all orders of $15 or more, an expense it also views as a marketing cost, Gale says.
ENutrition tested a variety of marketing programs in an effort to lure customers, including sending free gifts with purchases and offering discounts on orders, Gale says. But free shipping came up the winner. "Our research shows that shipping is the No. 2 issue for consumers who may shop online," he says. "Most consumers still worry about using their credit card online, but once they cross that hurdle, the next issue is shipping. We decided to take that out of the equation by offering free shipping."
In addition to meeting consumer demands for inexpensive shipping options, online retailers also offer free shipping to compete with one another. "It puts pressure on competitors," says Cyberian Outpost's Peck.
In traditional catalog retail, shipping often has been a profit center for companies. Consumers have been willing to pay shipping and handling charges for the convenience of not having to go to the store, says Forrester's Williams. That's true for customers shopping online as well, she adds. Catalogers Lands' End Inc., with shipping rates of $3.50 to $15.95, and L.L. Bean, with rates of $3.50 to $7.50, have very similar shipping rates for catalog and online sales.
But online, the environment is much more competitive, and free shipping is a distinguishing factor. "Online, your competitors are just a click away," Williams says. "Retailers have to consider whether or not they have to offer free shipping to be competitive."
In one price battle, free shipping is helping a small bookseller-1bookstreet.com-stand out from its much larger competition.
When Amazon.com, barnesandnoble.com, and Borders.com announced recently that they would offer New York Times bestsellers for half off the cover price, 1bookstreet.com followed suit. But Amazon and barnesandnoble.com charge from $2 to $8 per order, based on the choice of service, plus 95 cents to $2.95 per item. And when consumers use price comparison engines to look for the best deals on the books, 1bookstreet.com comes up as the cheapest option because it also offers free shipping, says Robert J. Staff, chief economist at Zona Research Inc., an Internet consulting firm based in Redwood City, Calif. "People could start migrating to 1bookstreet.com from Amazon.com to save on shipping," he says.
1bookstreet.com had been looking for a way to increase its customer base without incurring a lot of advertising costs when it decided to offer free shipping via the U.S. Postal Service last year. Launched last year as a limited-time offer, the promotion has generated such positive customer feedback and results for 1bookstreet.com that it's been extended indefinitely, according to John Conroy, the company's vice president of marketing.
Ukiah, Calif.-based Soda Creek Press, which operates 1bookstreet.com, patterns its online shipping options after the shipping arrangements it has set up for its catalog operations. The company doesn't offer free shipping for catalog purchases, where shipping charges for years have generated revenue for the company. But 1bookstreet.com considers free online shipping an advertising cost, Conroy says. And unlike larger online booksellers, 1bookstreet.com doesn't add per book handling charges to the cost of an order.
Not for profit
But can retailers sustain free or reduced shipping rates indefinitely? Kenneth Seiff, CEO at New York-based retail discounter Bluefly Inc., suspects they won't have to. Bluefly offers a flat-rate shipping fee of $3.95 per order. "In the short term, it is very difficult to try to build market share and try to profit on your shipping policies," Seiff says. "But in the long term, I think shipping rates will reach more of a happy medium, though I don't think we will ever view it as a profit center."
While free shipping is becoming more popular, Forrester's Williams doesn't expect it to become ubiquitous on the Internet sales channel. Instead, as Web sellers evolve their sites, their challenge will be to put shipping costs in more prominent locations where consumers can view them easily. Some retailers do that already.
"Are all online retailers going to do away with shipping charges?" Williams asks. "Probably not. Are they going to try and pull shipping policies to somewhere earlier in the buying process? Yeah."
Wal-Mart Stores Inc. of Bentonville, Ark., has a flat online shipping rate of $3 per order except on special items. In those cases, the shipping charges are included in the product descriptions. By comparison, Plano, Texas-based JCPenney charges $4 to $28 based on total weight up to 100 lbs.-a shipping charge customers will have to pay at checkout. Auction sites such as uBid and Onsale.com also offer shipping estimates in item descriptions.
Retailers will have to find a balance, Williams says. "They don't want to scare consumers off on the front page, saying 'we are charging you 40 bucks to ship this product.' But at the same time retailers don't want consumers to abandon the process at the very end."
If the customer buying that backpack, computer case and rolling upright suitcase, for instance, would have balked at a $20 shipping charge, eBags could have lost out on a more than $400 sale. To avoid that, Nordmark says, the shipping bill is for now some baggage that eBags can afford to carry.
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