E-commerce grew 20% for Costco in fiscal 2015—20 times faster than store 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.
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 (see chart, page 24). Express service can add 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.