April 29, 2011, 12:54 PM

May 2011 Supplement: Solving the "Free Shipping" Puzzle

Online shoppers prefer to pay nothing for shipping, or as little as possible. That puts pressure on retailers to minimize fulfillment and delivery costs, while still providing good service. It's a complex task, but there's help available.

Free shipping is a powerful inducement to online shoppers. So powerful, in fact, that L.L. Bean announced in March it would provide free, everyday shipping with no minimum order size to U.S. and Canadian consumers.

Although free shipping can attract more shoppers and entice them to spend more, retailers still have to cover the costs of delivering the package. Picking up the shipping tab for customers means that e-retailers must keep to a minimum the costs of fulfilling and delivering an order and reducing the number of returned items, all without negatively impacting the customer experience.

That's easier said than done, given the complexity of the fulfillment and shipping process. Carriers have a bewildering array of rates and rules that affect many aspects of a retailer's operation. That includes some that don't at first glance seem related to shipping rates, such as the shape of the boxes a retailer uses or how it captures a shopper's home address.

Firms that specialize in shipping and fulfillment can offer the expertise to help retailers keep shipping costs low, making it easier for them to offer free or reduced-cost shipping.

"Consumers have been conditioned to expect free shipping, but that does not mean there is a one-size-fits-all free-shipping strategy," says Ramsey Mansour, director of Retail and Consumer Goods for UPS. "There are a lot of elements that make up a cost-effective free shipping strategy, including supply chain, choosing the right packaging and having partners to help with logistics."

Buyer's remorse

Simply choosing the lowest rate in order to minimize the cost of free shipping offers is a strategy fraught with risk because it can lead to increased delivery times. The longer it takes a package to arrive, the greater the chance of a shopper changing her mind about the purchase or becoming so dissatisfied with the long wait that she opts to return the package. As every retailer knows, dissatisfied customers are less likely to be repeat customers.

"Free shipping energizes customers, but the last thing retailers want to do when offering it is to compromise the quality of the customer experience in any way, because a poor customer experience can negatively impact customer loyalty, which is more costly in the long run," says Jon Routledge, senior vice president, sales and marketing for Streamlite Inc., provider of lightweight package shipping services. "The aim is to deliver without doubt. That means if a retailer guarantees delivery within five business days, that's when the package is delivered."

Negotiating a competitive carrier agreement is a crucial part of keeping shipping costs low. But that's not easy. Carriers have myriad rates and service options, such as overnight, next day, flat rate, ground and consolidation services in which carriers such as UPS and FedEx hand the package off to the United States Postal Service for final delivery to the customer.

Understanding the shipping rate grids and the additional accessorial fees carriers charge is a major challenge for retailers, because shipping is not their expertise, even though it is likely their second- or third-largest expense. "Shipping rates are based on weight, zones, package dimensions and delivery time. Even if retailers understand this, they don't necessarily know how to manage the process of getting the best rate and service," says Ken Wood, president of LJM Consultants, which helps retailers analyze shipping contracts, negotiate rates and audit weekly invoices. "There are volume discounts that can be negotiated and actions retailers can take to reduce additional surcharges. But the options offered by carriers are varied, complex and tough for retailers to understand without personnel dedicated to it."

Shipping experts can help retailers achieve the desired level of service at the lowest cost. For instance, if a customer selects expedited shipping and the retailer's fulfillment center is in the same shipping zone as the customer, the package can be delivered via ground transportation and arrive the next day at a substantial savings.

"Rather than pay the higher rate for standard overnight delivery, the retailer can save money shipping the package via ground and still achieve the same level of service," says Robert Toner, vice president and chief operating officer for Innotrac, provider of fulfillment and customer care solutions for multichannel retailers. "Retailers have to weigh their customer satisfaction goals versus the cost of available delivery options."

Having private carriers hand off packages to the U.S.P.S. for the final leg of delivery is another way to reduce costs, but it can add a day or two to delivery times. "As long as the customer's delivery expectation is met and it does not hurt the customer experience, then choosing this option makes sense," adds Toner.

Net minimums

One example of the complexity of shipping is the net minimum that is often part of a carrier contract. While carriers typically offer volume-based discounts, they still charge a minimum fee per package. Retailers can easily assume the discount they've achieved by reaching a certain volume level will apply to all packages, and forget about the net minimum, which often is applied to smaller packages.

For example, a retailer that has reached the threshold for its discount has two packages to be shipped to zone B in the carrier's delivery area. One package weighs 10 pounds, the other two pounds. After applying the discount—in this case 30%—the package weighing 10 pounds will ship for $7 and the package weighing two pounds would ship for $1.34. But because the carrier has a minimum net charge of $5 per package, that is what the retailer is charged for the two-pound package.

"Net minimum charges are something a lot of retailers don't fully grasp, because they assume the discount applies to all packages once the volume threshold has been met," says Amine Khechfe, co-founder and general manager for Dymo Endicia, provider of shipping software applications for the U.S.P.S. "They are often surprised to learn that is not the case when they get their monthly invoice."

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