July 31, 2011, 12:00 PM

The dawn of the age of free shipping

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But there's little doubt that free shipping is the new must-have retail offering. It's on the minds of retailers large and small, including venerable retail chains like Macy's Inc. (free shipping on all online orders of $99 or more) as well as web-only merchants and catalogers like Quidsi Inc. (free shipping on all orders of $49 or more at its pet supplies site Wag.com, which drops to $39 if a Wag.com order coincides with an order from one of Quidsi's other sites, Diapers.com, Soap.com or BeautyBar.com) who figure that consumers want the convenience of shopping online without having to pay extra to receive their orders.

Retail chains are stepping into free-shipping programs, hoping to use their stores as a wedge against web-only rivals like Amazon. Chains like Sears, Roebuck & Co. and Wal-Mart Stores Inc. offer free ship-to-store or other forms of in-store pickup of online orders—a strategy known to produce incremental sales as online customers arrive at stores and spend on extra items. Sears also offers free shipping on all online orders for $79, a program called ShopVantage it introduced last fall.

Retail chains participating in ShopRunner, a program launched last fall by e-commerce technology provider GSI Commerce Inc. and largely spun off by eBay after it acquired GSI this year, are promoting the free shipping service in stores as well as online, with some offering deals such as a second or third product for free for customers who sign up for the annual shipping program, Golden says. "We believe every multichannel retailer came into ShopRunner with the idea of using ShopRunner in every retail channel," he says. "ShopRunner is a loyalty program across all channels, not just online."

Indeed, Golden says he figures ShopRunner has an opportunity to one up Amazon Prime by building on its presence among multichannel retailers, including The Sports Authority Inc., PetSmart Inc. and General Nutrition Centers Inc. They can promote ShopRunner to consumers in their stores, including offering free shipping to a consumer's home if the item she seeks is out of stock in the store she's in. ShopRunner retailers get the benefit of ShopRunner's high-volume shipping rates from UPS, and they show up on lists of ShopRunner retailers on the web sites of other ShopRunner merchants.

"As ShopRunner rolls out to more retailers like Musician's Friend, many consumers who never heard of eBags will click to see us as well as other brands listed among ShopRunner's participating retailers," says Peter Cobb, co-founder and senior vice president of web-only retailer eBags Inc.

While participating retailers share in the annual $79 fee ShopRunner charges consumers as well as in covering the cost of shipping, they pay no other fees to ShopRunner.

Consumer-pleasing promotions

The focus on shipping offers showed up in a survey of 200 retailers in the first quarter of this year by research and advisory firm The E-tailing Group Inc., which found that free-shipping promotions were among the top three promotional strategies cited by 87% of respondents, up from 55% a year earlier. That jump of 32 percentage points was by far the largest increase among promotional strategies mentioned in the study, the 10th Annual Merchant Survey. "Merchants are embracing pricing and promotional strategies—particularly conditional free shipping to drive purchasing," the study says.

And no wonder: consumers respond to shipping deals—particularly during peak shopping periods. A survey of more than 2,000 consumers conducted by Lightspeed Research for Internet Retailer during last year's holiday shopping season, for example, found that 65% of consumers cited free or discounted shipping as "very important" in choosing an online retailer to make a purchase. Only "low price," at 69%, was cited by more consumers as being very important.

Some retailers say they've found free shipping to be second to none among promotions that win over shoppers, and are moving marketing dollars from sales to shipping offers. "Customers prefer to get free shipping, even more than a product discount that equates to free shipping," says Roy at Stonewall Kitchen. The retailer offers free shipping for a minimum order value that Stonewall sets based on its average order values. Although its free-shipping threshold may vary by season, it has recently been at $65. At $10 less than an average order value of $75, the $65 threshold has led many customers to spend an extra $10 or more to get free shipping, Roy says.

Stonewall Kitchen declines to disclose how much its shipping offers boost conversion rates or sales, but other retailers are more forthcoming. At ReStockIt.com LLC, a web-only retailer of office and restaurant supplies, for instance, free-shipping offers (no minimum order required, and available on over 100,000 products) have played a key role over the past two years in more than doubling conversion rates to about 3.75% from under 2%, says co-founder and director of sales David Redlich. "It sets us apart from the competition," he says.

The free-shipping oxymoron

The road to free shipping—the term is an oxymoron, experts point out, because all shipping is costly and paid for in one way or another—can be a long and difficult one to travel outside of participating in programs that require consumers to pay an annual fee. It ranges from sourcing consumer products at the best price, to storing them in the most optimal way in a warehouse, to configuring the most efficient way to pack orders, to dealing with what can be hard-ball negotiations with carriers to get the best shipping rates and delivery schedules.

With competitors raising the ante, and delivery services coping with rising fuel prices, even retailers experienced in efficient shipping practices are finding they must continually sharpen their pencils.

Just ask Roy at Stonewall. While startled by the free-shipping moves by L.L. Bean and Williams-Sonoma, she says, it was not as if Stonewall Kitchen hadn't already been putting a lot of effort into its shipping deals. "We were already working hard on this," she says. Stonewall estimates that shipping costs represent about 4.5% of revenue, compared to an industry average of about 6%.

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