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A holiday survey by Shop.org and BizRate Research suggests 79 percent of online retailers will offer free shipping with conditions such as a minimum order.
Source: Burlington Free Press/AP [burlingtonfreepress.com]
We've been talking about free shipping and now it appears many of the well-known players are going to use it. So what're your current thoughts on free shipping now on the eve of the biggest shopping time of the year?
as an online retailer we have offered a flat rate shipping fee (which doesn't cover the shipping costs) for some time now and we like it because ..
1. the customers don't get confused with different shipping costs
2. we can show very cleary on the site the shipping cost which helps customers
3. we don't think free is required in our sector (none of our competitors that i know of ship free)
It allows the client to buy without having to wade through the checkout process to discover what the ship charge might be
Back to "free shipping"
I hope that everyone understands that Free Shipping is a failure of marketing or customer economics. It's a costly, lazy gimmick that publicly owned businesses do to make their quarterly figures when they've run out of options...as they did in the lates 90s when investor expectations were so high.
Remember, many execs still make their real money with company stock and options.
Free shipping may have some value, especially in clearing out junk inventory, but its about the last thing a sharp retailer should employ to boost sales.
Yeah, I read that article and my first reaction was to unload some internet and retailing stocks LOL
LL Bean expects to lose 20 million by offering free shipping. Are you suggesting they're willing to spend that much money to unload their lower quality items?
Sure it's a promotional gimmick, but there are millions of dollars at stake and if the large merchants are using free shipping, what chance do smaller merchants have if they don't?
I guess if you want to do it smart (doesn't apply to Dot Coms), up-sell to next day air at high price/profit.
Our free shipping is the only discount (read:gift) that we offer our clients and only during this very commercial time of the year. It seams well received by all our customers, regular or first-timers.
So if people are coming to your online shop for different reasons than they go to Amazon or LL Bean or whatever, why should you copy the techniques of Amazon or LL Bean or whatever? Their techniques may be good for them, but they are not good for us because we are not them, not in their situation. And the reverse is true. Mr. LL Bean cannot answer the phone when a customer calls and tell them where they can get that shirt that LL Bean doesn't have, ya know?
I don't know about offering overnight. I have pretty much gotten rid of this unless it is to a business or to a repeat customer, because a significant amount of the people who have asked me for it were clearly trying to ensure they could make a purchase with a stolen card.
I hope that everyone understands that Free Shipping is a failure of marketing or customer economics. It's a costly, lazy gimmick
free shipping doesn't cost a penny when it's done right ............ consumers are stupid, they get all excited when they see free and they don't notice that you've put the product prices up slightly to include the shipping fees .........
I have built in a calculator into the shopping cart. So customers can see the amount they have to spend until they get free shipping. In addition the customers are presented suggestions for accessories they could buy to cross the "free shipping line".
First of all, you have to understand the catalog companies do not treat shipping as just shipping. They treat it as a profit center. A huge profit center. As they can mail in ungodly quantities, they get ungodly discounts. What may cost you and me $3 to ship, costs them $.50. But more importantly, because they see it as a profit center, profits from shipping charges are written into budgets a year and a half prior. It takes alot to get a catalog company to decide to use free shipping on a large scale.
But they do under some circumstances, and here is their reasoning...
Most catalog companies calculate something called lifetime value. This is the value of a customer over the "lifetime" of being a customer. Basically, how often a customer orders, times the average order value minus the cost of getting them to buy. The more times a customer buys from you, the less it costs you per order to get them to buy. In really simple terms, you are talking loyalty. Lifetime values are huge and if a catalog company can increase the lifetime value of a customer base, they will sacrifice upfront profits to do so.
So, one time that catalog companies will use free shipping is to "reactivate" a customer. If a customer has stopped purchasing from you, their lifetime value drops. If you can get them to start again, it goes back up.
The other time they will use free shipping is for customer accqusition. Getting a customer to purchase that first time (and thus being able to "own" the name and both mail the living daylights out of them and rent the addresses to other interested but non-competing parties). The theory is that if you get a large number of people to purchase the first time, you will get a certain number who stick around to become high value lifetime customers.
The point being on both of these, is that they fully expect to loes money on the free shipping purchase with the hopes that the overall lifetime value of the customers will be increased.
Now, they don't do all of this blindly (if they are a good catalog company). Their customer bases are broken down into segments with certain attributes and the perdicted lifetime value of certain types of customers is figured.
Internet customers are funny because they can have both a fantastic lifetime value or a one time is enough, yucky lifetime value. It maybe that LL Bean (and others) have calculated that the LTV of the internet customer base is now enough to give free shipping a second whirl.
BTW, the 3 year number is about right. It takes 2 to 3 years to establish a good LTV figure. I am willing to bet they found the LTV of the last free shipping holiday promotion worth the money.
Circa 1999 quote from WSJ on Dot Com mentality: "The web, where it costs $100 to get a customer who comes to your site to buy $60 worth of products... and never comes back."
We know now that the web isn't the venerable LL Bean paper catalog. Sites that survived the crash did so by MAKING MONEY NOW. Tiny niche operations grew, big cash-rich MBA-run "concepts" often failed pathetically.
For one thing, not anticipated in '99, email advertising has become almost worthless. Huge lists were seen as gold in '99. Not so, anymore. It's impossible to discern "lifetime value" on the web.
I follow what the big boys do; but I know the small sites make the fat profits.
It's impossible to discern "lifetime value" on the web.
I have to respectfully disagree. I was successfully doing so for the last company I worked for. LTV is easy to calculate if you keep good records and tracking. It is not so hard to keep track of what a customer bought and from what source (even search engines) if you program things correctly and thouroughly. A clever programmer can do it on the cheap if they know enough about cloaking and cookies. (For those of you interesed, look up how catalog companies use media or source codes to track then think creativly in terms of your site.) Even without those, a good customer database that can track returning customers, rather than treating each purchase as a new customer, can provide a wealth of LTV information.
And I disagree on the email as well. Done properly, email lists are still very profitable. Again, at the last company I worked for, the list was about 120K names and netted $40K over the year. Careful testing and product offerings plus value in your newsletter does wonders for a list.
I think one of the best things that ever happened to me was to get an internet education at a catalog company. Tracking was drilled into my head and data was touted as the all knowing god.
The sites that failed in the dot com bust failed to calculate LTV. They guessed at it, and guessed very badly. Some survived by making money now, and that is fine, but to grow, you do need to figure out how to get more. If you can calculate that if you spend $2 per name, you will be able to make $5 per name over the liftime of the customer, you grow. If you guess that you can spend $40 per name and only make $5, you don't grow.
Frankly, the concept is no different than PPC bid tracking, which I think has proven itself quite successfully.
We sell a product that people buy frequently throughout their lives. Yet most of our business comes from new people; only 30% of our orders are repeat. I'll guess that's typical of our kind of product. Dot coms and their shareholders had fantasies about loyal shoppers, as if the web were a corner general store in the 1870s.
I know from speaking with our customers that 90% flit from site to site (not necessarily to save a few pennies). Often they have orders in transit from several websites which can cause confusion. The loyalty that exists is more to a cluster of several sites that they regularly trust to buy from.
As for email, it was seen as the glue to cement relationships. It did a darn good job of that for a time. Our list too is still profitable but far less so now. Pfishing and spam have almost killed email. While our list has value, we're getting few new sign-ups and filters are blocking current subscribers.
Yes, you can track LTV, but does it matter for most of us? We get repeat customers. But Lifetime customers? In the sense the LTV means someone who will shop a site repeatedly for a decade or more (as is common with catalogs), there will probably be no such thing.
In the sense the LTV means someone who will shop a site repeatedly for a decade or more
No, not at all. As I said, you need about 2 to 3 years to do a good lifetime value. As a matter of fact, the catalog company I worked for calculated LTV on only 3 years, to help combat changes in the market that can affect LTV.
What probably happened at LL Bean is that they ran the Free Shipping promotion 3 years ago. On the surface, it looked like a bust. It lost money. Three years later, when they have good data on the LTV of the customers, some bright marketer segmented out the people who made their first purchase during that time and compared the LTV of those customers to ones who made their initial purchase the year before without the free shipping. It probably showed that those customers LTVs times the number of customers gained during that promotion made the promotion worth while.
Of course, while I am saying this, keep in mind I have seen even big catalog companies do stupid things. That is what logically should have happened but the internet does funny things to peoples' minds. They think that the economy on the internet is somehow different from the real world economy. It is almost exactly like real world economies. Cyberspace is a big mall, nothing more. ;)
but does it matter for most of us?
Yeah, it does. Knowing how much you can safely spend to get a new customer is very valuable. Think about starting a PPC campaign that the bids start at $1 each. You need to know if it is worthwhile to get into the game. $1 a click is alot. But if you figure that each customer you gain will be worth on average $100 you know that you can run that campaign for 100 clicks. If you get 1 sale in 100, you break even. 2 sales in 100, you profit and $1 a click is well worth it. If you have no sales in 100 clicks, you shut the campaign down and you are only out $100. As opposed to not knowing, where you might let the campaign run for 200, 300, 400 or more clicks or not at all because you don't know how much you can afford to spend to get a new customer.
Even if you only get 1 purchase from every customer you ever have, you still have a LTV. Knowing what that LTV is helps considerably in determining where you will advertise and what promotions worked.
We have been talking about email lists. You may think that the email lists aren't that profitable, but you may find that the LTV of customers on your email list have a better LTV as compared to a random segment of your regular customer base. The email list customers may never buy from an email, but just getting the email may keep your company fresh in their mind so that they purchase from you when they need something. But you can't know that unless you know the LTV of your email list customers versus te LTV of your regular customer.
free shipping can pay off long-term if we offer it to a buying segment that results in more repeat sales than other segments
Yes. See, this is where knowing the LTV of your customers or segment of customers is helpful. If your LTV is low, let's say a mear $5 and it will cost you $6 to give free shipping, never mind the free shipping. Make your profit up front (as jsinger says) and move on. But if you find that your customers LTV is $15 and it will cost you $6 to give free shipping on the first order then you should go for it even if it means that you will loes money on the first order. This is basing it on the assumption that you will have more customers who buy fom you during a free shipping promotion than if you had not had a promotion. It is also why you need to test it first on a small scale before taking out to a larger one, to make sure that this is true. So to recap, if your LTV is $15, no promotion - 5 out of 100 visitors buy = $75 profit. With free shipping promotion - 12 out of 100 vistitors buy (LTV $15-$6freeshipping = new LTV of $7) = $84 profit.
That is a really simplistic way to look at it, but I think (hope) that you get the picture.
I need to stress though that jsinger is right when he said it can be misused. You need to know this number, not guess. Lots of dot coms guessed these huge LTVs and spent enormous amounts of money only to find out later that their LTV were much less than they anticipated.
Testing promotions and then comparing the data next to non promotional customers or at least calculating your normal customers LTV is a must if you are using this to justify taking a loss on an advertising or marketing method.
In the catalog world, LTVs were used to look at who we should be focusing our money/mailings on as well as determining where we got the biggest spenders. Thinking along those lines, even search engines have different demographics. If you can calculate a LTV of a customer gained through a G organic listing versus the LTV of a customer gained through a Y! organic listing, you could conceivably dertiermine if you would be better off to court G or Y! when doing SEO rather than shooting down the middle and hoping for the best. Just for the record, I had not gotten that far when I did ecommerce for the catalog company, but I had a plan on how to do that.
[edited by: hannamyluv at 12:14 am (utc) on Nov. 16, 2005]
Verdict for us: charge for shipping.
The problem is that there are always new players who are so eager to sell and do not take all costs into account..
For all of you who will say now "but my competitor is offering free shipping" Try to think of an creative way to offer a bonus that will make you stand out from your competitors. I for example always have a low cost product that look very attractive. I offer it as a gift with every purchase. so I stand out with minimum cost.
The problem is that there are always new players who are so eager to sell and do not take all costs into account..
In the U.S. I wonder if all merchants understand that UPS has a fairly new fuel surcharge and a big surcharge for home delivery. There are plenty of dummies selling online. I see some sites that have free shipping but barely bother to mention it!
OTOH look at http://www.llbean.com to see how they properly highlight "FREE SHIPPING." If you offer "the F word," best to put a time limit on it to avoid war with competitors and to increase the marketing effect
Problem is that LLBean's red bold "free shipping" will be noticed by all their competitors, too.
[edited by: lorax at 2:27 pm (utc) on Nov. 16, 2005]
[edit reason] delinked [/edit]
That's not a problem for them. ;)
LL Bean has strong brand recognition. Their name has become as familiar as Westinghouse and Campbell's - at least here on the east coast USA. People visit their website because of the strength of their brand. For LL Bean, the choice to do free shipping wasn't to be competitive, it was a marketing move to create more sales. I'm quite sure their margins are fat enough to cover the costs. The choice to do it now was savvy. They probably would have done fine without the promotion but what looks like a good-will gesture to the buyer has the side-effect of making it difficult for their competitors - especially smaller companies and those that may be struggling with severely reduced cash reserves - to capture a portion of this season's sales when everyone is looking to make each dollar count. The inclination will be to buy names they know - the free shipping line makes it that much easier for the buyer to decide.
We offer free shipping all year. We are in an industry with tons of competition with everybody selling pretty much the same brands on-line, catalog and retail. We are still able to make money doing this.
By offering free shipping we can obide by the MAP guidlines of manufacturers, still make money, and make shopping more appealing and simple for the customer.
If two reputable sites have the exact same item for about the same price, but shipping costs $50 at one and is free at another it is a no-brainer for the customer.
When I shop on-line I add the words "free shipping" to alot of my search queries....maybe people who don't offer free shipping don't know people do that.
By offering free shipping we can abide by the MAP guidelines of manufacturers
That's another VERY important point. Our suppliers are beginning to crack down on web deep-discounting. Several have just instituted minimum web prices (mostly because old line brick/mortar and paper catalogers are fuming about the web)
Result? Back door gimmicks such as free shipping are growing. I think that alone explains a lot of it in some businesses.
Sure if you sell something that costs $3 and the profit is $1 then it doesn't make sense. But If you sell a high end item with a profit margin of hundreds of dollars then giving away $5 worth of shipping is a no-brainer.
If offering free shipping increases conversion rates and ultimately your bottom line then do it.
I'm suprised nobody has brought up "Ecommerce User Experience" at all.