Zero is the shipping fee online shoppers want to see—and increasingly will get.
Paul Demery Managing Editor
How to offer that perk profitably is the challenge for e-retailers.
At Stonewall Kitchen, a multichannel retailer of foodstuffs, kitchenware and other home goods based in Maine, getting orders to customers throughout the U.S. in the fastest and more efficient way is forever on the mind of Aimee Roy, Stonewall's distribution manager. Having started as a retailer 20 years ago, Stonewall has worked hard to operate as a tight ship with its supply chain, fulfillment and shipping operations for store, catalog and web sales.
The retailer has seen consumers respond when it offers free shipping on online and catalog orders—and more competitors offering free shipping. "As a retailer facing pressure from our peers, we have to offer free shipping or be left behind—and have our market share go to someone else who offers what customers want," Roy says.
But their experience with the power of free shipping offers did not prepare Roy and her colleagues for L.L. Bean Inc.'s announcement in March that it would permanently offer free shipping on all orders except for its largest products like kayaks and mountain bikes. Roy says her e-mail inbox was flooded with comments from colleagues about how this raised the bar for all retailers. "It shocked us all when we heard that L.L. Bean began offering free shipping," Roy says.
'Yikes! Free shipping!'
The buzz carried over to a shipping industry conference Roy attended soon afterward. "It opened up everyone's eyes," she recalls. "It was 'Yikes! Here's this well-known retailer and look at what they're offering.'" And even though L.L. Bean is not a direct competitor to Stonewall, Roy says she and her colleagues realized the apparel and outdoor recreational gear retailer's move was likely to raise expectations among online consumers, making it that much more important to woo shoppers with generous shipping offers.
Nor was L.L. Bean the only e-retailer moving more aggressively into free shipping. Roy soon learned that kitchenware and foodstuffs retailer Williams-Sonoma Inc.—a direct competitor to Stonewall with $1.2 billion in 2010 web sales according to the Internet Retailer Top 500 Guide—had also launched an aggressive free-shipping policy. For an annual fee of $30, Williams-Sonoma was now offering for no additional charge free shipping of most items with no minimum purchase, and with delivery within five business days of an online order.
The list goes on of retailers offering more generous free-shipping offers of one kind or another, often including expedited shipping. Besides responding to competitive pressure, these web retailers are hoping to eliminate the biggest single reason that keeps consumers from completing online purchases. In a survey of 3,000 online consumers last year, Forrester Research Inc. asked shoppers to give the primary reason why they had abandoned an online shopping cart: The largest percentage of respondents, 44%, said that shipping and handling costs were too high.
Web retailers are getting the message and increasingly offering free shipping, especially during the crucial holiday season. 49% of U.S. e-commerce transactions in the fourth quarter of 2010 included free shipping, up from 44% a year earlier, according to comScore Inc., which tracks consumers' web activity. And the percentage did not drop dramatically after the holidays, with 47% of online orders shipping for free in the first quarter of 2011, up from 37% just two years earlier.
With no sign that this trend will reverse, online retailers have no choice but to figure out how, when and to whom to offer free shipping—and how, in the process, to increase their revenue and trim their costs, so that they can offer shipping perks profitably. There's no one size or flavor that suits all, and plenty of experimentation is underway as retailers react to the rising pressure to offer free or discounted shipping.
More deals
Here's just a sampling of some of the recent developments:
- United Online Inc.'s FTD.com, the online floral retailer, is offering a free-shipping program like Williams-Sonoma's to customers who pay an annual fee of $29.99 to participate in the FTD Gold Membership loyalty program.
- By the start of this year's holiday shopping season in November, ShopRunner Inc. says it will have more than doubled the number of retailers—to 90 from 44 in June—participating in its free-shipping program, which competes head-on against Amazon Prime, the free-shipping program from Amazon.com Inc. Like Amazon's program, ShopRunner enables participating merchants to offer their customers two-day shipping for no extra charges beyond an annual fee of $79, ShopRunner president Mike Golden says. Amazon Prime, launched in 2005, has attracted about 6 million subscribers, with a big majority of them in the U.S., estimates analyst Colin Sebastian, who follows e-commerce companies for brokerage and private equity firm Robert W. Baird & Co.
- FreeShipping.org, a coupon site for free-shipping offers, featured more than 4,000 retailers as of last month, up more than fourfold since January, says web manager Simon Jobman.
- The world's largest e-marketplace with 25 million sellers worldwide, eBay Inc.'s eBay.com, has revised its fee schedule to encourage sellers to offer more free or discounted shipping deals to their customers. Instead of charging sellers a 12% commission on sold apparel items, for example, eBay will now charge 10% of the combined price for the item and the shipping fee. Under the old rules, on a $40 sale an apparel seller would pay eBay $4.80, or 12%. Under the new rules, the seller would pay eBay $4, or 10%, on the same order if the seller doesn't charge for shipping. If the seller does charge, say, $10 for shipping on top of the $40 for the apparel, it would pay eBay a fee of $5, or 10% of the total order value of $50.
EBay says that about 30% of the items sold on eBay shipped for free under its old rules, but it hasn't said how the new fee schedule has affected sellers' shipping policies.
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%.
And now it will take an even closer look at how it can cut costs so it can offer free shipping more often. For instance, Stonewall will consider purchasing some products in larger quantities but less often in order to pay for fewer inbound shipments to its warehouse. It has also required stricter inventory preparation procedures from suppliers, such as placing product-identifying bar codes on each item instead of just on large multiple-item cartons, which provides for more efficient warehousing as products can be scanned individually and tracked more efficiently, Roy says.
By maintaining information such as shipping destination zones and the size and dimensions of packages, retailers can also better negotiate contracts with carriers and take additional steps that, overall, can cut 20% to 30% off shipping costs, says Tim Sailor, founder and principal of shipping consultants Navigo Consulting Group.
"Carriers can make it difficult for people to understand their true shipping costs," he says, noting that the overall costs tied to surcharges for things like rural delivery destinations and fuel costs have been increasing faster than general shipping rates. Good data, he says, "lets you figure out where your shipping dollars are going."
When a retailer knows, for example, that it ships a lot of products to low-volume areas where a carrier may charge extra, the retailer can present that volume information to its carrier to demand a lower rate. A retailer could also check whether regional carriers—such as OnTrack in California and other western states and Eastern Connection in the northeastern U.S.—serve its high-traffic areas at shipping rates that beat those of national carriers.
Lift from Facebook
Although small-parcel (under 150 pounds) delivery is dominated by UPS, FedEx Corp. and the U.S. Postal Service, each of these companies as well as smaller players have been expanding the ways they work with retailers. UPS and FedEx, as well as other companies like Streamlite Inc. and Newgistics Inc., offer shipping programs that cooperate with the U.S. Postal Service to take advantage of its ability to provide relatively low cost pickup and delivery for all U.S. residential addresses. In addition, shipping management programs, such as Kewill Flagship from Kewill Inc., can help retailers choose among the best shipping options from multiple carriers to stay within targeted costs and transit times.
Free shipping can also get a boost from relatively new-age developments. At Stonewall Kitchen, Roy has found Facebook a productive venue for spreading the word about free-shipping deals—and, in turn, winning more friends on the social network.
"We'll make posts on Facebook saying, 'Come Like Stonewall Kitchen. Get a free-shipping code,'" Roy says. "It helps us to get more friends on Facebook, as customers forward the promotion to their friends."
As retailers head into the all-important fourth quarter, free-shipping offers will undoubtedly win them more friends when they need them most.
Low shipping costs make free shipping possible
While free shipping is proving an important promotional tool for many retailers, for BeachMint, it's a must, says director of operations Mike Gammarino.
BeachMint, a young and growing members-only online retailer, specializes in selling quickly changing inventory associated with celebrities. Its JewelMint.com sells copies of jewelry worn by stars like actor Kate Bosworth, and its StyleMint.com features outfits that shoppers can customize based on styles of Hollywood stars Mary-Kate and Ashley Olsen. Every item on both sites sells for $29.99, and all shipping, including returns, is free regardless of order value, Gammarino says.
BeachMint's customers must make one $29.99 purchase each month to participate as members (if they don't make a purchase or opt out of membership within the first five days of a month, BeachMint charges their credit card for a $29.99 credit good for a later purchase). At $29.99, however, the retailer doesn't have much room to cover shipping costs. "We can't afford more than $3 in shipping costs for a $30 order," Gammarino says.
The retailer, which processes hundreds of orders a day and is planning to launch a number of additional sites, checked with several logistics companies to see which could provide the lowest shipping costs and make it easier for it to afford free shipping. It settled on Streamlite, which provided a first-class shipping rate averaging less than $2 per package. "They offered rates 20% less than the Postal Service," Gammarino says.
Streamlite, which operates 20 warehouses around the U.S., uses a variety of carriers to ship its retailer clients' orders to a Postal Service facility nearest the end-customer; it relies on the Postal Service for the final delivery. But unlike the Postal Service, Gammarino says, it also offers online tracking of shipments throughout the delivery process, enabling BeachMint to provide a higher level of service to its customers.
"We're an experience company," he says, but to keep its members coming back every month, that experience must include free shipping. "It's worth it to us," Gammarino says. "We don't want our members to buy just one piece of jewelry and then disappear."