The FINANCIAL -- Free shipping is an increasingly important tool in the online retailer's marketing arsenal, but few sellers understand the intricacies of the strategy and are leaving significant profits on the table, new research suggests.
Shipping Fees and Product Assortment in Online Retail explores the implications of various shipping fee policies for online retailer profitability, and the impact of each policy on customer decisions about the size of their shopping carts and whether to purchase from particular product categories.
Although price remains a primary determinant of whether a consumer will buy a product, free shipping provides an added enhancement for online merchants to consider. Shoppers are only one-tenth as sensitive to increases in shipping fees as they are to product price increases, according to the researchers, so there is room available for merchants to experiment with different value combinations.
To help online sellers understand the complex relationship between shipping fees and product pricing, and the effect it has on consumer behavior, Ngwe and Chen analyzed sales data from Southeast Asian fashion retailer Zalora in the Philippines. Because the data included the company's startup period, encompassing more than two million orders from 2012 to 2016, the researchers could track customers across multiple purchases on the site as the company experimented with different shipping policies, including free shipping and "contingent free shipping," which requires shoppers to meet a minimum purchase total to qualify for complimentary mailing.
Additionally, the researchers found that under a contingent free shipping policy, a promotional discount in a particular product category becomes more attractive to shoppers. The reason: the product discount might further encourage the buyer since that would help them meet the free shipping threshold.
Shoppers, fill your baskets
The study showed that shoppers spent 9.4 percent more when they need to meet a free-shipping minimum. However, there were 6.4 percent fewer purchases overall when the company moved from free shipping to a contingent free shipping model, according to Ngwe.
Ngwe attributes the higher purchase totals to customers overshooting the minimum balance needed to qualify for free shipping, due to the extra time and effort required to hit it exactly.
As one might expect, customers who visited the seller's website more frequently, as well as more recently, exhibited the highest demand and purchase totals. However, another finding related to loyal shoppers was more counterintuitive, says Ngwe. According to his research, VIP shoppers were less sensitive to paying a higher shipping fee, presumably because their desire for the products was stronger.
Instead of free shipping, retailers like Zalora that sell products in multiple categories would be better served by offering online product discounts to their most frequent customers. "Our results suggest that that's a safer and in the end more profitable way for the firm to reward loyal shoppers."
Ngwe and Chen also used the data to simulate a subscription service through which Zalora customers could purchase an annual membership to receive free shipping, similar to the Amazon Prime model.
Despite the trend toward online shopping, some previously online-only sellers are now establishing a physical presence, says Ngwe, citing the Google Store, Amazon Go, and Bonobos showrooms.
As growth in online retail has outpaced expansion in traditional retail stores, the higher cost of doing business online often gets lost in the discussion, says Ngwe.
Many multichannel strategies to consider
Retailers have a number of options when deciding how to fulfill customer orders while attempting to maximize profit and customer satisfaction, says Ngwe. To help them, Ngwe tries to get a sense of where customers find value in deciding between online convenience or seeing something up close in the store.