Free shipping in online retail is a very tantalizing promotion… Everybody's doing it; it’s becoming more widely expected; and it can be a way to get business. But don’t let these temptations play with your bottom line unless you know what you're doing. Somebody’s got to pay free shipping, and if you're an online retailer, know what you're doing before joining in the fray. Prior to the recent Black-Friday and Cyber-Monday sales, the National Retail Federation Industry Group reported that 93% of consumers surveyed stated unequivocally that free shipping -- as well as price -- would drive their online shopping and buying.
A survey performed by Compete.com asked: "Which of the following would encourage you to purchase more products online?"
Online retailers responded, with nearly 80% offering some sort of no cost shipping this holiday season to drive sales. As it turned out, the shopping experiences were not all positive for either side: Black Friday failures at the likes of Amazon, Walmart, Target, Avon, Toys “R” Us and Barnes & Noble, to name a few, included “opening” their online sites late, poor handle of traffic volume, websites down for long periods, many consumers disappointed at checkout to find that their shopping carts were empty, as products were sold out, plus a variety of other disappointments.
“Free online shipping is not so free after all,” wrote MSNBC business contributor, Eve Tahmincioglu, in an article referring to the consumer experience. Here are some of the downsides of free shipping that I see for online retailers:
1. The cost of free shipping is added into the price. The “cost” of free shipping has to be recouped somewhere, and it’s usually reflected in the total price of the item. As a result, the price is higher to start with than the price where free shipping is not offered. This may affect those who buy based solely on price and are doing a lot of price comparisons. And with higher prices, you might lose sales.
2. No money to buy later in the season. The “buy now” atmosphere that’s created by these early-season promotions might backfire later when people lower their buying activities because they already spent the money they had available. (Comscore Chairman and Co-Founder, Gian Fulgoni, in video interview with MSNBC.com had both good news and not-so-good news for retailers regarding this season’s retail sales).
3. Shipping with conditions. Some online retailers require certain minimum purchases before the free shipping benefit kicks in, i.e. the consumer has to buy x amount of goods or a certain product before he/she gets the free shipping. This may turn off buyers before they proceed to purchase.
4. The bigger the retailer, the greater the pricing advantages. Because of their ultra-enormous buying power and volume, huge online retailers have economies of scale that others don’t have. They get the best prices from manufacturers and wholesalers, and they have favorable arrangements with shippers as well. The 'hit" they take on their bottom line is less per unit. You have to decide if it’s worthwhile for you to compete on this level.
5. Slow shipping, slow returns. Retailers who provide “free shipping” are not going to ship by the fastest, most expedited, most expensive means. The goods may not arrive soon enough to allow time for returns or exchanges. The consumer will be inconvenienced in several ways, and may feel he/she is receiving poor customer service.
6. Online retailers cut back on costs in order to do promotions. In order to afford promotions like free shipping, costs may have to be cut somewhere else; some retailers are reported to have decreased their number of employees and are keeping lower inventories to save money.
Online retailers have to worry about competitive pricing, and keeping their customers happy, not to mention making a profit. New challenges pop up almost daily in online retail pricing competition and free shipping is one of them. The costs have to be covered somewhere – and it's usually at the price of your bottom line. Know what needs to go into your own pricing, as well as your competitors’, in order to set correct prices and make a profit on your sales. Competitive pricing intelligence tools help you quickly and easily get the data and information you need to help you determine what YOUR price should be at any given time. If you're going to offer free shipping -- or any other promotions -- be sure you know what you're doing, and proceed with caution. Don't just follow the herd.