Jennifer Polk

A member of the Gartner Blog Network

Jennifer Polk
Research Director
1 years at Gartner
1 years IT Industry

Jennifer Polk is a research director within Gartner Research. Read Full Bio

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What is Free Shipping Really Worth to Your Business and Customers?

by Jennifer Polk  |  October 25, 2013  |  Comments Off

Amazon, the world’s largest online retailer, recently announced an increase in its free shipping minimum, from $10 to $35, for the first time in a decade. While some would argue that an increase after ten years is reasonable, the merchant still pointed out its expanded assortment of items, digital delivery and free shipping service, Amazon Prime, as justification for the increase. Whether or not you believe the increase was valid, you should consider what this signals to consumers and how it may impact their behavior and expectations of your business. To be clear, free shipping is rarely ever free. It costs your business in terms of hard dollars for supply chain overhead, which you may or may not be able to pass along to your customers. Some businesses bake the cost of shipping directly into the price of the goods, while others try to make up for the lost margin by cross-selling and upselling to higher margin products and services. Still others offer a trade-off of time and convenience for shipping costs in order to manage variable consumer demand. Customers who want their goods sooner will pay a little more. This the most common model. Amazon turned this model on its head with its Prime service that essentially allows you to pre-pay for free or discounted two-day shipping.

eCommerce

By encouraging customers to prepay for Prime, Amazon is solving for the trade-off in time, convenience and shipping costs, and they’re circumventing, or at least nullifying, the zero moment of truth with some customers. Let’s face it, once customers have prepaid for shipping for the next month, they’re somewhat locked into a relationship with that retailer. Why on earth would you ever buy from another retailer if Amazon offers the same product at a lower, all-in price (including cost of merchandise + shipping or gas to go to local store). There are even whispers that this latest move is an attempt to steer more shoppers toward Prime by making it more cost-effective to lock-in the cost and timing of shipping than to meet the higher minimum with each purchase. Pretty smart if you ask me. So how you can your business create a shipping model that benefits your bottom line without turning off your customers. The key is to understand what matters most to your highest value customers when they buy your particular product. Is it price? Assortment? Convenience? Really consider their state of mind when they’re making this purchase decision. Is the purchase planned in advance, is it an impulse buy or is a decision made under duress?

Once you understand when, where, why and how customers decide to purchase your product and why they do or don’t choose your brand, you can start to model scenarios where there is a trade-off for what they want more of and what you want less of. Say you’re an online retailer who sells shoes, and through research you learn that customers are perfectly willing to buy shoes online except for one issue—the shoes need to fit. If they don’t fit, the customer is left in a lurch, having to pay for shipping costs in both directions and still missing the shoes they need. Zappos overcomes this obstacle by offering free shipping and returns. DSW minimizes risk by accepting returns of most online purchases in its stores. LL Bean nullifies the risk and rewards customers by offering free shipping on returns to LL Bean Visa cardholders. Once you know what your customers care about, specifically your high value customers, you can optimize the commerce experience to better meet their needs and have a positive impact on your business by emphasizing (and monetizing) dimensions of their purchase that are most important to them. You can use approach to improve various aspects of the commerce experience—from shipping to promotions—by delivering what customers value and are willing to pay for.

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