August 14, 2007

Free Shipping

Every once in awhile, marketing experts point out the problems with shipping and handling costs. Granted, it might not be fair to charge $8.00 shipping on a $2.00 item. Now, let's review some facts.

Fact: It costs money to ship merchandise to a customer. Think about the last time you sent Christmas gifts to your family in Florida, or Oregon. Did you get to do that for free, or did the USPS, UPS or FedEx demand to cover their costs and earn a profit to ship your gifts to your family?

Fact: Many companies profit from shipping and handling. Obscene profit from shipping and handling probably is wrong, we can all agree on that. Let me ask you a question ... is it wrong for Apple to markup the iPhone at levels far greater than competitors markup their phones? Brand experts seem to love the fact that Apple really hammers the customer because they have 'brand equity'. Every company picks and chooses how it prices items. Some companies make their money on gross margin, others on shipping and handling, others on volume. The customer ultimately decides 'what is right', she votes with her pocketbook.

Fact: Customer loyalty is fickle. Really, really fickle. Pundits and bloggers proudly proclaim how they will change their own behavior and no longer support these awful companies that charge for shipping and handling. Customers sometimes act differently.
  • In 1999 at Eddie Bauer, we tacked on a $3.00 'handling' fee, on top of wildly expensive shipping fees. Customers never flinched. A few complained. Annual online/catalog retention rates did not change. Customers did not change their behavior.
  • In 2005 at Nordstrom, we reduced shipping and handling from an average of $10 to $17 per order, down to a flat fee of $5.00 per order. That seems reasonable, doesn't it? Go ask somebody at Nordstrom if annual online/catalog retention rates increased, stayed the same, or decreased.
Fact: Zappos has free shipping, but Zappos prices items at a more expensive level than competitors. We love to tell the story that Zappos has free shipping. Yet, the items they sell cost about $3.00 more than at comparable online retailers. Buy five pair of shoes, and you're paying $15.00 more than you are at Macy's. We can probably all agree that a $3.00 fee per item is a fair cost to ship an item, but it isn't truly "free shipping", is it?

Free shipping is a shell game. A brand that truly leverages free shipping is hoping that the increased brand loyalty offsets the loss in shipping/handling revenue. As customers, we get to vote for our favorite scheme with our pocketbooks.

2 comments:

  1. Anonymous2:16 PM

    Great post Kevin. I just attended etail last week where the Zappos CEO gave an interesting presentation on his top 10 lessons learned in e-commerce (#3 being don't compete on price). I always wondered how someone who says 'Don't Compete on Price' can justify offering free overnight shipping both ways.

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  2. Hopefully, they'll get big enough that their scale will deliver profit. It's hard to run a profitable business when you give up seven or eight or ten dollars on every order.

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