One of our loyal readers left a comment recently, suggesting that it was ok to run a free shipping or 20% off offer if you gave up $7 of margin but increased profit by $8 due to increased response.
I've run hundreds of p&ls for free shipping or %-off promotions, always having to prove that the promotion would be profitable.
So when this reader suggested that it was acceptable to run the promotion because it is more profitable to do so, it raised a theoretical question:
If the promotion is truly more profitable, then why isn't the promotion part of your standard business model? In other words, if it is truly more profitable, why ever stop running the promotion? Why stop running the promotion and then accept less sales, and less profit? Aren't we here to maximize sales and profit?
Discuss.
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I believe these type of promotional offer are a part of many standard business models. That is not to say that these promotions are offered constantly or even very often.
ReplyDeleteFree shipping or %-off offers can be more profitable because they generate incremental response. Making the offers available constantly takes away its ability to generate incrementality.
This incremental sales comes from customers' perception that this offer will not be readily available.
I'm inclined to agree that permanently free shipping can be a good thing if it results in more revenue.
ReplyDeleteIn reality though, it depends on the nature of the business. For example, in an existing B&M operation with high fixed overhead, free shipping will likely result in cannibalization of the B&M revenue, and net profitability will not increase. Over time, I suspect such operations will benefit from streamlining and reducing the number of physical stores to lower overhead costs.
As a consumer, I have never been sold on ecommerce because of the abundance of malls where the same item is available sans shipping markups. One exception I can think of is Business Depot, which delivers for free (above $50). Because office stationery is so heavy and bulky, this is a great efficiency in my opinion, and it has turned me into a loyal repeat customer. Under other circumstances I might shop around more.
The other factor playing into this question is the competitive environment. In a highly competitive market, it doesn't make sense NOT to offer free shipping if that results in sales going to the other guy. But not ecommerce operations are that competitive, so it really depends.
Matt --- Jessica, did you conduct tests to understand if your comments are true, or do your comments represent hypotheses?
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