November 19, 2008

The Free Shipping Death Spiral

I will preface this by saying that I don't have a problem with free shipping --- in fact, if you want to run you business model by offering free shipping 24/7/365, have at it!

It is the promotional nature of free shipping that sets the customer file into a free shipping death spiral, especially when our businesses need shipping/handling revenue to maintain profitability.

Run a unique Multichannel Forensics analysis, creating six segments.
  1. Pays For Expedited Shipping, January - October.
  2. Pays For Regular Shipping, January - October.
  3. Takes Advantage Of Free Shipping Promo, January - October.
  4. Pays For Expedited Shipping, November - December.
  5. Pays For Regular Shipping, November - December.
  6. Takes Advantage Of Free Shipping Promo, November - December.
The free shipping death spiral happens when customers in segment (6) are in isolation with segments (1) (2) (3) (4) (5).

The free shipping death spiral happens when customers in segment (3) are in isolation with segments (1) (2) (4) (5), but are in equilibrium with (6).

The free shipping death spiral happens when the conditions above exist, combined with customers in segments (1) (2) (4) (5) being in equilibrium/transfer with customers in segments (3) and (6).

The free shipping death spiral happens when newly acquired customers enter via (3) and (6), then follow the conditions above.

Under these conditions, those who shop via free shipping will only shop via free shipping, and those who shop via free shipping during the holidays will only shop in the future via free shipping during the holidays. Even worse, customers who used to pay for shipping are leaking into free shipping, then not paying for shipping again.

If your business can be highly profitable under these conditions, no worries --- though I'd ask why not go to a free shipping 24/7/365 business model?

Even if we're locked into the free shipping death spiral, we can mitigate impact in segments (3) and (6) by minimizing January - October marketing activities that offer regular shipping charges, and in segment (6), by simply minimizing all marketing activities from January - October.

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