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Free shipping - boom or bust

September 3, 2015

According to certain experts, free shipping from online shops is unsustainable. However, others believe that free shipping is a powerful tool to drive online sales, if used the right way.

Natalie Berg (left), global research director at Planet Retail, explains in her new report The Future of Retail: 10 Trends of Tomorrow that free shipping is unsustainable and that consumers will have to pay for small online orders by 2020.

“Shoppers now expect delivery to be fast, reliable and crucially, free,” says Berg. “This is unsustainable in our view, and we are beginning to see the first signs of cracks in the system. A number of retailers, including Amazon and Walmart Canada are quietly raising the minimum spend required to be eligible for ‘free’ home delivery.”

Scott Galloway, marketing professor at New York University Stern School of Business (NYU Stern), supports Natalie Berg in that free shipping is unsustainable and believes that US e-commerce giant Amazon is pushing other online shops to offer free shipping, but that it is only a ‘race to the bottom’.

In his presentation at the Digital Life Design Conference in New York City in May this year, Galloway said that Amazon’s shipping costs have increased by 40% a year, and in 2014 the company had shipping costs for US$3.5bn more than what their customers covered through payment of shipping fees. The number of US online purchases with free shipping has likewise increased to represent two thirds of all online orders in 2014. It is conceivable that free shipping thereby constitutes a large part of Amazon’s shipping costs. Scott Galloway calls Amazon’s shipping strategy a ‘last man standing’ approach, since the e-commerce giant is the only one who can withstand such large deficits in shipping costs over a longer period.

However, not everyone is as negative towards free shipping as Berg and Galloway. According to the American freight auditing company Betachon, free shipping can actually improve a company’s online business if used with care.

Free shipping has to be combined with the right measures and Betachon has identified several free shipping strategies that online retailers can use to drive sales without destroying their business. These are:

1. Free shipping as a marketing stunt – free shipping to new and old customers or specific customers from a campaign.
2. Free shipping built into the price – shipping is included in the price of the product.
3. Free shipping on bulk orders – free shipping on orders over a certain amount.
4. Free shipping through subscription – free shipping for customers with membership.
5. Free shipping as a campaign – free shipping for Christmas, for specific countries, etc.

The second largest discount retailer in the USA, Target, offers free shipping on orders over a certain amount in their online shop. They already have one of the lowest thresholds on free shipping, and in February this year they halved the threshold on free shipping from US$50 to US$25 in an attempt to win more market share online.

Unfortunately, it has not been possible to get a statement from Target on how halving the free shipping threshold has affected the bottom line. However, it is seen in Target’s 2015 first quarter earnings that its online sales have increased by 37.8% compared to the same period last year. This indicates that halving the free shipping threshold can be used as a conversion tool.

Time will tell whether Target will experience equally large deficits in shipping costs as Amazon. According to Natalie Berg, Target’s halving of its free shipping threshold is a desperate attempt to win ‘the shipping wars’, and she believes that Target will return to the threshold of US$50 shortly, as the halving is unhealthy for Target’s bottom line and for the industry as a whole.

“Regardless, each business is different and the most viable strategy is the one that keeps profit margins high and the consumers coming back,” Betachon concludes.

Key points:
• The report The Future of Retail: 10 Trends of Tomorrow predicts 10 trends that will shape the future of retailing, including price increases on parcel deliveries.
• Natalie Berg is the author of the report and global research director at Planet Retail, a provider of insight into and knowledge sharing of the retail industry.
• In comparison to Target.com, Amazon.com’s threshold for free shipping is US$35, unless you are an Amazon Prime member.
• Up until 2011, Target and Amazon were partners where Amazon had been responsible for Target’s online platform.
• The largest discount retailer in the United States is Walmart, which has just lowered the threshold on free shipping from US$50 to US$35 in their online shop in an attempt to match Amazon.

To watch Scott Galloway’s presentation at the Digital Life Design conference click here.

September 3, 2015

 

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