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Is 'free delivery' really free?

October 7, 2015

Claire Borsenberger, researcher for Le Groupe La Poste, and Emmanuel Vivet, deputy director, international affairs, Le Groupe La Poste, examine what is really meant by the term “free delivery” and what motivates companies to offer such a service

 

Free delivery is offered by many e-tailers in order to attract consumers and induce them to buy online. But do e-tailers really lose money on delivery services offered to e-shoppers? In the majority of cases, no. The words “free delivery” are actually misleading.

According to the 2014 UPS and comScore joint survey, 81% said free shipping is an important consideration when making an online purchase. When displaying an ‘all-inclusive’ price on their website, e-tailers actually include both the item price and the fees for delivery services.

Why use such a strategy? Empirical evidence from surveys or behavioral studies suggest that consumers are highly responsive to the handling and shipping fees incurred when purchasing goods on the internet. They adapt their purchasing decision (quantity, amount and frequency) according to the amount of such fees. Psychologically speaking, consumers are convinced that they have a better deal when delivery fees are referred to as “free”. As such, consumers are more and more reluctant to pay shipping fees.

In practice however, handling and shipping fees are simply the substitute for the implicit travel costs incurred by consumers in traditional retailing (whatever the transportation means used). Yet consumers do not seem to see it this way.

These perceptions can lead to irrational behavior. E-shoppers will abandon or purchase goods depending on whether shipping fees are explicitly shown or included on the overall price. In summary, the way price information is framed affects consumers’ preferences.

This could be explained by the cognitive processes and behavioral biases. Indeed, consumers tend to be loss adverse and sensitive to the risk of making a wrong purchase decision. When an option is free, there is nothing to lose, so there is no risk of making a wrong decision.

The way shipping fees are displayed in the global transaction also affects the ‘fairness’ perception of a price. Hence, when delivery fees run the risk of being perceived as unfair or disproportionate (compared to the price of the product purchased), it is preferable for e-tailers to display an all-inclusive price.

However, in some cases, the “need for cognition” – for instance, the willingness to understand the ‘true’ price of an item – can lead to the opposite conclusion. Consumers who have a high need for cognition would probably prefer to face a partitioned pricing as long as surcharges are considered as reasonable or fair.

October 7, 2015

 

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