Free Shipping and Handling Aren't Free
Five ways to ensure profitability.
Five ways to ensure profitability.
Christmas is coming early this year, at least if you’re an e-tailer planning to be in synch with your customers. According to BizRate’s “2006 eHoliday Mood Survey,” 35 percent of consumers plan to start shopping by Halloween. Online merchants are ready for them.
What’s on top of online shoppers’ wish lists? You guessed it — free shipping and handling. Historically, consumers have perceived any shipping charge as high because anything is more than they would have paid in a retail store. This year, customers needn’t worry. Online retailers are determined to level the playing field. They’re lining up to act like Santa. Eighty-three percent of them plan to give away some form of free shipping in hopes of driving more holiday sales.
As a marketer, I believe in fulfilling customers’ desires when it’s practical. Problem is, free shipping and handling charges aren’t free at all, at least not for e-tailers. Shipping costs have risen considerably over the past year due to higher fuel costs. The reality is that shipping charges have a clear effect on the bottom line since they cover the real operational expense of getting product from your warehouse to the customer. In some cases, merchants treat shipping charges as a profit center, since building a profit margin into shipping charges is often less visible than raising prices.
From a marketing perspective, attracting new customers with free shipping and handling is similar to using a low-price strategy. These customers tend to be more price sensitive and less brand loyal than full-price customers. As a result, it can be difficult to keep bargain hunters purchasing without further price inducements after the holidays.
Ensure Profitability
There are several ways to enhance merchandising to maximize the results from a free-shipping offer. Bear in mind that over time, most promotions lose their effectiveness. Try the following:
Metrics to Assess Free Shipping and Handling
Since free shipping has a quantifiable cost in forgone revenue, it’s important to determine its impact to protect profit margins. When considering free shipping promotions, analyze the following to determine how many extra orders free shipping must yield to at least cover the cost:
Forgone revenue = initial revenue projection – revenue without shipping = projected shipping revenue
Gross margin per order without shipping = revenue per order without shipping – [cost of goods sold per order + fulfillment costs per order]
Incremental number of orders needed to breakeven without shipping = forgone revenue/gross margin per order without shippingThe breakeven number of incremental orders will fall if a free shipping offer either increases average order size or increases the proportion of orders that include certain highly profitable add-on purchases.
Free shipping and handling aren’t free. Free shipping may help move lots of product, but it doesn’t guarantee you’ll make more money. It does guarantee more customers. But these new price-driven customers tend to have a lower lifetime value than your traditional customer base. This makes it even more important to figure out ways to engage these customers and develop brand loyalty.
Meet Heidi at E-Mail Marketing, the first in the new ClickZ Specifics conference series, October 24-25 in New York City.