According to experts, free shipping in online shops is unsustainable. However, others believe that free shipping is a powerful tool to drive online sales, if used the right way, writes Lotte Weichenfeldt Schjøtt of EDI-Soft.
Retail Expert Natalie Berg says in her new report The Future of Retail: 10 Trends of Tomorrow[i] that free shipping is unsustainable and that consumers have to pay for small online orders by 2020: “Shoppers now expect delivery to be fast, reliable and – crucially – free. 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 NYU Stern, supports Natalie Berg in that free shipping is unsustainable and he believes that US e-commerce giant Amazon is pushing other online shops to offer free shipping, but that is only a “race to the bottom”.
Galloway said in his presentation at the Digital Life Design Conference in New York in May[ii] this year that Amazon’s shipping costs have increased by 40% a year, and in 2014 Amazon had shipping costs for $3.5 billion 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 2/3 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 strategy, since the e-commerce giant is the only one who can withstand such large deficits in shipping costs over a longer period.
However, it is not all who are equally 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
Betachon identifies several free shipping strategies[iii], which they believe online shops can use to drive online sales without destroying their business:
- As a marketing stunt – free shipping to new and old customers or specific customers from a campaign.
- Built into the price – shipping is included in the price of the product.
- On bulk orders – free shipping on orders over a certain amount.
- Through subscription – free shipping for customers with membership.
- As a campaign – free shipping for Christmas, for specific countries, etc.
The second largest discount retailer in the US, 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 $50 to $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[iv] that their online sales has 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 the free shipping threshold is a desperate attempt to win ‘the shipping wars’, and she believes that Target will return to the threshold of $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.
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, which is a provider of insight into and knowledge sharing of the retail industry.
Until 2011, Target and Amazon have been partners where Amazon has 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 $50 to $35 in their online shop in an attempt to match Amazon.
Watch Scott Galloway’s presentation at the Digital Life Design conference here.