Building The Business Case For Free Shipping

03 September 2015


 

For online customers across the globe, shipping costs are one of the most important considerations when deciding where to shop. With retailers under pressure to offer complimentary delivery as a means of attracting and retaining customers, what are the effects of free shipping on an eCommerce company’s bottom line, and how can they best implement this into their operating model?

Across the Asia Pacific region, eCommerce is full of opportunity and growth potential. However, as in other regions, many online retailers find it challenging to build a sustainable and profitable business model.

At SingPost, we believe that in order to be successful, businesses must deliver best-in-class customer experiences, putting the needs and behaviors of consumers at the core of their systems and processes. Customers today have full visibility over product pricing and service levels. They also have the power to instantly research alternative offerings and switch to a competitor in a matter of seconds. Online retailers must therefore provide a superior shopping experience while sustaining a rational business model in order to survive today’s highly competitive eCommerce marketplace.

While a positive shopping experience is driven by numerous factors, research shows that transparency with regards to shipping costs as well as the notion of free delivery are key customer experience influencers. Indeed, according to research conducted by Accent (now Startek) in 2014, 90% of consumers are drawn to online shopping by the notion of complimentary shipping[i].

What Customers Want

According to a 2013 Forrester Research study, shipping costs were cited as the primary reason behind customers abandoning their eCommerce carts during the online shopping experience. Indeed, when determining whether to buy or not, consumers ranked affordable pricing, low shipping costs and quick delivery options as their most important considerations. The report also found that around 60% of eCommerce customers would switch to a competitor site if they could buy the same product for less cost at an alternative store.

Research jointly conducted by eDigitalResearch and Interactive Media in Retail Group in 2013 revealed that consumers are frequently surprised when asked to pay a delivery fee on top of the cost of goods. Furthermore, studies carried out by comScore showed that almost 60% of eCommerce transactions in the US during Q1 2014 received complimentary delivery, with around 80% of shoppers saying that they were prepared to wait an additional two days for delivery, providing there is no charge for shipping.

Pricing Offset

When evaluating free shipping options it is important to understand a business’s operating margins, as well as the sizes, weights and average order values of its products, as these can affect shipping costs and a firm’s bottom line. Once this information has been gathered, there are numerous ways eCommerce retailers can integrate free shipping into their operating models.

For instance, by introducing a minimum order value, retailers are able to cover the cost of delivery through margins added to individual items. Minimum order values can also be used to increase cart size and improve the economics of the eCommerce site by encouraging shoppers to buy more than they ordinarily would.

Another possibility is to roll out subscription-based free shipping. This involves shoppers paying an upfront subscription fee, which entitles them to a range of special offers like free delivery, VIP promotions, free returns and extended warranties. It is also a great way to encourage repeat purchases, as shipping costs are recuperated through the subscription fee and by combining all sales to form an overall minimum order.

And lastly, by offering promotional-based free shipping, retailers can increase purchases for a limited period of time and trial a range of minimal order values. All three options allow online retailers to offset the price of shipping against bulk orders with a minimal value.

‘Win-Win’ Scenario

While at first, free shipping could be seen as being detrimental to company profitability, it nonetheless brings an array of benefits to businesses that cleverly integrate complimentary delivery into their operating models.

Indeed, as alluded to above, the larger the number of items purchased, the greater the average basket size – over time, revenue streams will grow and customers purchase more frequently. Free shipping also increases customer loyalty and enhances the customer experience, both of which are key in retaining and attracting new buyers in today’s increasingly competitive eCommerce marketplace. Furthermore, complimentary delivery also raises conversion rates. According to 2013 study by eDigitalResearch, businesses that offer free shipping experience higher cart conversion rates, which lead to greater profitability.

While providing free shipping is a complex decision for eCommerce businesses to make, it nonetheless offers clear benefits to shoppers and retailers alike, and is an experience that must be viewed as a ‘win-win’ scenario for both parties. For eCommerce companies, free shipping boosts sales volumes, offers increased opportunities to engage with consumers, builds brand loyalty and allows for promotional activity. Conversely shoppers see complimentary delivery as an added value, which leads to repeat visitation, increased conversion rates and growth in basket size.

Your Trusted eCommerce Partner

SingPost is a regional expert with an extensive network and thorough understanding of the diverse customer expectations, custom regulations and legal requirements to build scalable and cost-effective delivery solutions. As part of our full service eCommerce solution, we provide delivery and returns management across the Asia Pacific region. Our well-established mail and logistics network ensure that you can deliver your eCommerce promises to your customer while maintaining a profitable costs structure.

For more details contact our team and read here.

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About the Author

Marcelo Wesseler, CEO of SingPost eCommerce

Marcelo leads the eCommerce business unit for SingPost. He has more than 15 years of international experience in global eCommerce businesses and held senior management positions at KPMG Consulting, Hewlett Packard in the US, and RS Components. Prior to joining SingPost in 2012, Marcelo implemented businesses like hpshopping.com, sonystyle.com, mini.com, china.rs-online.com to name a few. Follow Marcelo on Linked

 


SOURCES

[i] http://www.accentonline.com/news/is-going-to-the-mall-during-the-holidays-your-worst-nightmare