January 26, 2010
OpEd Guest Post By Kevin Hillstrom, President of MineThatData
Last Week, we published an article about the benefits of using a free shipping model to drive online sales. This article got a good deal of attention from those who agreed and some who had reason to disagree. We decided it’s important to weigh all options and get all perspectives. Because of this, we invited Kevin Hillstrom, President of MineThatData, to provide a counter argument to our benefits of free shipping article:
Twice in my career, I’ve dealt with the challenges of free shipping.
In the late 1990s, I was responsible for catalog marketing at Eddie Bauer. We loved to offer free shipping and percent-off promotions, and for good reason. Our mail and holdout tests suggested that, in the short term, promotions increased sales by between ten and fifteen percent, sometimes yielding increases of twenty percent.
Our test results were consistently positive. And yet, our business was not responding in the way that we thought it should. On an annual basis, sales did not increase. Profitability appeared to erode more, on an annual basis, when we ran frequent promotions. So we did something unique: we created a six month long test panel. The first segment of customers were allowed to receive all promotions. The second segment of customers were not offered a single promotion. At the end of six months, we compared the performance of each test segment.
Each segment spent the exact same amount of money, when measured over the course of six months. When measured over time, promotions had no impact on increased customer spend.
The segment that received promotions just shifted their demand to the time periods when promotions were offered. These customers spent twenty percent more during promotional periods, then spent twenty percent less during non-promotional periods. The customers who were not offered promotions simply spread their dollars out over time. At the end of the test period, customers who did not receive promotions were significantly more profitable than the customer segment offered frequent promotions. In the next year, we repealed the vast majority of marketing promotions. Sales decreased by about five percent. We achieved the most profitable direct marketing year in the history of Eddie Bauer.
I was a Vice President at Nordstrom when we shifted our shipping and handling model from the traditional model ($14.95) to a flat, $5 fee per order. This strategy yielded a very modest sales increase that didn’t sustain itself over time. Within several months, customers perceived the significant decrease in shipping expense to not be of tremendous value, and sales returned to previous levels. We simply generated less profit, and found that customer loyalty did not increase over time.
From an outside perspective, free shipping is a common sense gold mine. Free shipping provides an outstanding customer experience. There’s no reason to believe that free shipping shouldn’t be part of the brand experience of every e-commerce business.
But when you have P&L responsibility, when you are accountable for delivering a set amount of profit dollars in a given year, free shipping provides numerous risks. That being said, there are cases where free shipping can help boost the profit and loss statement.
1. The higher the gross margin, the more likely free shipping is to work.
2. The lower the return rate, the more likely free shipping is to work.
3. The higher the free shipping hurdle (free shipping on orders > $150), the more likely free shipping is to work.
4. The faster you ship merchandise to the customer, the more likely free shipping is to work.
5. If free shipping is part of a loyalty program (i.e. free shipping for a $25 annual membership fee), the more likely free shipping is to work.
6. If free shipping is embedded in the cost of an item, the more likely free shipping is to work.
As always, results vary across different business models and companies. The best way to know if free shipping works for your business is to test free shipping. Offer free shipping to a portion of your customer base for three months, six months, or a year, and run a profit and loss statement against a comparable segment of customers. Let your customers tell you whether free shipping is important to them!
Kevin Hillstrom is President of MineThatData, where he helps CEOs understand the complex relationship between customers, advertising, products, brands, channels, social marketing, and mobile marketing. Kevin has more than twenty years of Executive retail and direct marketing experience at some of America’s leading brands, including Nordstrom, Eddie Bauer, and Lands’ End.
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