In a move that was widely reported and closely monitored by their competitors, Toys R Us just announced that they would be offering Free Shipping on all purchases of $19 or more. That’s a 60% reduction from the prior $49 threshold and arguably one of the best offers customers will find this shopping season. How are they making that offer, and maybe more importantly, how can YOU offer free shipping without breaking the bank?
In the press release announcing the offer a company representative said, “Based on current insights and a comprehensive review of the competitive landscape, we’ve decided to drastically lower our free shipping minimum, just in time for the holiday season.”
Clearly they’ve done their homework, and their conclusion is well supported by industry research and articles. Free shipping drives sales. But how can companies continue to reduce the customer cost for shipping while carriers are increasing rates?
We’ve previously shared tips you can use to optimize your shipping costs and minimize the impact that dim-weight pricing has on your organization, but let’s not be fooled – there’s no such thing as free shipping. Those costs are hiding somewhere.
As we approach the beginning of the Holiday season, here are a few ideas of ways you might be able to offer free, or reduced cost, shipping so you’re not at a competitive disadvantage in the marketplace.
Setup Promotions to Increase AOV
Unless you’re making the delta up somewhere, offering free shipping to your customers is eroding your profit margin. So, make sure you’re injecting some balance into the equation by establishing intelligent thresholds. Toys R Us has set their minimum at $19, and you’ll need to figure out what your target should be, too. Determining this can be a complex iterative process. You’ll want to analyze your Average Order Value (AOV), average shipping cost, the expected lifetime value of the customer and your willingness to sacrifice some margin per order, in favor of increased traffic, or conversion.
The psychological effect of a free offer is extremely powerful and there’s plenty of research showing that people will spend more to make sure they don’t have to pay for shipping. The negative connotation of paying to get a product from the merchant to your doorstep far outweighs the actual monetary value of the service. Given the option of spending a few more dollars to reach the amount required to qualify for free shipping – and being rewarded with the loot your buying – versus paying for the shipping itself is a powerful motivator and will often entice customers to put one more item in their cart in order to qualify for the free shipping offer.
Time Promotions for Greatest Effect
As you enter the peak fourth quarter it’s easy to predict that free shipping is a great offer to promote as a part of your Cyber Weekend marketing. But consider whether the offer needs to be a permanent part of your promotional strategy. If you can adopt a secondary strategy like flat rate shipping – like GNC did last year – it can help reserve preserve margin and amplify the impact of your free shipping periods, as well as drive urgency in your customers to shop at key times.
Target Loyal Customers
If you’re getting the sense that one-size doesn’t fit all when you’re evaluating how to make no or low-cost shipping profitable, you’re on the right track. And just like picking the right products, the right order totals and right timing are important, you should also carefully consider who in your customer pool qualifies for the best offers.
Segmenting your promotional strategy to target your highest-value customers is a tried and true approach that Amazon has nearly perfected with their Prime program. Internet Retailer reports that Prime members spend 140% more annually than the average Amazon customer – $1500 compared to $625. There’s no disputing the net benefit of giving up some profit margin when the repeat business and lifetime value of the customer can bring that return on your investment.
Your results may vary, but the principal lesson is the same – identify your best customers and make them your best offers.
The Great Pricing Hack
OK, so there’s no such thing as free shipping. But the illusion of free is compelling. So if the cost to ship a $20 product from Point A to Point B is $4.99, one easy way to preserve margin is to adjust the product price to cover the loss. Look at your assortment, and determine which product prices can be increased to subsidize your shipping loss. Use these inputs to make informed pricing decisions:
- product price – which ones can bear a slight increase?
- competitive landscape – you don’t need to increase every price. Use good judgment to affect those where there’s less competition.
- location of your customers relative to your fulfillment center – if you target the items where your shipping costs will be inherently lower you’ll maximize benefit.
Find a Fulfillment Partner
A third party partnership can often make sense for most businesses. While you’re an expert at your core business, a company specializing in order fulfillment will offer you:
- Extensive capabilities
- Expertise and Value-Added-Services
- Buying power and discounted rates
Use these benefits to your advantage to enhance your shipping offers.
The powerful message delivered in a Free Shipping offer can increase sales, traffic, and conversion, but if you’re not careful you could unwittingly increase volume but decrease profits. Using a careful blend of the tips outlined and the services of a third party who offers expanded capabilities and better shipping rates than you could get on your own is the surest way to ensure your success.
Photo credit: Ken Teegardin