7th March 2016
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.
“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”.
Scott Galloway said in his presentation at the Digital Life Design Conference in New York in May 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, which they believe online shops can use to drive online sales without destroying their business:
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 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.
Text by: Consignor, email@example.com