April 28 2014 08:05 PM

As noted in my previous column, the holiday debacle was indeed that – a debacle for not only UPS and FedEx but also for those shippers that offered free shipping or other incentives to entice customers to purchase as late as the day before Christmas Eve for expected delivery in time for Christmas Day. In fact, according to Shop.org, one in every six retailers offered free or upgraded expedited shipping as late as December 23.

While lessons were hopefully learned by both the carriers as well as by e-retailers, what was evident was the fact that free shipping has become the new normal for e-retailers. A recent study by Forrester on shipping policies found that 92% of the top 50 retailers had free shipping policies. For many of these e-retailers, free shipping is necessary to preserve market share.

However, in order to offer free shipping, shippers usually either absorb the cost or slightly increase prices to cover it. But this is getting difficult to do, particularly as carrier rates continue to rise, with the 2014 average FedEx ground rate increasing 3.9% and UPS average rate increasing 4.9%. The reality is that the new rate impacts were much larger than the carriers announced, with many customers realizing 7% to 8% effective increases. For e-retailers, shipping costs can range from 5% to 20% of total revenue. While offering free shipping for unique products and high margin products may be good, it’s not advisable for low margin products. So, e-retailers are introducing a slight twist to free shipping – subscription based services.

Perhaps one of the most popular offerings is Amazon Prime. At a cost of $79.00 per year, subscribers receive free two-day shipping, no minimum order size plus unlimited streaming with Prime Instant Video and free books through its Kindle e-reader tool.

Meanwhile, Newegg, an online retailer of computer hardware and software, recently has introduced its own version of Amazon Prime – Newegg Premier. For $49.99 per year, subscribers receive free expedited shipping guaranteed to arrive in three days or less, discounts on two-day and one-day shipping. Restocking fees are also waived along with free returns and dedicated customer service.

Another entrant to this subscription based service is Shoprunner. Shoprunner partners with such retailers as Anne Klein, Nine West, Neiman Marcus and Petsmart and for $79.00 a year, provides unlimited free two-day shipping, no minimum order size and free returns shipping. 

While subscription-based services may not be for all e-retailers, the use of either a minimum order or minimum number of items is also proving popular. For example, Amazon made headlines a few months ago when it raised the minimum order from $25.00 to $35.00. Although there was a brief outcry over the increase, Amazon was quick to encourage customers to sign up for its Amazon Prime service for just a few dollars more. Another example is that of Staples. Through its free membership, Staples offers free shipping on a minimum order of $19.99.

As such, there is no “one size fits all” when it comes to free shipping. However, it plays such an important role in the highly competitive e-retailing space. In fact, according to some estimates, free shipping can lift sales by 10% to 20%. According to “UPS Pulse of the Online Shopper,” shipping costs play a huge role in influencing online shoppers’ attitudes and behavior. Sixty-eight percent of those surveyed cited free shipping as their top driver of positive recommendations for an online retailer. On the other hand, 59% cited shipping costs being too high as their top driver for a negative recommendation. 

For those e-retailers contemplating free shipping options, a shipping strategy that is reviewed on a regular basis is necessary. When developing such a strategy, be sure to review what the competing e-retailers are offering and also be familiar with shipping options from parcel carriers. Some experts suggest rate shopping, that is, downgrade the shipping service. Forrester estimates that this can reduce shipping costs up to 30%. However, many retailers are now placing a higher importance on customer experience and are concerned about the possible loss of tracking visibility or losing packages.

Customers now expect some kind of free shipping or else they will likely abandon their online shopping cart. As shipping costs rise, however, e-retailers are answering the demand for free shipping and increasingly with a twist.