OK, Amazon has made believers of us all. They've grown to a market cap bigger than Walmart and their shipping approach gets a lot of the credit. (Interestingly their low earnings gets blamed on their shipping approach too.) Yet Amazon's latest announcement, limiting the number of Prime Shipping family members, goes to show that the jury's still out on a winning strategy. We suspect that the jury will never come in; that free shipping is a complex and dynamic enough strategy question that it justifies continual scrutiny.
The link between buying and various free freight policies is pretty well established. A Wharton Business School study found 52% of online shopping cart abandonments are driven by shipping and handling costs. That same study found shoppers spend 30% more when shipping is included at checkout. We suspect, however, that these statistics vary from market to market; that shoppers of fashion shoes and shoppers of automotive repair parts behave quite differently; meaning that some markets have more free freight/buying sensitivity and others have less.
To assess their sensitivity many companies experiment with their site attempting to quantify abandonment rates and the reasons for them. Free shipping's influence on abandonment is a prime query. However, experimenting with just your site or just one abandonment reason overlooks a critical reality—customer behavior in a dynamic competitive market place. Here's a behavior model to illustrate the point:
Let's suppose shoppers come to your site or a competitor's initially at random. Having shopped they go to check out and buy or abandon at a certain rate based on your freight payment policy. If they abandon your site they go to a competitor and don't come back until they've similarly abandon at another's site. If they buy what's in their cart, you get that sale and, when ready, they return to your site first—giving you another bite at the apple.
Knowing abandonment rates in this model, you can actually determine the resulting market share of each competitor and all that those details entail—growth, top- and bottom-line. Here are some example results in a three-competitor market:
In addition to these numerical specifics this model disclosures, there are several insights to be drawn. Among them
How shoppers behave while on and off your site matters a lot
Competitors and what they do matter
You have to perform against competitors or lose, perhaps big time
Modest differences in abandonment rates can have large market share benefits and penalties
Getting customers to come back to you, keeping them from competitors, is very effective
Abandonment rate differences between competitors are more consequential in high performing markets—ones with low abandonment rates
Is Amazon's growth and earnings a result of its shipping strategy? Can the same be said for others with less growth and higher earnings? These questions are worth submitting to the jury.
Good luck in developing your free shipping strategy. It's important!
Terry Harris, Chicago Consulting, can be reached at email@example.com. He will be speaking at the PARCEL Forum, October 19-21, 2015, at the Hyatt Regency in downtown Chicago. Visit www.PARCELforum.com for more information.