This time last year, before any of us could imagine large-scale store closures and mask-clad grocery shoppers, experts were predicting e-commerce sales growth in North America of around 15% for 2020. According to Signifyd’s Ecommerce Pulse data, online sales increased nearly 40% since late February.
The evidence clearly shows a rapid acceleration in the pre-existing migration to online shopping, perhaps shifting the curve forward by several years. Adoption rates that were anticipated for 2021 and 2022 have already been eclipsed, and it may be some time yet before brick & mortar operations resume anything resembling the prior norm.
As millions of consumers are shopping more online than ever before, some perhaps even for the first time, it is critical for online retailers to evaluate their e-commerce practices for any area of competitive weakness. One of the most under evaluated elements of the electronic purchasing experience is an organization’s shipping pricing policy.
Let us examine how consumer expectations have changed when it comes to retailers charging for shipping fees for online or mobile purchases.
In the “Pre-Amazon” world, most consumers expected to pay a shipping charge. They seldom questioned how charges were derived, and were tolerant of ancillary fees (handling charges, etc.). It was often accepted that an expedited or guaranteed delivery day would incur a higher shipping charge. In todays “Post-Amazon” world, free or flat-rate shipping is mandatory, expedited delivery is expected, yet higher price tolerance is limited and acceptance of ancillary fees (with few exceptions) has disappeared.
With this evolution of consumer expectations involving shipping charges for online purchases, how do most shippers derive their pricing strategy to ensure it is appropriate? We often hear the following explanations:
- “We matched what our competitors are charging”
- “We feel we had to offer free shipping”
- “We pass on our actual carrier rates”
- “We pass on our rates with an upcharge”
If an online retailer cannot answer the following questions, it is likely time for a strategy overhaul.
- “What is your level of profitability or loss on shipping overall? Per product category? Per SKU?”
- “Is your pricing strategy driving away customers? If so, is it due to pricing level, structure, presentation, or all three?”
- “How would a change in rate level or structure affect your sales or bottom line?”
If, after getting this far, it has become clear your internet shipping pricing policy needs a tune-up, then consider following these steps for e-commerce pricing policy success.
Steps for Success
Step #1 Evaluate the effectiveness of your current strategy. It is critical to understand your current shipping profitability at all levels: as a whole, by client, by product, and by order. This baseline can usually be achieved by fusing carrier invoice data with an order file containing the data points mentioned. Layer in critical metrics to complete the picture: cart abandonment rate at shipping cost exposure, reorder rates, order size, direct customer feedback, etc. Then compare your current practices to those of your top competitors to determine if they have an advantage in either cost or structure. Is what you are doing par for the course? Is it innovative? Outdated?
Once this self-evaluation is complete, if it appears improvements are necessary to remain competitive, it is time for…
Step #2 Create plausible adjustments or alternate strategies based on data and research. There are two primary questions to be answered at this stage: “What is the appropriate price level?” and “What is the appropriate price structure?”. Quantifying your customers’ reaction to a change in policy is critical. Platform A-B testing can help determine the shipping cost elasticity of your clients. By establishing multiple instances of your platform and dividing your customers into test and control groups, you can determine how changes in pricing level or structure affect sales, whether order size or frequency changed, and whether cart abandonment rates increased or declined. The goal of these tests is to answer the question: “Should you make shipping rates a competitive advantage or a profit center?” This question is the overarching issue when determining price point, and the answer should be made clear during A-B testing and customer feedback for price-elasticity. It is important to gain the answer to this question first. Once this is clear, the next question becomes pricing structure.
The “shipping rates as competitive advantage or profit center” answer will play a large role in determining the appropriate structure. Solve this next. Any structure you choose must be consistent, predictable, clear, simple, and flexible. The most common pricing structures are: free, flat, variable-flat, pass-through, pass-through with upcharge, and custom.
Each of these structures has unique advantages and disadvantages. For example, free shipping is simple, predictable, transparent, and creates an advantageous market position. However, it is expensive, which may lead to increases in product cost, reductions in delivery speed, and an eroding bottom line.
Choosing an effective strategy can lead to higher sales volumes, larger order sizes, smaller shipping losses or shipping profits, and an improved customer experience.
Step #3 Try alternate strategies. Review the results then make changes. Do not be afraid to make adjustments, letting your customers’ behavior drive your decisions.
A new strategy implementation will often mean some type of benefit to your customers, perhaps in the form of lower rates or a simpler more predictable structure. Be sure to communicate these benefits to them during the ordering process.
Step #4 Develop metrics for continuous evaluation of program effectiveness. Finally, comprehensive monitoring is critical to maintaining the program’s effectiveness. Develop KPIs that are industry appropriate. Perform continuous competitor research, and research well-regarded organizations in other industries. Whenever possible, solicit direct customer feedback. It will be necessary to reevaluate the program each time your carriers implement a rate increase, there is a shift in customer expectations, a new competitor enters the market, etc. Test your program regularly and keep an eye on your metrics. Don’t be afraid to make mid-course corrections; what is cutting edge today could be obsolete tomorrow.
Kenneth Moyer has more than 28 years of industry experience, including a 16-year multidisciplinary tenure at UPS. During his time with UPS, he spent 8 years in pricing, developing, analyzing, and implementing thousands of UPS pricing agreements. Kenneth has leveraged this valuable experience to effectively serve as Executive Vice President of Supply Chain Strategies for LJM Group, where he also serves on the company's executive board. Kenneth has implemented robust solutions and negotiated best in class parcel agreements for some of the country’s largest shippers, including several Fortune 500 companies. He holds a Bachelor of Science degree from University of Maryland.
This article originally appeared in the July/August, 2020 issue of PARCEL.