Online retail white paper

Online retail white paper
Free shipping: Your competitive advantage
Contents
3
Executive Summary
4
Online Consumers Increasingly Expect Free Shipping
6
The Retailer Perspective
10
Shipping As a Value Proposition: Global Trends
12
Threshold Free Shipping
13
Free Shipping – A Summary Of Models And Considerations
14
Beware The Hidden Costs
Alternatives to Free Shipping
15
Key Insights on Free Shipping
17
Free Shipping in Australia
For more information, please contact your account manager.
Alternatively, please contact:
Marc Gauci
Manager, eTailing /Fulfilment
Australia Post
P (03) 9106 9237
E Marc.gauci@auspost.com.au
2
Executive summary
When asked during a visit to Australia in mid-2011 what the biggest disruptor to retail was in the US
market, e-commerce veteran Bob Myers had no hesitation in responding: “Free shipping”.
Mr Myers knows a thing or two about the subject – he transformed JCPenney.com into a billion dollar
plus online business, then did it once more with QVC.com. He is the only person to sit on the board of
both the National Retail Federation and Shop.org, the e-commerce arm of the NRF.
More than group buying, comparison shopping, daily deals, mobile devices and other oft-quoted
“disruptors”, free shipping represents the greatest challenge for online and multichannel retailers.
This trend is extending to the Australian market, with an increasing number of local online retailers
moving to a free shipping model. Businesses like online footwear retailer StyleTread have made 100
per cent free shipping and free returns the core of its value proposition.
The challenge lies in finding the balance between maintaining margin and increasing order values
through free shipping – the threshold where the free offer becomes profitable.
The purpose of this white paper is to outline the options, the trends and the considerations for
managing free shipping as a competitive advantage.
3
Online consumers increasingly
expect free shipping
The most widely publicised case of free shipping being offered in 2011 comes from L.L. Bean, the US
multichannel outdoor gear and apparel retailer. When L.L. Bean announced unconditional free shipping
for any order value across its full range year-round, it sent shockwaves through the retail industry.
Margin pressures plus the rising costs of fuel passed along by carriers like FedEX and UPS have made
shipping costs even more difficult to manage in North America. However, L.L. Bean have brazenly
flown the flag for the consumer with a national television campaign touting its free shipping offer,
daring competitors to match.
What is yet to be determined is whether this strategy on the part of L. L. Bean, in light of rising fuel
and delivery costs, is sustainable. If not, it will be an embarrassing and costly task to roll it back in
light of the heavy promotional campaign already in play.
Free shipping is one of the most powerful marketing tools in the online
retailer’s arsenal.
4
Zappos.com and ShoeBuy.com in the US offer free shipping and returns in an effort to capture and
defend market share, despite the high return rate on footwear (Zappos averages a 30 per cent return
rate).
Locally, online shoe retailer StyleTread offers free shipping and returns as well. Its delivery policy is a
cornerstone of its value proposition:
–– Free and Fast Delivery
–– Free Returns
–– Free 100-Day Return Policy.
The tagline in the header at www.styletread.com.au reads:
Order heaps, try them on at home and simply send back the ones you
don’t want for free.
Logistically, StyleTread supplies all customers with a return slip with their order, advising them to use
the carton and bubble wrap. Customers can call the carrier directly to organise pick-up for the returns.
There is no doubt consumers love free shipping. The question all retailers want to know is whether
this type of benevolence toward customers with free shipping both ways is sustainable and / or
applicable in their own business model.
Let’s hear what some experienced Australian online retailers think.
5
The retailer perspective
Jethro Marks, CEO, The Nile (online bookseller)
Founded in 2003, The Nile spearheaded its successful business model
during an early phase of Australian e-commerce.
We have a continual process of trying to find the best offer for our customers, balancing up cost,
service, selection and convenience. Over the past few years we have experimented with a number of
different offers, and finally decided that free shipping was the one that was most sought after by our
customers.
The results of this have been fantastic, with a very high increase in our conversion rate. While we
had a conditional free shipping offer we would get some customers purchasing more items per
transaction, but with the introduction of free shipping, we are now introducing a far higher number of
new and repeat buyers.
The balance of pricing comes down to being able to incorporate the shipping cost into the item
charge while maintaining a competitive pricing offer. We are continually tweaking our supply chain to
try and find the right balance of speed, price and convenience, and are the first to admit we still have
a long way to go.
6
Paul Downs, founder, Hitworks and former chief information officer,
City Beach (multichannel surfwear retailer)
City Beach oversees a 60-strong store network nationwide and recently
revamped its e-commerce presence, improving online revenue by 200 per cent.
At City Beach we used free shipping as a lever to increase the average order
value (AOV) and as a promotion in its own right at key trading times, such as Christmas.
Free shipping used as a lever did directly increase the AOV when we applied it in that way.
I wouldn’t offer free shipping as a promotion anymore, I would look to provide free shipping for all
transactions and cost it in as a cost of doing business where possible. There will obviously be some
exceptions to this rule. Think of it like this – shipping at cost to the customer and returns at cost to
the customer are a potential barrier to them doing business with you. Your aim as an online retailer
should be to remove as many of these barriers as possible. So, work hard to look at your operation
and see if you can make it more efficient so that you can pass those savings on to your customers
through free shipping and returns!
7
Ben Liau, Marketing Manager, Jairus (parent of Mooo.com.au,
online personalised goods)
Mooo has enjoyed significant growth since its beginnings in
2007, expanding its product offering to include personalised
stationery, art, toys, clothing and jewellery.
We currently offer free shipping for all orders over $200, and
we are looking to review this. We also use free shipping as a
promotional tool, to drive conversion and increase average order
value.
Generally free shipping is a better conversion driver than an
actual discount of the same value, but it does depend on the order threshold.
We base our free shipping decision-making on our price of shipping as a percentage of the order and
the target average order value we need to hit to ensure the order is profitable.
Free shipping has improved profitability, but because the threshold is fairly high, it has not been as
effective as we would like it to be.
Mark Rowland, CEO, StyleTread (online footwear retailer)
Styletread is an online shoe retailer, whose growth trajectory
has attracted local investors including Nine Entertainment in
May this year.
We are driven by customer service and we wanted to be number
one in customer service. Therefore we could not bring ourselves
to charge for delivery … we want to go a step further and provide
free next day deliveries and are working towards this
We also understand that we are trying to convince someone to
buy online and not in a store. Given bricks and mortar stores don’t charge customers to walk out of
the store, we needed to match this with a comparable online offer.
Our return rates are over 20 per cent, but this is to be expected and was built into our business plan.
However, just one month shy of our first birthday our fast, free delivery model seems to be working
and is attracting loyal customers who keep coming back for more.
8
Stuart Duff, General Manager – Multichannel, Bevilles
Jewellery retailer Beville’s is currently replatforming its e-commerce store to get set for its
online retail future.
At Beville’s we use free shipping as a purchase incentive for all orders over $30. We’ve discovered
that conversion rate more than doubles every time we offer free shipping and have also increased our
average order value by using minimum order value qualification. Our free shipping promotions feature
on our website’s top navigation as well as through a rotating free shipping banner on the front page.
The free shipping logo also appears on all our product detail pages. However, in offering free shipping
we are careful not to restrict our customers’ choice. Customers can choose to pay for an express
service if they have a more pressing need for their item.
9
Shipping as a value proposition:
the global trends
In a recent US study commissioned by UPS, titled “Smarter Strategies on Free Shipping”, Forrester
Research interviewed 13 web retailers of varying sizes about their experiences with free shipping
offers. The study found strong evidence that free shipping attracts new customers and helps to
improve customer loyalty. Customers are also less likely to abandon their shopping carts and buy
more.
Findings to come from the report included:
–– Retailers find value from free shipping, but view it to be a “necessary evil” of e-commerce. Several
retailers specifically said they offered free shipping to “stay competitive”, but tried to avoid offering
it whenever possible because it eroded their already thin margins, only offering this option during
key shopping periods (e.g. seasonal holidays, etc).
–– Free shipping sometimes results in unexpected costs beyond subsidising the shipment. Retailers
identified that free shipping also increased labour and customer service costs associated with free
shipping order “spikes”, and greater IT costs when these offers incorporated exclusions or product
restrictions.
Retailers with the best “free shipping” results were those who had generous margins on their
products, products that were easy to fulfill and strategically placed distribution centres, allowing them
to offer free shipping more frequently because they were able to take advantage of lower shipping
rates. This clearly makes a difference to retailers such as Zappos, that have strategically located its
single distribution centre next to the UPS central hub in the US and are now renowned for a generous
free delivery and returns policy. Zappos does no drop shipping, every item is fulfilled from the one
location.
The P&L responsibility for “free shipping” has an impact on how frequently retailers offer it. Retailers
who identify the service as a marketing expense tend to offer free shipping more frequently, and
generally do not downgrade shipping service levels to save money.
10
Zappos: the case for
free shipping and returns
In 2004, Zappos established itself as a pioneer of the fast, free shipping promotion and
generated incredible growth. A 2004 Christmas promotion provided free overnight shipping for
all online customers placing orders on 23 December, with guaranteed delivery before Christmas.
The promotion delivered record holiday sales and added to an overall increase in sales
revenue of 127 per cent against the same period of the previous year. In 2005, Zappos was
named the fastest-growing online retailer by Internet Retailer, with total sales of $184 million
in 2004.
In his book, Delivering Happiness, Zappos CEO Tony Hsieh credits much of the company’s
success to loyalty and word-of-mouth through great customer service and great shipping offers.
“I’d rather spend money on expedited shipping than on marketing,” Hsieh says. “That creates
the best customer experience and results in repeat customers.”
In 2008, Zappos stopped advertising free overnight shipping, and reverted to the universal
offer of “fast, free shipping”. According to Hsieh, the decision to cease advertising came
about “because we found that our customers were happier when they were surprised by the
fast shipping.”
11
Threshold free shipping
Charles Nicholls, Chief Strategy Officer at web conversion company SeeWhy and author of Lessons
Learned from the Top 10 Converting Websites offers retailers a formula for understanding the breakeven point where a minimum order value to include free shipping can be implemented.
This is a vital metric in order to make informed decisions on what order value threshold to offer free
shipping at, or which products to select for specific free shipping offers.
“The break-even point is where the margin on an order equals the cost of shipping,” says Nicholls. “A
simple way to approximate the break-even point is to (a) use a range of average shopping-cart values,
or (b) calculate both the average margin and the average cost of shipping, for the different basket
sizes. This allows you to set a minimum order value where offering free shipping all the time will still
leave you with sufficient margin.”
The basic formula can be applied to varying shipping methods for merchants who want to calculate
the break-even of overnight delivery versus standard delivery, for example.
By having clear visibility of your break-even point across all variables of the online equation (order
value, order size and weight, required delivery timeframe, etc.) online retail marketers can develop
targeted, profitable promotional strategies around free shipping.
The greater the time spent analysing and testing free shipping promotions, the greater the profitability
and competitive advantage. Merchants who “guesstimate” the mark where free shipping works will
have limited, if any, success with the promotion.
Understand the elasticity of shipping costs too – the rising cost of fuel may impact future promotions.
For example, Staples in the US has had to raise its minimum order value for free shipping from $50 to
$75 due to the rise in fuel costs and the pass-on effect through increased shipping costs.
12
Free shipping – a summary of models
and considerations
Promotional free shipping: Promotional free shipping relates to limited time fulfillment offers and
often plays a part in seasonal marketing activity. The limited-time nature of this model can work as
a powerful driver for short-term sales by giving customers an added incentive to buy. According to
a 2010 E-Commerce Shipping Practices Survey by US postage provider Stamps.com, 64 per cent of
participants declared that free shipping was the most effective promotion for driving holiday sales
regardless of order value. Retailers such as Mooo and Big W Online have successfully introduced this
model.
Threshold free shipping: Free shipping promotions subject to order threshold work to encourage
purchasing activity and increase cart value. The profitability of this model is based on the breakeven point at which a minimum order value to include free shipping can be extended to customers.
Threshold free shipping has been an ongoing strategy for Officeworks – the retailer offers customers
free shipping if they spend $55 or more. Beville’s offers customers free shipping for orders of $30 or
more with great success while Mooo is currently reviewing their threshold limit of $200.
Conditional free shipping: Offering free shipping across certain product categories can quickly shift
clearance stock and older SKUs by giving customers a more compelling reason to purchase. Retailers
should consider that this model may emphasise certain product categories at the expense of premium
or newer items. In Australia, retailers such as Deals Direct have successfully introduced conditional
free shipping.
Unconditional free shipping: Building unconditional free shipping into the value proposition is a
proven way for retailers to boost conversion and increase average order size. However, retailers
should remember that most customers expect unconditional free shipping as a rule, and offering
free standard delivery might not always be enough to secure wallet share. Despite this, customers
are usually prepared to pay for premium services such as next-day, courier or international delivery.
SurfStitch, The Nile and Styletread have effectively incorporated unconditional free shipping into their
service offer.
13
Beware the hidden costs
of free shipping
It’s imperative also for merchants to understand that it is not the shipping cost alone to consider
when offering free shipping. The success of the promotion depends on a number of different factors
including product value, supply chain design and customer service capability. Consider what additional
services may be required to support a free shipping promotion – greater IT costs, higher numbers of
staff, higher rate of returns, management of stock levels, etc.
Merchants can be caught out by the increased demand brought on by a free shipping promotion if all
the elements are not considered. Don’t let the great customer experience offered by free shipping come
undone by poor management of the promotion. Most importantly, don’t allow the profits gained through
increased order values be eaten away by unforeseen additional costs to run the promotion.
ALTERNATIVES TO FREE SHIPPING
For those e-tailers that don’t think free shipping is a viable option,
the Forrester report “Smarter Strategies on Free Shipping” offers
a few strategies to remain competitive:
Flat rate shipping: Retailers reported this is an extremely
effective strategy. Companies send those orders by ground to
keep costs under control.
Shipping promotions on key items: By offering free shipping
only on key items that meet a certain margin, retailers can
mitigate some of the expenses associated with free shipping.
This type of promotion can be an effective way to incent some
incremental purchases.
VIP shipping programs: Offer customers the option of paying a one-time fee in order to receive free
services. This model has been highly successful for Amazon with its Amazon Prime program, where
customers can sign up for an annual flat fee to receive unlimited free shipping. Independent replicas of
this model are becoming increasingly popular, with services like ShopRunner and FreeShipping.com
14
Key insights on free shipping
26
of online consumers say they switched retailers while
purchasing online. 53% of those consumers said they switched
because they found lower shipping prices with other retailers.1
%
INSIGHT: Online customers are actively seeking reductions in shipping costs, and are prepared to
shop around to find cheaper offerings. Consumers are increasingly unwilling to bear the cost
of shipping.
Free Shipping Day in the US jumped 61% in 2010. 2
INSIGHT: Now in its third year, the dedicated Free Shipping Day in the US increased revenues by 61
per cent over 2009 to $954 million, with 1750 merchants participating (an increase of almost double
on the previous year). The success of this national promotion proves free shipping’s value as an online
sales promotion.
85
%
of consumers rate Free Shipping as the No. 1
purchase incentive. 3
INSIGHT: When asked to choose from the five most popular promotions when shopping online, 85
per cent chose free standard shipping without conditions. Free shipping was chosen 166 percent
more than the next best promotion. As a result, shipping for many e-commerce companies is a loss
leader.
61%
of consumers are likely to cancel their entire order if free
shipping is not offered. 4
INSIGHT: Shipping costs are the biggest reason for shopping cart abandonment, and more than half
of consumers now expect free shipping when shopping online. Free shipping as a promotion
will increase conversion rate and improve average order value.
1. Source: Forrester Research North American Technographics® Retail Online Survey, Q3 2010
2. Source: FreeShipping.org
3. Source: National Retail Federation
4. Source: comScore, May 2011
15
Transactions featuring free shipping rose almost 10% in 2010, from
45.6% in 2009 to 55.1% in 2010.
INSIGHT: A steadily increasing number of merchants are responding to consumer demand and
competitive pressure by offering some level of free shipping. It is no longer a choice – free shipping
is a critical tool for remaining competitive in the online retail environment.
57.5
%
of online merchants offered unconditional free shipping as a
limited time promotion during the 2010 US holiday season.
INSIGHT: During peak periods where high sales volumes are expected, unconditional free shipping
can boost overall sales, but to extend the offer year-round (as L.L. Bean has committed to) may be
difficult to sustain profitably.
The number of companies offering unconditional free shipping in the
US is declining. 2
INSIGHT: According to the report, the number of companies offering free shipping post holiday
season dropped from 23 per cent to 5 per cent. Unconditional free shipping is a harder pill to swallow
now that fuel costs have increased, and the high numbers of merchants offering free shipping mean
this is only one tool for gaining competitive advantage, but no longer the stand-out tool.
44
%
of online shoppers abandoned carts because of the high cost
of shipping and handling. 3
INSIGHT: Advertised delivery options including price, timeframe and carrier brand have a major
impact on the rate of shopping cart abandonment. Nearly 50 per cent of shopping carts could be
salvaged if delivery options were more competitive.
1. Source: comScore, May 2011
2. Source: EquaShip eShipping News Free Shipping Survey April 15, 2011
3. Source: Understanding Shopping Cart Abandonment a 2010 study by Forrester Research.
16
Free shipping in Australia
Free shipping is the number one promotion in online retailing. Shoppers love it, but it remains the
cause of great consternation within the e-commerce industry.
Free shipping is the focus of increasing discussion and debate within the Australian online retail
marketplace, as retailers dare to offer more free shipping to challenge competitors.
Some, like StyleTread, have constructed business models and marketing strategies from the outset
structured around free shipping, with a highly efficient centralised fulfilment model, very similar to
Zappos’ successful US model.
Others, particularly multichannel retailers, will struggle to offer free shipping and maintain profits, and
will offer the promotion at a purchase threshold (eg. $75) to increase order value and build in scalable
shipping costs. The multichannel retail world now watches L.L. Bean closely to see whether its bold
decision to run with unconditional free shipping year round will survive.
Locally, we are seeing the emergence of low flat rate shipping offers from the likes of Myer and Target
to give customers certainty over the price of shipping, reducing cart abandonment.
However, the statistics indicate that the demand for free shipping as a promotion will only continue
to grow, and merchants need to prepare to incorporate this promotion into their business strategy
at some level. All of the retailers we spoke to in compiling this paper undertake reviews of their free
shipping promotions.
“This approach obviously works – look at the explosive growth that StyleTread has seen over the
last few months offering free shipping, free returns and a 100 day returns period,” says Paul Downs,
Managing Director of Australian e-commerce consulting firm Hitworks. “How many other online
retailers offer that service? Not many.
“However, in 48 months, most online retailers will be offering this service so you may as well plan for it
now rather than react to it in the near future.”
17