The Double-Edged Sword of Free Shipping

According to a new report by Forrester Research, e-tailers will have to find a way to use free delivery offers more efficiently.

“This holiday season, many online retailers picked up the delivery tab for customers — a big draw for the 82 percent of consumers who say that shipping matters,” the report says. However, the report goes on to point out that “for the new year, retailers must resolve to pull in the reins on free shipping costs and offer it selectively based on each order.”

Used As Special Promotion

The report found that, among others, brick-and-click operations like Circuit City and pure play e-tailers like Blue Nile offered free shipping as a special promotion this holiday season to attract more shoppers to the Web. Forrester also discovered that many online merchants are offering free shipping year-round in one of three ways:

In-store pick up. Payless.com lets its customers pick up their online orders free of charge by taking delivery at any of its brick-and-mortar locations.

Free shipping for a set dollar (US$) amount. E-tailers such as HomeRuns.com, Ashford.com and Office Depot aim to generate more impulse purchases by offering free delivery at a specific level.

Across-the-board, no-charge delivery policies all year round.

Double-Edged Sword

Forrester insists that free shipping is a costly way of snagging customers. “Since retailers have started down this path, they will have a tough time turning back, because consumers take shipping costs seriously,” the report states.

For example, a recent Forrester survey of 5,831 online shoppers found that 82 percent of respondents consider shipping costs paramount to their buying decision.

In addition, the report predicts that free shipping will become even more important as less affluent users come to the Internet.

“Free shipping will be just what the doctor ordered to grab the 11 million households that will begin shopping online in 2000,” the report concludes.

Cost Of Doing Business

While free delivery has been used as a customer acquisition ploy, Forrester warns that a return to extensive delivery charges will drive consumers back to brick-and-mortar stores in a hurry.

Still, the report concludes that e-tailers that focus only on revenue growth and not bottom-line expenses could become victims of a free-shipping nightmare.

The Solution?

Forrester suggests that e-tailers make sure that margins on their products are high enough to cover the costs of free shipping.

“By building shipping costs into the item price and then offering ‘free delivery,’ customers get the perception that they are getting a deal,” the report concludes.