Wednesday, March 20, 2013

Free Shipping

Up until recently, we charged $25 shipping (or local currency equivalent) on all our orders. This equated to about 10% of the total cost of an average order. We had discussed and debated whether to offer free shipping, as this is generally considered industry best practice, but we liked the fact that charging shipping gave us a way to offer a promotion (free shipping) that meant we didn't need to discount our product. We also felt that 10% wasn't significant and that people who had designed their shoes and were ready to place an order were already very committed on our site and unlikely to be put off by free shipping.

I was chatting with Ahmed Fahour, the CEO of Australia Post at the Prime Minister's Forum on the Digital Economy and he shared the story of a test run on eBay for shipping costs. A watch was being sold and an A/B/C test was run to determine the best way to sell it:
1. $25 for the watch and $25 for shipping.
2. $40 for the watch and $10 for shipping.
3. $50 for the watch with free shipping.

Any guesses as to what the break up of sales was? Apparently almost no one purchased under scenario 1. 20% of the sales happened under scenario 2, and 80% of the sales happened under scenario 3! Having 50% or even 20% of the total cost being shipping is quite different to 10%, but it's still very clear that people don't like to pay for shipping.

We hadn't adjusted our prices since launch so with this shipping test in mind we decided to rejig our pricing late last year and offer free shipping. Unfortunately it was too difficult to run an A/B test of pricing on our site, as prices are listed in so many places and needs to be incorporated into our back end accounting systems, and we made a whole range of changes to the site at the same time, so we don't have definitive results on whether free shipping has made a difference but our gut feel is that it's been a small positive.

I'd love to hear results from anyone who has been able to run a free shipping A/B test on an online retail site.

Image credit.

6 comments:

  1. That's really interesting. I know I tip to buy if I get a discount (aka free shipping promotions), but that's when I have been prpcrastinating a purchase. I also get easily persuaded when there's something exclusive in the mix: like a limited edition *insert-piece-of-not-very-expensive-but-fangirl- appropriate-merch-piece-here*.

    But as for something I'm buying straight up, my brain just prefers comparing flat prices - shipping seems like a tax and then when I get it in pretty packaging I think "is this where my $25 went?".

    Ironically, I LOVE pretty packaging :-)

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  2. When consumers shop at a regular bricks and mortar stores they don't get charged a "rent fee" when they check out.

    Consumers love free shipping and managed properly retailers can incorporate the cost of shipping into product margins.

    This A-B test example where a store offered Free Shipping or a 10% product discount had Free Shipping as a clear winner.

    http://www.barilliance.com/blog/2012/07/10-off-or-free-shipping/

    Free shipping will become the norm.

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  3. This is also a debate we are constantly having here at Booktopia. We have decided to keep our shipping charge (for now) due to the fact that others we have spoken to noticed an instant decrease in basket size after offering free shipping.

    My hypothesis is that when you charge shipping people feel they want to get value for their shipping charge and so increase their basket size. As soon as you offer shipping (and we have seen this during our free shipping periods) please just buy what they need with the thought they will come back later to get other product, which they may or may not do.

    Many sites include an additional charge into the cost of their product which varies based on your IP Address. This means if you buy multiple items you are actually getting charged for shipping multiple times. We find this a bit deceiving and so are open and upfront with our low fixed shipping charge.

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  4. Hi Michael

    Interesting debate !

    We did a similar A/B test on our shirts on Owen & James. We use to offer $149 and $6 shipping and trialled $155 with free shipping. Conversion increased from 0.7% to 1.1% sustainably and therefore the decision to go with free shipping was easy.

    Each product and business model would have its own pros/cons

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  5. Michael raised very important issue related to pricing structure. $25 shipping that equated to about 10% of the total cost of an average order. Make sense from the Weber Fechner Effect point of view. Hence, people tend to apply savings on a percentage basis and apply logic disproportionately to a purchasing decision.

    The free shipping discussion has a lot to do with Gain-Loss Framing explained in “The Strategy and Tactics of Pricing” by T.Nagle, J. Hogan, J. Zale. Customers tend to evaluate prices in terms of gains or losses from an expected price point, and those judgments affects the attractiveness of the purchase. Ask yourself which of the following two petrol stations you would be more willing to patronize, assuming that you would always pay with a credit card.

    - Station A sells petrol for $1.65 per litter, but gives $0.15 per litter discount if the buyer pays with cash.
    - Station B sells petrol for $1.50 per litter, but charges a $0.15 per litter surcharge if the buyer pays with a credit card.

    The economic cost of buying gasoline from either station is identical. Of course, the same as in the given by Michael example of selling watch on eBay. Nevertheless, most people find the offer from station A more attractive than the one from station B. The reason is that people place more psychological importance on avoiding “losses” (paying extra shipping fees could perceived as loss) than to capturing economically equal size “gains”.

    The watch example from Michael’s post is much more complex, hence it involves perceived psychologically value. Total economical cost was the same for either $25 watch + $25 shipping or $50 + $0 shipping, but customer associates different satisfaction level whenever she/he is wearing on her/his wrist $25 or $50 watch. The psychological value is easy to spot if you compare $50 Stainless Steel watch to $4000 Rolex Stainless Steel watch. You can see current time no matter if it was $50 or $4 000 watch.

    There are folks around who are dealing with this kind of stuff everyday. If your company is facing similar dilemmas, you could approach:
    Delloite which recently acquired Monito Group (T. Nagle works for them), or Simon-Kucher & Partners specialised in pricing (global strategy, marketing and pricing firm with office in Sydney).

    Thomas Novsky

    Weber Fechner Effect http://www.redmarketer.com/?p=2157

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  6. Michael, thank you for some really helpful information.

    I have recently launched my childrenswear brand; your article and the corresponding comments underneath were just what I needed to try a Free Shipping model!

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