How the offer of 'free Shipping' Affects on-Line Shopping

How the Offer of 'Free Shipping' Affects On-line Shopping

The phrase "free shipping" is like a siren song to many who shop on the Internet.

For whatever reason, a free shipping offer that saves a customer $6.99 is more

appealing to many than a discount that cuts the purchase price by $10, says

Wharton marketing professor David Bell. Bell noticed this phenomenon a few

years ago while doing research for an online grocery store, and the observation

prompted him to look more closely at the ways Internet retailers use shipping

charges -- or the lack thereof -- as a promotional tool.

The result is a model that can help managers set shipping fees in ways that both

appeal to customers and drive them to buy in quantities that can be efficiently

processed. "There is no direct analog to this in the traditional retail world," Bell

says. "It seemed to us that firms had not figured out the 'right' shipping policy, so

there's a lot of experimentation going on without clear guidelines."

Internet-based shopping is the fastest growing sector of retailing in the U.S., Bell says, with sales

exceeding $110 billion during 2004. Approximately 60% of online retailers cite "free shipping with

conditions" as their most successful marketing tool.

Consumers like free shipping offers, perhaps because it makes the online retail transaction more

comparable with that at the neighborhood store. Whatever the reason, it's clear that consumer behavior

changes when shipping fees are imposed. With fees, shoppers will make fewer shopping trips and

purchase more goods at a time -- not unlike shoppers who drive great distances to a particular store, Bell

says, and decide they had better stock up while they're there. Alternately, fees can prompt consumers to

simply walk away. A survey from 2004 found that shipping and handling costs triggered 52% of the

abandonment of online shopping carts, Bell says.

While some might argue that shipping fees are merely a substitute for the time and travel costs involved

with visiting a bricks-and-mortar retailer, consumers may not buy that argument, Bell notes, adding that

the link might not be so clear in the minds of many because travel costs are not collected at the traditional

retailer's point of sale.

Some companies have struck a middle ground by waving shipping costs when customers exceed a

threshold -- a strategy that can indeed make customers think differently about price, Bell says. Whereas

higher prices always are bad for consumers in traditional retailing, customers of online retailers can

benefit from higher prices because they push the total closer to the free shipping threshold.

Setting Thresholds -- and Prices

In a recent paper titled, "Free Shipping and Repeat Buying on the Internet: Theory and Evidence," Bell

and two colleagues -- Skander Essegaier, a professor at Koc University in Istanbul, and Yinghui Yang, a

professor at the University of California at Davis -- developed a model that shows how firms can use this

dynamic to their advantage, while not putting customers at a disadvantage.

Bell gives an example of a firm that lowers its free-shipping threshold to induce customers to purchase

Bell gives an example of a firm that lowers its free-shipping threshold to induce customers to purchase

smaller quantities with greater frequency. If the company's goal is to leave consumers equally well off in

terms of their long run costs, should the threshold