In online retail, one of the key (and sometimes controversial) strategies that businesses often debate is whether or not to offer free shipping to their customers. The concept of a free shipping policy has gained immense popularity in recent years, with numerous studies suggesting that it can have a significant impact on consumer behavior and sales. This post aims to dive deep into the psychology behind free shipping and its implications for businesses, backed by relevant stats and facts. A word on who we are and why it’s relevant to the subject at hand – Speed Commerce is an end-to-end provider of customer experience & fulfillment solutions for ecommerce retailers and manufacturers. If your goal is to offer free shipping in a way that can grow your bottom line, we can help in a number of ways. Contact us for customizable solutions. In the meantime, let’s dive in.
The Power of Free Shipping
Influence on Purchase Decisions
According to a study conducted by Walker Sands, 90% of online shoppers say that free shipping is the top incentive that would make them more likely to shop online. This stat clearly shows the immense power that free shipping holds over consumers’ purchase decisions. When faced with the choice between paying for shipping or getting their items delivered for free, most consumers tend to opt for the latter, leading to increased sales for businesses.
Shopping Cart Abandonment Rates
Another significant piece of evidence supporting the effectiveness of free shipping is the impact it has on reducing shopping cart abandonment rates. The same study by Walker Sands found that 67% of customers have abandoned their online shopping carts due to high shipping costs. By eliminating or minimizing these costs, businesses can significantly reduce the chances of losing potential customers and increase the likelihood of completing sales.
The Psychology Behind Free Shipping
Perceived Value and Discounts
Free shipping has a powerful psychological effect on consumers, tapping into their perception of value and the desire to obtain a good deal. When customers see the option for free shipping, it creates the perception that they are getting something extra without having to pay for it. This perception can lead to increased customer satisfaction, loyalty, and repeat business. Furthermore, offering free shipping can also be seen as a form of discount, as customers no longer have to factor in shipping costs when making their purchase decisions.
Endowment Effect and Loss Aversion
The concept of the endowment effect plays a role in the effectiveness of free shipping. The endowment effect refers to the idea that people tend to assign a higher value to things that they feel they already possess. By offering free shipping, businesses are essentially giving customers the feeling of ownership of the product even before they make the purchase, increasing the perceived value. Moreover, the concept of loss aversion also comes into play, as customers may feel like they are losing something if they have to spend on shipping costs. By eliminating these costs, businesses can create a positive emotional impact on potential buyers.
Free Shipping and Customer Loyalty
One of the significant benefits of offering free shipping is its impact on customer loyalty. Multiple studies suggest that consumers tend to be more loyal to businesses that offer free shipping over those that don’t. According to a survey by Deloitte, 60% of customers say that they are willing to increase their purchases from a retailer that offers free shipping. This indicates that free shipping has a positive impact on the customer’s willingness to return to the business for future purchases. Loyalty can also lead to word-of-mouth marketing, with satisfied customers recommending the business to their friends and family, helping businesses save on marketing costs.
Free Shipping and Competitive Advantage
In today’s highly competitive online retail landscape, businesses must offer something unique and appealing to stand out from their competitors. Offering free shipping can be a significant advantage, with research indicating that as high as 93% of online retailers provide free shipping to their customers in some form or the other. Consumers have come to expect free shipping, and businesses that don’t offer it risk being left behind their competition. Research has shown that offering free shipping can also increase the average order value by enticing customers to add more items to their carts. This increased order value can help businesses offset some of the costs incurred by offering free shipping, further emphasizing the point that businesses must find the right balance of benefits and costs of free shipping.
Finding the Right Balance
While offering free shipping can undoubtedly be a powerful tool for boosting sales, it is essential for businesses to find the right balance. Offering free shipping on all products may not be financially feasible for all businesses, especially those with low-profit margins or heavy and expensive-to-ship items. Here are a few strategies for finding the right balance:
Minimum Order Threshold: Setting a minimum order value for free shipping can encourage customers to spend more to qualify for the offer, thereby increasing average order values.
Limited-Time Promotions: Businesses can periodically offer free shipping as a time-limited promotion to create a sense of urgency and drive sales. This can be particularly effective during peak shopping seasons like Black Friday or Cyber Monday.
Membership Programs: Creating a membership program that offers free or discounted shipping as a perk can incentivize customers to sign up and become loyal customers.
Product Bundling: By bundling products together, businesses can cover the shipping costs within the overall price, giving customers the perception of free shipping without bearing a significant financial burden.
Your Bottom Line: So, is free shipping worth it to offer to customers?
Despite the quick answer we want the best answer to the question is not straightforward and depends on a few more factors:
Types of Products Being Sold:
Businesses with low-profit margins or expensive-to-ship items may find it challenging to offer free shipping while maintaining profitability. In such cases, offering free shipping may not be financially feasible. However, businesses selling products with high-profit margins can afford to absorb the cost of shipping.
Business Size:
Smaller businesses with lower shipping volume may find it challenging to negotiate better shipping rates than larger businesses. The cost of free shipping, in this case, could be very high relative to the overall business revenue. On the other hand, larger businesses may enjoy more favorable shipping rates, allowing them to offer free shipping while maintaining profitability.
Competitor Positioning:
The competitive landscape is a critical factor that determines whether to provide free shipping. If competitors offer free shipping, failing to offer it can result in losing a considerable number of customers.
Customer Preferences:
Customer preferences are an essential factor in deciding whether to offer free shipping. For many consumers, free shipping can be a deal-breaker in deciding whether or not to make a purchase. Businesses must understand their target audience and their willingness to pay for shipping before deciding whether to offer free shipping.
Shipping Costs:
The cost of shipping can vary depending on the distance, weight, and size of the package. Businesses should analyze their shipping costs, relationships with carriers, and the desired profit margin to determine if offering free shipping is within their financial means.
Overall, it’s important to balance the cost of offering free shipping with the benefits of attracting and retaining customers. How do shipping zones and shipping cost reduction measures impact your calculus? Businesses that can offer free shipping while maintaining profitability can benefit significantly from increased sales, customer loyalty, and a competitive advantage. However, businesses need to find their unique balance point to maximize the value of free shipping while remaining financially viable.
Who are we? Speed Commerce is an end-to-end provider of scalable customer experience solutions for ecommerce retailers and manufacturers. We grow our clients’ businesses by providing winning customer experience strategies such as 24/7/365 ecommerce customer service, order fulfillment, and warehousing. If you like our content and want to see other specific content, or want to learn more about how 3rd-party fulfillment can help grow your bottom line, reach out to us here.
