Forrester: Retailers Find Value in Free Shipping Offers, But Are Often Reluctant to Provide Them

While retailers find value in providing free shipping, they're often reluctant to provide such offers. This was one of five findings gleaned from a Forrester Research report titled Smarter Strategies on Free Shipping: Understanding the True Costs and Benefits to Retailers. The report was commissioned by UPS.

While some retailers view free shipping to be a competitive advantage that wows shoppers, the majority of retailers interviewed in the report perceived free shipping offers to be a “necessary evil” of the e-commerce world. Several retailers specifically said they offered free shipping just to stay competitive and tried to avoid offering it whenever possible because it eroded already thin margins.

Four other findings from the report include the following:

1. Free shipping sometimes results in unexpected costs beyond subsidizing the shipment. While the cost of delivering the package is the key concern associated with free shipping, retailers noted other problems, such as the fact that would-be shoppers are conditioned to wait for free shipping offers before making a purchase. There's increased labor and customer service costs associated with free shipping order spikes, as well as greater IT costs when free shipping offers incorporate exclusions or product restrictions, according to the report.

2. Product category was the biggest driver of the “effectiveness” of free shipping. While all retailers surveyed reported gains in sales with free shipping offers, the report found that some had more profitable experiences with free shipping than others. Those with the best results were retailers who had generous margins on their products (usually due to the fact that they were selling unique assortments of products) and those who sold products that were easy to fulfill (e.g., small items like flash drives and low-weight items like apparel).

A corollary to this finding was that the location of the retailer’s distribution center had an impact on the effectiveness of the free shipping offer: Retailers with multiple distribution centers or those that were centrally located were more frequently able to offer free shipping because they could take advantage of lower shipping rates overall.

3. Many retailers have found creative work-arounds to offering free shipping. Because most retailers look for ways to drive sales without losing margin, some executives noted that they found tactics like premium shipping clubs, flat-rate shipping and incorporating shipping into the cost of the product particularly effective in offsetting free shipping offers.

4. Where free shipping resides on a profit-and-loss statement can significantly impact how frequently retailers offer it. While the majority of retailers identify any shipping-related costs or expenses within their transportation line items, some retailers allocate these costs under marketing expenses because free shipping is such an effective driver of incremental sales. Those retailers that consider free shipping a marketing expense also tend to offer free shipping more frequently and generally don't “rate shop” (i.e., downgrade shipping service levels to save money).