The Power of the Free Shipping Offer

Abstract

Actually, the economists and innovative experts consider whether the idea or a concept will be worthwhile while coming up with any form of business. In particular, they are exclusively thinking about the economic value that can be attained through the outcomes of the innovative process. The immense growth of the e-commerce sector over the past decade has highlighted the important role of shipping fees and great power of the free shipping offer as a form of an economic strategy in gaining new customers and retaining the existing ones. The following paper explores the concept of free shipping and its significant benefits in greatly influencing the purchasing behavior of online customer. The offer of free shipping involves various factors adapted by many retailers to be a marketing tool used to increase customer acquisition, customer retention and to influence order incident rates for e-commerce companies. One of the aspects that the paper seeks to address is the advantages associated with e-commerce businesses offering free shipping as a promotion and sale strategy. The paper also discusses the level of profitability that online retailers seek to gain by mitigating the real cost of shipping both in the short and long term. Undoubtedly, free shipping is an additional cost to the retailers that involves the use of virtual and paperback advertising methods. in fact, these advertising methods incur various costs which are initially not included in the actual selling prices of commodities. Therefore, free shipping is a powerful method to mitigate the actual costs of shipping and attain profitability.

Free Shipping Offer

The growth and evolution of the e-commerce industry has significantly popularized online businesses as one of the most attractive ventures in the business world of the 21st century. According to Ward, Sipior, and Volonino (2016), sales from e-commerce activities are expected to grow at a rate of 14.7% by 2017 that indicates the rising interest of shoppers to engage in online transactions because they consider online shopping to be fast, reliable and convenient. In retrospect, the existence of a physical geographical separation among retailers, consumers and products creates additional costs of transportation and order assembly that are not part of the traditional retailing process. Thus, online retailers are often forced to charge shipping and handling fees because of the existence of additional costs. However, as online retailers continue to master the art of offering products desired by consumers through a quick-and-easy-to-use virtual interface, shipping costs remain the last frontier in perfecting online shopping.

The reams of surveys on the purchasing behaviors of online shoppers indicate that the main complaint of more than 50% of online shoppers is the inclusion of shipping fees; over 60% of online shoppers admit to abandon the purchase of a product when shipping fees are added (Kacen, Hess, & Chiang, 2013). On a larger scale, it is evident that the ability to do away with shipping fees plays a major role in the success of any online business across the global front. As such, the understanding of behavior of an online consumer, the psychology of choice and the value placed on the term ‘‘free’’ has enabled e-business enterprises to capitalize on the free shipping offer as an effective tool in attracting and retaining consumers. According to a study conducted on the impact of free shipping offers on the consumer attraction, consumer retention and profitability, the results indicated that 62% of online shoppers strongly believe that free shipping is a necessary service that should be provided by every online retailer (Javadi, Dolatabadi, Nourbakhsh, Poursaeedi, & Asadollahi, 2012). Furthermore, the results from different studies indicated that 80% of online shoppers admitted that they could make even more purchases provided there is free shipping of their products (Ward et al., 2016).

Given the survey statistics, it would be irrational to ignore the power of free shipping offer as a fundamental strategy required for the success of business-to-consumer and business-to-business e-commerce ventures. Today, an increasing number of e-commerce businesses have realized the power of the free shipping offer and have begun to incorporate this strategy in their business models. For example, e-commerce companies such as Zappos have embraced the strategy of free shipping without any purchasing conditions while other companies such as Amazon, which was among the first online retailers to introduce the concept of free shipping, offer only free shipping based on a certain minimum purchase threshold.

The core purpose of this research paper is to explore the power of free shipping offer not only as a major persuasion cue in consumer acquisition and revenue increase but also as an important influential tool in gaining competitive advantage in a rapidly growing industry. In addition, the following paper aims at close examination of the fondness of consumers in relationship to the free shipping offer. Moreover, the paper examines the ways online retailers can optimize consumer fondness to attract new customers and gain the highest profits possible while bearing the actual costs of shipping. Earlier researches have revealed that the free shipping strategy is a relevant and important marketing tactic, which can bring success to online retail business within a short period of time if implemented successfully. As this paper seeks to emphasize on the power of free shipping offers, it further discusses the empirical decisions to waive shipping fees in order to influence consumer acquisition and repeated buying. Moreover, it highlights on the elasticity of order sizes and attracting new consumers using free shipping offers. The paper is organized in three sections that explore the topic. The literature review section briefly reviews economic and market literature that relates to the power of free shipping offer as a strategic tool in new customer acquisition, customer retention and increase in revenue sales. The empirical analysis section presents internet data on consumer online purchasing behavior that is influenced by the offer of free shipping; it also discusses corresponding results on the impact of using free shipping as a strategic marketing tool. The paper ends with a conclusion section, which summarizes the paper discussion and provides several recommendations and the directions for future research to ensure that online retailers do not bear significant expenses while consumers enjoy the benefits of free shipping.

Literature Review

The growth of e-commerce has been characterized by shipping costs incorporated in online business models. Given the fact that products are spatially separated from online consumers at the time of purchase due to geographical limitations, the process of shipping goods from the seller to the consumer is an essential aspect of e-commerce businesses (Frischmann, Hinz, & Skiera, 2012). According to Javadi et al. (2012), shipping costs involve the costs of transportation and handling services that ensure that goods move from the seller to the customer and maintain the exact quality and quantity as per the purchase order. In fact, online businesses depend on established shipping policies that regulate the amount of costs that an online retailer incurs while providing products to consumers without incurring losses for the purchase transaction. Thus, creating a viable shipping policy is a crucial decision for every online business; there is always a trade-off between including shipping fees as a means of recovering costs incurred in transporting goods and decreasing/exclude shipping fees as a strategic approach to attract consumers. Schindler, Morrin, and Bechwati (2005) highlight that many online consumers are often skeptical of shipping fees and consider these additional costs to represent a retailers’ scheme to get additional profits. From this perspective, many online retailers have come up with the idea of excluding shipping fees and adopting the free shipping offer strategy as a long-term effective tool for bringing a turn-around to their online businesses.

The free shipping policy can come in two main forms. The first form involves an e-commerce business offering free shipping of goods to the consumer without any predetermined or conditional terms regardless of the order size or geographical location of the online consumers. In fact, this is the most frequently used form of free shipping; it attracts a larger consumer audience as the online shoppers are easily persuaded to make a purchase, when there are no extra shipping costs incurred. The purchase threshold-based free shipping is the second form of shipping policies. The retailers commonly use this free shipping policy as a marketing tactic that encourages online shoppers to increase the total order size in order to reach a certain purchasing threshold that provides the benefit of free shipping. Schindler et al. (2005) state that the threshold based component is only beneficial to consumers, when the value of the order size meets the specified purchasing threshold; however, failure to meet the specified threshold results in imposing shipping fees that is negatively perceived by the consumers, who are unable to purchase certain order sizes. Despite the differences between the unconditional and threshold-based forms of free shipping, both policies remain to be integral tools in influencing the purchasing behavior of online consumers and increasing profitability for online retailers (Frischmann et al., 2012). The offer of free shipping increases consumer’s propensity to make a purchase; this fact relates both new and existing customers due to the psychological perception of gaining value for a commodity without incurring additional cost. While creating a perceived price value for a commodity, online retailers are able to incorporate the costs of shipping within a particular price range that is still competitive with market prices; thus, they are able to attract a larger consumer base compared to online merchants that do not offer free shipping options (Meng, Wan, & Rong, 2015). The successful introduction of free shipping offer by the e-commerce firms such as Amazon and eBay have revolutionized the sphere of shipping fee policies by providing the average online shopper with the opportunity to shop conveniently without any fear of incurring shipping costs (Elhadary, 2014). The power of free shipping offer consists in the fact that it serves as a vital incentive that allures online customers, who are seeking to make purchases without incurring the costs for transportation and handling. In fact, the use of the free shipping offer has gained tremendous popularity among online shoppers as it eliminated the worry of incurring shipping costs. The power of the free shipping offer entails the impact on three main frontiers of any online business, which include consumer acquisition, consumer retention, and increase in profitability.

Consumer Acquisition

Free shipping offer is considered to be one of the major essential ideas online retailers can adopt as an effective method of attracting and converting new online consumers. From a psychological viewpoint, the research shows that the use of the word ‘free’ in any promotional context is accompanied by positive emotions that stimulate buyers to consider and/or make purchases of the commodity (Meng et al., 2015). Hence, the inclusion of the free shipping offer has the power to attract new consumers, who are unwilling to cover shipping costs. The research shows that the stores that offer free shipping have been able to attract a large traffic of new online consumers within a short period of time; they also successfully converted new customers to repeat buyers.

Consumer Retention

Given the competitive nature of online businesses today, creating a loyal consumer base is fundamental for the success of e-commerce businesses. According to Schindler et al. (2005), it is easy for online businesses to lose customers because of the unpredictable market dynamics of online commerce. Thus, the incentive of the free shipping offer keeps bringing back online shoppers to a specific business due to the perceived benefits the customers seek to maximize.

Increase in Profitability

While some people may view free shipping as an expensive undertaking, offering free shipping to online clients improves conversion rates greatly that translates into increase in sales and revenues. High conversion rates guarantee repeat purchases and an increase in profit margins. By including a free shipping offer on e-commerce websites, it is possible to optimize the net profit per visitor that is a crucial step for online retailers in maximizing profits.

The phenomenon of offering free shipping option capitalizes on the perception of many consumers, who strongly believe that the elimination of any amount of costs not only decreases the actual cost of a commodity but also brings forth numerous benefits. From the psychological standpoint, the fear of encountering a loss is in human nature and humans intrinsically seek alternative options to avoid losses. Therefore, the feeling of receiving something without incurring expenses that is provided by the free shipping offer elicits a positive reaction in comparison to circumstances when there is a standard cost stipulated. Moreover, multiple studies have shown that the viability and impact of using a free shipping option is greater compared to cases when there are lower shipping rates offered. The reason for such a phenomenon is the fact that the perception of ‘free’ or zero costs is considered to be a significant cost benefit, while the difference in shipping costs may amount to a small difference of as low as one cent (Elhadary, 2014). Therefore, the free shipping option is considered to be a zero- risk venture by consumers who intend to eliminate any chances of incurring losses. Focusing on the need of online consumer to avoid shipping costs and associated risks, online retailers strategically target shoppers with the means of free shipping offer as a guaranteed avenue to counter shipping expenses. Thus, e-commerce companies attract many online shoppers, who cannot resist the appeal of incurring zero costs in shipping the purchased commodities. The majority of online consumers do not expect the inclusion of shipping costs that can be eliminated in the product prices. However, e-commerce businesses possess the ability to establish a suitable threshold that neutralizes shipping expenses through maximizing the purchases of online consumer; this is the backbone in the success of the free shipping offer among many online retailers (Frischmann et al., 2012).

Empirical Analysis

A better understanding of the power of offering free shipping as a strategic tool in transforming online businesses it is possible to examine various internet based e-commerce business models to provide an overlook of the impact of this strategic marketing tool. The paper focuses on the e-commerce giant Amazon, which is suitable for this kind of analysis, as it is highly successful in offering free shipping while attaining high profits in a competitive online business environment. The online venture, Amazon, offers a wide range of homogenous products; the provision of free shipping is an added advantage for creation of product differentiation and attraction of new online consumers (Kacen et al., 2013).

A look at Amazon’s online book retailing section is effective in understanding the benefits of offering free shipping as the popularity of e-commerce literature today has transitory effects on influencing product prices and shipping costs. Generally, there are various practices across the e-commerce environment that can affect the complete analysis of online products such as product weight, order size and geographical location of the consumer in some cases (Hou & Blodgett, 2012). However, the analysis of book retailing products of Amazon shows that there are well-defined units for each product with shipping prices that are based on the number of product units, which is independent of a physical location of the consumer.

Amazon has a fixed fee of $3.00 and an additional fee of $0.99 per book unit for purchasing a single book unit. This implies that the total cost of shipping a single book is $3.99. However, the firm set a purchasing threshold of a minimum purchase of $35 as a precondition to free shipping as Amazon was expanding to online retail of other various commodities (Ward et al., 2016). Therefore, for example, an online shopper, who seeks to purchase a single book unit and does not wish to incur the shipping cost associated with the single purchase, can decide to increase his/her purchase order size in order to meet the specified threshold and enjoy the benefit of free shipping. As a result of this strategy, Amazon has enjoyed a large online retail presence over the years by attracting over 175 million online users a month. Amazon offers two free shipping components, which include Amazon’s prime subscribers, who enjoy unlimited two days free shipping offer on products purchased for an annual $99.00 membership, and a purchase threshold-based free shipping component of $35. In fact, it is clear that Amazon’s free shipping policy is a strong persuasion tool that attracts online shoppers from across the world; this strategy also provides a high conversion rate, fast acceleration on order sizes and high margins of purchase rates (Javadi et al., 2012).

Conclusion

From a market point of view, this paper concludes that many online consumers are unwilling to incur additional cost when making online purchases, especially, the costs associated with shipping. Therefore, the introduction of the free shipping offer serves as an ideal option that is readily embraced by online consumers as it greatly influences their purchase behavior and patterns. The free shipping offer is a major incentive in gaining competitive advantage and increasing market share in the e-commerce sector. Many online shoppers demonstrate strong unwillingness to pay shipping fees; thus, e-commerce companies that have adopted any free shipping strategy enjoy a vast online presence that transforms their online businesses to successful ventures.

Considering both threshold-based and unconditional free shipping, there is an increase in new consumer acquisition, consumer retention, conversion rates and revenue earnings, when e-commerce businesses include the free shipping option as s service to online consumers. By examining the success of the e-commerce business giant, the paper concludes that there is a major association between free shipping offers and a positive purchasing attitude of consumers. Amazon’s success is founded on its ability to sell its products to online shoppers at reasonable market prices and to allow shoppers to enjoy free shipping that is a concrete evidence on the power of the free shipping offer. What concerns recommendation for further studies, there is a need to explore consumers’ willingness to pay additional costs within the free shipping offer in order to speed up delivery time. Additionally, there is a room to explore the customization of the free shipping policies per consumer segmentation in order to classify customers according to their geographical locations and adjust shipping policies to enable online retailers to incur a partial amount of the shipping costs rather than the full costs, which might adversely affect profitability.