Free shipping as a holiday promotion has become a must-do for online retailers; a new study helps retailers understand how this offer can become a differentiator.
Posted Jan 2, 2007
During the holiday season, the words "Free shipping!" can be seen emblazoned on company Web sites and bolded red in email subject lines. However, is this offer truly as exciting as its exclamation point would indicate? A recent study from ForeSee Results, "Free Shipping: Does It Drive Online Holiday Sales and Long Term Loyalty," finds that free shipping can lead to a significant improvement in customer loyalty. The study encourages that if companies go ahead with a free shipping initiative, they do not set any limits on the offer, as restrictions on free shipping can often create more customer frustration than satisfaction.
The study found that free shipping is proliferating online during the holidays. Sixty-three percent of online holiday shoppers reported that they had received offers for free shipping. Under a quarter (24 percent) said that free shipping was not offered and 13 percent did not recall whether it was offered or not. Larry Freed, president and CEO of ForeSee Results and author of the report, says, "Customers have an exception of free shipping during the holiday season that has been built up over the years by retailers themselves." The numbers suggest the question whether free shipping actually stands as a differentiator or is merely the cost of doing holiday business.
Customers report that the competitive edge is only granted to companies who place zero restrictions on free shipping. Customer satisfaction with the Web site increases 0 percent when they are offered free shipping with restrictions over no shipping deal at all. However, there is a 4.9 percent increase in the satisfaction rating for free shipping without restrictions. A similar pattern can be seen in customers' likelihood to purchase next time. This likelihood does not increase for restricted free shipping but jumps up 2.4 percent for unrestricted shipping. Likelihood to recommend increases 4.9 percent for totally free shipping and actually decreases 1.2 percent for conditional offers. Freed says, "When they see free shipping is being offered on that site, it builds their expectations even higher. When there are restrictions, consumers are often very, very disappointed."
Freed believes that although totally free shipping may seem like a heavy cost for retailers, in the long run the promotion will pay for itself. He explains that due to costs on in-store products, such as inventory carrying costs, floor space, lease and people costs, and fixtures, companies should invest the money they save in online products on shipping costs. Although Freed reports that free shipping is currently only an absolute must-have for the holidays, it should eventually become a year-round offer. He says, "Shipping costs creates a barrier to purchase online. At the end of the day you want them to purchase. If the consumer has a preference for online shopping you don't want to create a barrier."
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