What to consider before offering free shipping

November 22, 2011

When Best Buy recently announced its earlier and more expansive holiday free-shipping program, deal-tracking Web sites immediately started buzzing with speculation that other retailers would respond with their own shipping promotions. After all, only days earlier, Sears came out with its headlining offer.

So with the big boys of retailing offering so many deals, does an independent retailer need to follow suit and jump into the free-shipping fray?

Not necessarily, say retail consultants and business owners.

Many independent retailers offer free shipping without figuring whether it will be a money loser, says Bob Phibbs, a business strategy and marketing consultant and author of “The Retail Doctor’s Guide to Growing Your Business: A Step-by-Step Approach to Quickly Diagnose, Treat, and Cure.”

“It sounds great, but is it something you’re offering because you have your customer hat on, or is it something that’s really going to grow your business?” Phibbs says.

He says Amazon can build a big enough order through offering free shipping to still earn a profit. But it’s tougher for smaller retailers. “They don’t have the leverage these other guys do,” Phibbs says. “If you’re trying to match Wal-Mart or Toys R Us for pricing and offering free shipping, where are you going to make that up?”

And unlike larger retailers with online order fulfillment centers, independents often fill online orders from store inventory, further crimping the profitability if free shipping is added.

Privately held retailers so far this year have generated a roughly 5 percent increase in sales, according to an analysis of financial statements by Sageworks Inc. But retailers aiming to accelerate sales growth in the final months of the year are looking for an edge, given ongoing shopper concerns about the U.S. economy.

Shop.org found that more than half of retailers it recently surveyed have somewhat to significantly higher budgets for free-shipping promotions this holiday season. And most customers expect some offer of free shipping.

But you can give customers some of what they want without giving away the store.

Jodi Black, co-owner of a Conover, N.C-based online store selling books and game aids for table-top role-playing games, combines free-shipping offers with other promotions. She’ll invite customers to an online chat about a new product with the promise of a free shipping giveaway during the chat.

“You have to offer some sort of free shipping somehow, because there are people who will not even look at [your site] if it does not say free shipping on it,” says Black, who runs Beautiful Brains Books And Games. Her site is offering free shipping on all orders between Black Friday and Cyber Monday.

Here are five questions a retailer should ask about free shipping:

1. What’s the math? Black took the average price of a book on her site and the average shipping cost, then estimated her expected sales volume as she calculated whether her overhead could support a free shipping offer for the long weekend. KeyBank’s online calculator allows you to play around with variable costs to determine how much volume you’ll need to break even.

2. What am I shipping? Black can ship her products using the U.S. Postal Service’s cheaper rate for media materials, but a retailer selling fragile or awkwardly shaped products will need to figure in higher packaging and shipping costs.

3. How can I promote it wisely? Use Facebook or other free marketing events, like Black does, to announce shipping deals, so that customers have another reason to want to connect with you often. Use e-newsletters to former customers and prospects.

4. How can I limit it? Rather than offering blanket free shipping, offer it on days that are typically slow or on products that aren’t selling well, or require a minimum purchase.

5. Do I really need it? Some Web sites, such as online gift retailer Uncommon Goods, sell highly discretionary or unique items, so price and free shipping aren’t motivating purchase factors. Such retailers may focus instead on a generous return policy and delivery guarantees.

Mary Ellen Biery is a financial writer at Sageworks Inc.

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