The inevitability of free shipping

Amazon is a fierce competitor. First they mastered logistics. Nothing was higher priority than getting the order fulfilled; even the most senior managers were drafted into the warehouse at peak periods. Amazon also mastered user interface, data analysis and showed the world how remarketing should be done in the interests of a long term customer relationship.
 
The day they announced Z-shops (now Amazon marketplace) signalled a massive expansion in their ambition. The day Amazon announced free shipping for all purchases, their stock price may have been hit as they put a multi-million dollar change against earnings, but it signalled the start of a new battle, the full effects of which we are only just beginning to experience. They also demonstrated that Amazon plays the long term game, and is willing to suffer short term pain for strategic ends.
 
This week, I speculated that for many categories of goods, always-on free shipping is inevitable, and that the e-commerce sector needs to plan for its arrival.
 
This prompted an angry outburst:
 
"Free Shipping - are there any studies regarding why people think that they should NOT have to pay for shipping? They don't go to the post office and expect to mail letters for free. They don't expect Fed-Ex to charge them nothing when shipping a gift to a friend. Why do they expect that there should be no cost involved in shipping their products? ESPECIALLY lower priced / lower margin products (as opposed to luxury items with very high markups).”
 
I may have touched a nerve here, clearly it is a painful issue for many mid-sized e-commerce companies. A search of price comparison websites before Christmas illustrated the problem: for many categories of goods, electronics in particular, free shipping was the norm. As comparison shopping has gone mainstream, and the shipping cost become part of the total calculation, it has become all too obvious to consumers that the cost shipping needs to be included in their decision.
 
Many studies, most recently Forrester, have shown that the cost of shipping is the single largest reason why consumers abandon shopping carts. Customers, now savvy to the extensive discounting which is an integral part of the holiday season, deferred purchases en masse, leading to a four week period of stagnant sales, and the highest industry wide abandonment rates of 2009. In response, or perhaps due to seasonal habit, the e-commerce sector offered extensive discounts, leading up to Black Friday/Cyber Monday and though the holiday period.

So while individual e-commerce teams may (and should) consider free shipping as a tactical promotion, many consumers are coming to expect it. It is universally liked by customers, and is in my view, an inevitable cost of doing business online.
So how does a mid-sized ecommerce company differentiate itself against the giants who can offer both free shipping, and the competitive prices?
 
This is a great question, with no easy answers. Part of the answer undoubtedly lies in differentiation through service, or ‘selling as service.’
 
Perhaps there are three questions every e-commerce vendor should ask themselves to answer this challenging question:
 
(1)    Who is your customer, now and in the future? Is your customer one of the growing breed price sensitive, value orientated deal seekers? Or is your customer more convenience seeking?
 
(2)    What’s your “unfair” advantage? What is it about your business that gives you an unfair advantage? Do you have unique supply, or a unique product? Are you selling the same products as other vendors? What can you compete on that gives you a long term unfair advantage?
 
(3)    How can you turn a one time purchase into a lifetime relationship? Repeat customers are inherently more profitable, more loyal, and better advocates for your business. What is it that  they want to buy, that will get them coming back again and again to purchase from you?
 
You may decide that your customer is price sensitive, and that your advantage lies in fastest delivery due to your superior logistics network. However, price based competition is increasingly the preserve of the volume players (Amazon, Wal-Mart, Target) who also have slick logistics. Most e-commerce vendors want to stay well away from their turf with good reason.
 
Service is undoubtedly one key element in a potential strategy going forward. Zappos demonstrated how superior service could build a sustainable long term business in an unlikely market.

This was a recurrent theme of a webinar on shopping cart recovery programs which I ran with Joel Book at ExactTarget. Joel and I sparked this debate and prompted the question posed above. It’s well worth watching if you’re in the mind to think through some of these knotty issues. You can watch a replay here.