Is Offering Free Shipping Worth It?
Just as Free Shipping has helped Amazon take over the ecommerce world, your brand can take back lost revenue at higher margins by implementing Free Shipping as well.
Amazon with Prime and its 2-day Free Shipping is kind of like Genghis Khan, conquering everything in his wake. It’s tempting for many manufacturers to launch on Amazon. Brands believe that if they start selling through Amazon, by joining the Mongol horde, it’s worth giving up margins for the sake of volume and revenue, even if it is low margin. Later when they try to launch their own ecommerce strategy, they find that any online marketing they do simply drives customers over to low margin sales on Amazon. So how can small online retailers compete? You may not be able to offer 2-day shipping for free, but you certainly can start to level the playing field by offering free shipping. By taking away Amazon’s free shipping and its resulting price advantage, manufacturers can drive more sales at far higher margin than through Amazon.
Here’s how the process played out for a real life client when we took this approach ourselves:
Amazon was already selling the client’s products online. The client engaged SmartClick to ran a variety of paid advertising programs for the brand. Unfortunately, since they were priced higher than Amazon and many other online retailers, and because they didn’t offer free shipping, we couldn’t drive many conversions from their website. We realized however, that our advertising, was actually driving significant incremental sales on Amazon.com and other online retailers! With the price and shipping cost differential, a consumer would literally have to be crazy to buy direct from the client’s website. We realized that unless we could convince the client to either move the levers of price or shipping cost, an preferably both, that we wouldn’t be able to drive many sales off their brand’s own website.
SmartClick recommended offering free shipping. The client was skeptical, because free shipping would obviously have a negative impact on their margins. They compromised and took a baby step in the right direction offering “Free shipping on orders over $50.” Unfortunately that didn’t work. Why? Because even though the average order size for this client usually is around $85, most of their items are individually priced around $30-$40, so from the consumer’s perspective, when comparison shopping, most users don’t realize that they’ll likely qualify. Free shipping on orders over $50 is an offer that sounds great to a CFO, but in reality, is a snoozer of an offer to a consumer.
Last month, SmartClick again recommended offering free shipping on all domestic orders and the client agreed to give it a try. The result was an immediate and sizable lift in the site-wide ecommerce conversion rate (approximately 20%). The biggest jump was in Google AdWords paid search where there was an 86% lift in conversion rate, mostly coming from branded campaigns. As a result, last month, the client had their biggest month of revenue in the last 18 months, and that was only with half of the month offering free shipping.
These statistics clearly demonstrate that consumers are smart. They know how to price shop online, which makes them largely largely vendor-agnostic – consumers just want the best deal. Without offering free shipping, customers frequently bought directly from Amazon.com after visiting the manufacture’s site. But level the playing field with free shipping and we see an immediate lift in conversion rates (not to mention the higher margins on consumer direct sales).
This case study shows that you can take on Ghengis Kahn when you’re smart about where you aim. Offering free shipping is just a single change that can be done to increase your sales volume. For a full analysis on what you can do to start nipping at the heels of Amazon, give us a call.