Timberline Interactive

"If everybody jumped off a bridge, would you do it too?"

That's the classic question posed by parents to their kids as an argument against peer pressure. But it might equally be asked of online retailers -- about free shipping offers.

Everybody is doing it. But is it good for your business?

In a 2007 National Retail Federation survey, almost 80% of retailers said they planned to use free shipping offers during the Holidays. Free shipping topped all other forms of promotion mentioned in the survey.

When it comes to shipping charges, merchants are from Mars and customers are from Venus: They just don't agree on what's fair. A recent PayPal study found that shipping costs were the No. 1 reason that customers abandoned their shopping carts. Meanwhile, 45% of merchants are losing money on shipping -- and you can bet the remaining 55% are just squeaking by at or slightly ahead of cost.

In my experience, "free shipping" offers out-pull financially equivalent promotions expressed as percentage or flat dollar off. In other words, if your AOV is $100, and shipping is $10, then there's no difference between free shipping, 10% off, and $10 off. But psychologically, free shipping trumps the others.

But does free shipping lift performance enough to pay for itself? Why do it? Three reasons:

• Free shipping promotions may lower your marketing cost more than the cost of the shipping you're giving away. For example, you give away $10 per order in shipping revenue, but the effectiveness of the promotion lowers your advertising spend (pay-per-click, or catalog, radio or whatever) $15 per order.
  
  
• Free shipping promotions tied to a minimum order value may raise your AOV -- and boost your profits. Again, this is mostly a function of decreasing your ad spend, and perhaps your fixed costs, as a percentage of total revenue.
  
  
• Lifetime value may be compelling enough to lose money on the initial order. Yeah, we've heard that before! Be careful with this one . . .

An article on the Wharton Business School website presents additional thinking on how to analize the cost-benefit of a free shipping promotion.At any rate, the performance improvement can be huge -- I have conducted A/B tests where the advertising cost was 3X as high for the default than for the free shipping . Even after accounting for the lost shipping revenues, the free shipping orders produced twice the profit.

But before you start rewriting the agenda of your next marketing meeting, read what David Bolotsky of Uncommon Goods has to say about it, in "One Retailer's View of Why Not to Offer Free Shipping," a great post over at the Shop.org blog.

David's main points:

• When shopping online, the price of shipping is well below the actual and perceived savings in time and (with gas around $4 a gallon!) travel.
  
  
• If you're like Uncommon Goods, which sells unique, hard-to-find items, price is probably not the leading motivator of your customers
  
  
• "Promotions are like drugs - they create dependencies - customers will certainly respond, but will also defer purchases in order to take advantage of the special offer - i.e. wait for the sale."