Amazon Prime and ShopRunner, which both offer online shoppers free two-day shipping with an annual membership, are changing customer expectations and forcing small and mid-sized online retailers to consider faster and more expensive free shipping options to be competitive.
Amazon Prime, which costs $79.99 per year, gives shoppers free two-day shipping on orders placed on Amazon.com and affiliated online retailers. It even offers a Netflix-like movie and television streaming service. Prime’s relatively new competitor, ShopRunner, offers a similar two-day shipping service with free returns for $79.99 per year or $8.95 per month. ShopRunner members can make purchases with many online stores, including Neiman Marcus, American Eagle Outfitters, Toys”R”Us, GNC, PetSmart, and Newegg.
Amazon Prime and ShopRunner are believed to have more than 10 million members combined, all expecting and receiving free two-day shipping on most online orders.
Changing Consumer Expectations
These free two-day shipping services and the growth of free shipping offers in general may change consumer expectations.
As an example, Shop.org reported in October 2013 that 34.9 percent of Internet retailers now offer some form of free shipping year-round. The percentage of ecommerce merchants offering full time free shipping options rose 51 percent in just the past year, again according to Shop.org. These statistics clearly point to a trend in free shipping offers. Given that free shipping reduces a retailer’s margins significantly, it is possible to attribute this massive increase in the number of free shipping offers to customer demand. Online sellers believe that they need to offer free shipping to be competitive.
Two-day free shipping is likely to change consumer expectations further, increasing demand for fast and free shipping options from every retailer as the number of available fast and free shipping options increase via Amazon Prime, ShopRunner, or similar businesses. Even PayPal recently tested two-day free shipping offers. Working with a few retailers, shoppers could get free, two-day shipping without an annual fee if they simply checked out using PayPal. The offer had no minimum purchase.
Why Offer Free Two-day Shipping?
When one considers how, as an example, ShopRunner works, it may not be immediately obvious why or how merchants benefit.
Retailers place ShopRunner banners on their sites, provide free two-day shipping on ShopRunner-eligible orders, and pay a commission of between 3 and 5 percent of the sale value for every order from a ShopRunner member. On some products this might represent a 75-percent reduction in margin for the merchant.
So why do it?
Participating merchants likely understand that loyal customers that return to a merchant’s site to make purchase after purchase are worth a lot. In the United States, 40 percent of all retail ecommerce revenue comes from repeat or return customers who represent just 8 percent of all online customers, according to an Adobe Digital Index report released in July 2013. Put another way, less than 10 percent of customers do 40 percent of the buying online.
These repeat and returning customers may also spend as much as five times more than a new customer on each order. When one considers how much online retailers spend on pay-per-click advertising, banner advertising, and other forms of new customer acquisition, free two-day shipping may be a reasonable expense.
Decentralization Makes Two-Day, Free Shipping Cost Effective
Decentralizing warehouses and order fulfillment may help online sellers reduce the cost of offering free two-day shipping services.
Many online retailers operate out of a single warehouse, shipping products nationally. For orders going to customers nearby the merchant’s facility, shipping costs are somewhat lower and delivery times are somewhat better. For example, a merchant could send an order via UPS or FedEx ground if the customer happens to be only a couple hundred miles away, and expect that order to arrive the next day without any special handling. But sending orders across the country takes a lot more time and a lot more money.
To offer customers free two-day shipping, sellers might distribute inventory to warehouses located around the country, so that any order could be delivered in just a couple of days even using less expensive ground shipping services.
This decentralization might take one or more of four basic forms.
First, a merchant could simply open and manage a second or third order fulfillment facility. There would, of course, be the need for new investment in facilities, equipment, and employees. Unfortunately, this is probably not an option for many small businesses.
Second, retailers might rely on some form of drop shipping. As an example, there are several distributors of health and nutrition products in the United States. These distributors have facilities in every region, and will often drop ship as a service. A retailer of protein supplements, might rely on these distributors to fulfill orders near their facilities.
Third, an ecommerce business might use a fulfillment company that specializes in warehouse goods and order processing. Working with one or more of these service providers, a merchant could place inventory in several areas of the country. The nearest warehouse to a given customer could fulfill the order for the fastest shipping time.
Fourth, small retailers could partner to fulfill orders for each other. Imagine a couple of online specialty toy retailers. One is based in Los Angeles and the other is headquartered in New York. These two companies could compete on every level, but assuming that they stock the same products, they could fulfill orders for each other, making both of them more competitive with large retailers.
Amazon Prime, ShopRunner, and similar services might be an indication of how free shipping offers will evolve in the next few years. Merchants should think of ways to offer free two-day shipping and get new, loyal customers.