MasterCard Enters Free Shipping Fracas

Global payment firm MasterCard announced that its customers will receive free, two-day shipping from five of the Internet’s leading retailers. MasterCard also offered a premium service that extends the free, two-day shipping offer to other online merchants.

MasterCard joins American Express and PayPal in offering customers free, two-day shipping options at select online retailers. Earlier this year, American Express offered its cardholders free permanent membership in ShopRunner, a service that gives its members free, two-day shipping at several retail sites. Similarly, PayPal recently tested two-day free shipping offers with a few retailers, whereby shoppers could get free, two-day shipping without an annual fee if they simply checked out using PayPal. The offer had no minimum purchase requirement.

MasterCard has a new site in support of its free shipping offer.

Collectively ShopRunner, PayPal’s offer, and MasterCard’s recent move may be part of what some in the retail industry are calling the Amazon Prime effect, which is a trend to faster, free shipping services driven in part by Amazon’s Prime service. These offers are changing customer expectations, so that merchants, regardless of size, may need to change free shipping offers to reflect the two-day service available from Amazon Prime, ShopRunner, and now MasterCard.

MasterCard Offer Aims at Large Retailers

The “Free Shipping by MasterCard” offer features five of the retail industry’s best known merchants: Best Buy, QVC, Macy’s, Kohl’s, and Walmart. Online purchases made from these sellers can earn free shipping up to $20 per purchase and $500 maximum over a six-month period.

To take advantage of the MasterCard offer, shoppers must register at a special MasterCard site, sign in and shop from the site, select two-day shipping at checkout, and, of course, pay with a MasterCard. Customers will have to pay for the two-day shipping upfront and email the order confirmation to MasterCard to be reimbursed.

Customers must take several steps to use the MasterCard free shipping offer.

Regular online shoppers may purchase an annual subscription for $69.99, extending the free, two-day shipping to about 30 larger retailers, including Nordstrom, J. C. Penney, Home Depot, and GameStop. The premium annual subscription also raises the maximum limit from $500 for six months to $1,500 per year.

Implications for Small, Mid-sized Ecommerce Merchants

Free shipping is now — or, at least is becoming — a key to online ecommerce success. As an example, Forrester Research’s U.S. Online Holiday Retail Forecast 2013, which was released on November 25, found that many online shoppers will leave a site and not buy anything if there is not a free shipping offer available.

Customers may look at shipping as an extra cost or even a waste of money, which is different from how they calculate the gas and inconvenience of going to a store or mall. Even offering free shipping with a minimum purchase can make customers feel better about the checkout process.

Where MasterCard’s offer is different is that it is increasing the expectation around how long a package should take to arrive, and, perhaps, changing how sellers need to think about free shipping.

Consider the model at ShopRunner, which for many reasons, may be the most potent Amazon Prime competitor at the moment. ShopRunner is a marketing tool for merchants wherein the cost of two-day shipping and the 3-to-5 percent commission that ShopRunner takes on each sale is the cost of acquiring the customer.

When an ecommerce retailer purchases pay-per-click advertising, invests in email marketing, buys banner ads, or even prints a brochure or catalog to include in the shipping box, that retailer is investing to acquire or keep customers.

When it comes to accounting for these marketing investments, pay-per-click advertising, as an example, is often taken as part of marketing expenses generally and not attributed directly to a single transaction. For this reason, it is possible that merchants are losing money on some particular orders because of the advertising and promotional expenses associated with those particular orders, but making a profit overall thanks to spreading out marketing costs over all orders and generally increasing the total number of orders and reorders.

Ecommerce businesses may need to start thinking about shipping costs, even two-day shipping costs, in a similar way, not necessarily associating these costs with individual orders, but looking at the business as a whole to see if the free shipping offers are increasing profitability or market share company wide.

New Opportunity for Payment Providers

Free, two-day shipping offers also represent an opportunity for payment companies, like MasterCard, since these free shipping offers could give a particular payment service a competitive advantage. After all, most shoppers will choose the payment card or payment option that provides free shipping over other payment choices.

For the most part, PayPal, American Express via ShopRunner, and now MasterCard are focusing on large retailers, but there may be another opportunity with small and mid-sized online merchants.

What if, as an example, PayPal started to offer ecommerce retailers discounted payment processing fees for providing free shipping when the shopper pays with PayPal? In this example, some of the merchant’s free shipping costs are offset by a generally lower fee schedule, thus the merchant will be motivated to promote the PayPal-driven offer. PayPal has little to lose since it is gaining incremental transactions.