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Macy’s balances plusses and minuses of free shipping to loyal customers
Through a special arrangement, presented here for discussion is a summary of a current article from the blog of LoyaltyOne. The article first appeared on Forbes.com.
One million customers have joined Macy’s Bronze-level tier per quarter since the the Star Reward program was relaunched in May 2018. Many Bronze members are close to Gold status, which comes with free-shipping perks for customers but margin erosion for Macy’s.
And therein lies a challenge facing almost every retailer with a rewards program in the world of Amazon: How to manage the expected cost of free shipping while investing in rewards perks that delight members and help the merchant stand apart from rivals?
Here are four ways retailers can control shipping and free up the expense for customer engagement:
- Sell the whole outfit at once, not a piece at a time. Because free shipping applies to no minimum on spending, Macy’s Gold and Platinum members are ordering just one item at a time rather than bundling. That approach is being re-thought. Paula Price, Macy’s CFO, said on the retailer’s first-quarter conference call, “We are continuing to test and iterate in terms of what the free shipping threshold will be.”
- Letting shoppers BOSS Macy’s around. Orders through BOPIS (buy online, pick-up in store) and BOSS (buy online, ship to store) have expanded to more than 10 percent of digital sales.
- Finessing when to hold and when to flow. Macy’s “hold and flow” initiative is designed to reduce shipping expenses and improve margin by ensuring the right amount of merchandise is delivered to each store. Loyalty program data likely informs allocations.
- Encourage in-store action. Star Rewards members can win invitations to fashion events that get them off the website and into the store.
Macy’s recognizes increased shipping costs are a necessary investment to retain customers and improve customer loyalty. In addition to the growth in Bronze-tier members, spending among Macy’s top-tier Platinum members, which make up about 30 percent of all sales, rose 10 percent in the first quarter.
If that 10 percent higher spending, combined with other cost-management measures, can offset delivery costs by more than a few percentage points, it could present a golden opportunity, not just for Macy’s, but for its customers.
Discussion Questions
DISCUSSION QUESTIONS: What strategies can help retailers minimize the impact of free shipping perks as part of loyalty programs? Should free shipping come with spending thresholds, even for top-tier rewards members?
Poll
BrainTrust
Gene Detroyer
Professor, International Business, Guizhou University of Finance & Economics and University of Sanya, China.
Phil Rubin
Founder, Grey Space Matters
Getting inventory right the first time is definitely one way to control free shipping costs. One aspect of this that is missing, though, is the speed of shipping. Because while Amazon does offer free shipping, it’s also free shipping in two days (and often even faster). Buy online/ship to store works great, *if* customers’ expectation is they’re going to wait a week for their items to show up. I’ve found that it’s not the “free” part of the shipping that is killing retailers – it’s the “in two days or less” part. That means stores still can and should play a role in instant gratification – and the fashion shows with trunk show-style stock levels are a good way to do that. But free shipping is here to stay, even if it’s managed through thresholds or loyalty tiers. It’s more about managing customer expectation for how long it will take to get their “free shipping” stuff.
Managing expectations is huge.
As consumers we know there is a cost to shipping but Amazon’s proficiency can cause us to get amnesia. Even if brands do decide to absorb the shipping cost, they might consider still showing what that cost would have been (crossed out) to remind their consumers of the benefit that they are receiving courtesy of the brand.
Just because something is table stakes doesn’t mean it needs to lose its value.
Maybe some kind of segmentation of product categories would be useful here. Products that are more basic or commodity driven fall into one bucket. They lend themselves to replacement or replenishment purchases. They have more “knowns” about them. They will probably experience lower return rates because of these factors. Those less differentiated products will more price driven and lend themselves to a free shipping scenario. Higher novelty/fashion items have a lot fewer “knowns” about them. They are more about surprise and delight. Their level of differentiation means a much more difficult time in competitive shopping. The returns are going to be much higher. Charge shipping for this category. Don’t give up every nickel of margin at every opportunity.
Conventional retailers might be looking at this question from the wrong angle. They are putting up barriers to limit free shipping and minimize shipping costs. But what they may really be minimizing is sales. Amazon Prime puts the cost of shipping out of sight and out of mind for a year in one fell swoop. Consumers never let the cost of shipping impede their urge to click the “Buy Now” button again. Prime is focused on maximizing sales. Whether Amazon can do the logistical gymnastics to break even or better is their problem — not the consumer’s.
There are probably many things a retailer can offer a member of a loyalty program. But why free shipping? Free shipping is the ante to play in successful online sales.
Many retailers who don’t have a paid membership program (e.g., Amazon Prime), have a minimum order size for customers to receive free shipping, such as $35 or $50. Consumers typically expect a minimum threshold for free shipping, but as their expectations continue to rise, they may expect everything to be shipped for free. For higher status Macy’s loyalty customers, such as gold or platinum, it may make sense to offer them free shipping on any order size or at least drop the minimum order value a little for the most loyal customers.
BOSS is an intriguing idea — if you can get them in the store you can cross and upsell the whole ensemble but you’ll need to identify them prior to check out in a seamless guided shopping experience.
Have them scheduled, don’t make them wait and treat them like royalty.
I agree with my friend Ben Ball. Lots of shoppers are willing to spend once a year to at least partially offset the cost of services. Think Prime and membership fees at Costco and Sam’s. And most of these programs have some limitations. Want too get into Costco at certain times? Spend more money upfront. Want everything shipped on Prime terms? Too bad. But Prime is an example of more than a logistical offset. It’s a good example of brand building. When a customer feels like part of a club, they don’t mind paying a few dues.
It’s interesting to see how Macy’s and other retailers have gameified the free shipping perks. With both Amazon and Walmart leading the fulfillment next-day shipping wars, free shipping is the battleground where customer loyalties are won. We could argue that retailers could get creative with this, however, the bottom line is that Amazon and Walmart have irrevocably changed the game, where the expectation of free shipping or reduced shipping costs are in the mainstream.
There are creative ways that retailers could adjust their pricing strategies to absorb some of the incremental shipping costs and maintain their margins. By leveraging BOPIS, retailers will attract customers to their stores, position the store as a fulfillment channel, and while there entice consumers to shop, engage and connect with new products and experiences.
Gene is right that free shipping is the ante that must be played but for which customers and under what terms/conditions? Leave it to retail to follow Amazon and obsess on free shipping without the other prerequisites in place, as Nikki aptly mentions.
Loyalty marketing cannot and should not be one-dimensional, or two-dimensional as most retailers now focus on discounts AND free shipping. So whereas retailers have mostly focused on margin reducing “value” for customers, a select few have added focus on other loyalty drivers such as recognition, content and access. Amazon is one that delivers value across all these drivers but not as much on price as it used to.
Free shipping absolutely needs to be in the context of customer value which is ultimately about the customer experience, not the promotion. As a client CFO said most eloquently: “great companies get their best customers to pay more, not less.”
Take a look at Macy’s stock price and see how it compares to the S&P 500. Free shipping is not going to be a silver bullet for them, sorry.
The most successful loyalty programs are delivering much more than just tiered discount levels and free shipping. Providing access to special in-store events or other activities that have value to your customers is what retailers need to think about.
It’s true, the expectation on free shipping, and fast delivery times, is continuing to increase by consumers being trained by the likes of Amazon and Walmart. That doesn’t mean all retailers need to match them — but they need to deliver some other equivalently perceived value to the customer in a way that doesn’t eat away all of their margins. Spending thresholds and annual fees are two methods that can be used, but they can be combined and used in multiple ways as suggested in the article where higher loyalty tiers may lower the free shipping threshold, or provide access to fast delivery times. There could also be a way for customers to buy into high tiers with a fee that helps the retailer offset some of those costs. This is an area retailers need to get more creative with.
Ultimately, of course, it’s not whether shipping is free or not, but the overall profitability of the sale that matters (i.e. selling a $5 item for $15 with free shipping is better for the seller and worse for the buyer than selling it for $10 and recovering the $3 shipping and handling cost directly). The real problem is Macy’s, et al, have been competing with startups (and we all know who the #1 is) whose investors have been willing to subsidize years of losses in order to grow volume. Until that changes, it will continue to be an albatross.
So what can be done? My own personal experience tells me a threshold can be effective — even beneficial if a buyer fills out a basket to meet it — but I would think a Rewards member might resent it … what’s the point, then, of the membership?