Photo: iStock | Julie Clopper
A university study concludes that paid, membership-based free shipping (MFS) programs can compensate for delivery costs, reduce customer churn and be a significant revenue source.
Researchers from North Carolina State University and Texas A&M University calculated that MFS programs deliver a monthly average increase in net customer revenue by 12.75 percent, or $19.93.
Initially, the unlimited free shipping benefit is often exploited as consumers break down large orders into smaller ones without increasing their total spending. As a result, retailers may not immediately gain incremental revenue due to the reduced profit margin caused by increased shipping costs.
Over time, however, the free shipping benefit builds “a switching barrier that motivates consumers to increase spending and purchase more frequently with larger order sizes,” according to a press release. Members’ purchase variety and impulse purchases also increase.
The highest percentage change of revenue contribution after enrollment was surprisingly from “Light Buyers,” who were the most willing to pay shipping fees or purchase from the broadest product categories before enrolling. Researchers concluded this is because these consumers tend to consolidate their spending after enrollment with a much higher purchase frequency and do not exploit the free shipping benefit with a reduced order size.
Only a few U.S. retailers have paid membership programs driven by free shipping.
Amazon Prime, which recently raised its annual fee to $139 from $119, offers free two-day delivery, Prime Video, ad-free music streaming and cloud storage.
Walmart Plus, launched in 2020 and costing $98 annually, offers free shipping on all orders, exclusive deals, rewards on eligible purchases and fuel savings. It recently added Paramount Plus streaming.
Free shipping comes with an annual fee of $15 at Sephora, $29.99 at Wayfair, $29 at Bed Bath & Beyond and $25 at Barnes & Noble.
Many retailers offer free membership programs with complimentary shipping based on total annual spending or once the order size surpasses a specified threshold.
Best Buy’s free My Best Buy program recently began offering a free shipping perk after previously requiring order sizes of at least $35 to qualify.