Photo: iStock | Julie Clopper
Should More Retailers Roll Out Free Shipping Membership Programs?
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.
Discussion Questions
DISCUSSION QUESTIONS: Do you see paid membership-based, free-shipping programs working for significantly more retailers? Is free shipping based on spending minimums a better proposition for most?
Poll
Loading …BrainTrust
Carol Spieckerman
President, Spieckerman Retail
First of all, nothing is “free.” In a membership based scenario, there is (in my view) too much “calculation” risk–the retailer needs to charge just enough and the customer needs to see the price as a deal, and if you get it wrong someone is not going to feel very good. Either the consumer is going to feel like they paid for no value or the retailer is going to lose money.
For that reason, I like the spending minimum option much better–it is transactional and gives incentive for larger orders.
It’s almost as if this article was written with a very tongue-in-cheek expression. It’s all about a “free” product–and how much it costs.
Paid membership-based, free shipping (MFS) programs are a good option for retailers that have a high frequency of orders from customers. It makes sense for retailers like Amazon, Walmart and Target. However if a brand’s products are purchased infrequently, less than 12 to 24 times a year, an MFS program won’t be as appealing to customers.
Programs are useful if consumers place a large number of orders from a particular retailer. They can also be desirable if they offer perks other than “free” shipping. However there are limits as to how many subscriptions consumers want to sign up to.
Yes, and that limitation is exactly what the retailer will want. The membership for free shipping makes that retailer, in that category, the default shopping location. That is better than any loyalty program.
“Membership” is an effective way to temporarily hide other expenses (until it’s time to renew the membership.) So customers may think that shipping is free for 360 days out of the year and buy merrily through the year without giving the membership much thought. We do it gladly with Costco and other membership clubs.
Free shipping works to motivate buyers and often differently than other promotions or discounts like BOGOs. As such, it is a powerful tool, encouraging behavior for those customers, like me, who often blow their savings on outdoor gear (higher AOV) or order almost exclusively from Amazon. It’s also a great compliment to BOPIS in this new era of unified commerce. However I believe discounted or free shipping programs are not a one-size-fits-all proposition. I think a paid membership does well for Amazon who sells products at a variety of price points. However a spending minimum might work better for retailers with higher priced items that won’t leave customers feeling like they can never qualify for free shipping.
Of course, there are no free lunches. It’s interesting to see how the stats, and shopper behavior, evolve over time. Paid membership programs work best for highly-diversified retailers such as Walmart, Amazon, and to a lesser degree, Best Buy and others. These retailers benefit as various perks increase the likelihood of hooking shoppers on solutions and services, marketplace items, and more. It’s much harder for narrow-focus retailers to make the math work.
I love this topic. Free shipping is not really free shipping when you pay a membership fee. However it is perceived as such, especially if other benefits surround the membership. For example, with an Amazon Prime membership you get streaming video, discounts at Whole Foods, and more. Once customers pay a membership fee, they are more likely to want to get their money’s worth from it. It makes sense that they would try and do business with that retailer over others to take advantage of the benefits.
I am sure studies have been done comparing items, say $25 plus $2 shipping versus $27 with free shipping. While I am not familiar with any results, I am guessing the “free shipping” wins hands down.
There is an industry-wide misconception about what a free-shipping program is. First of all, it is never free, and the operational costs associated with this offer are rolled into a membership program similar to what Amazon Prime or Walmart Plus offers. While Amazon has raised consumer expectations that shipping should be “free” and within two days, without an associated membership program to recover the costs, most retailers will operate at a loss. In a margin-compressed economy, it will be a race to the bottom even to attempt to compete in this space.
Retail membership and loyalty programs are not just mechanisms to offer discounts and free shipping. They are about driving customer experiences and moving from simply transactional to personalized and connected relationships. It’s all about diversification, and Amazon is well positioned in this space with its Prime offerings, which extend into shipping, discounts, streaming content, and Whole Foods.
No shipping charge, no minimum, get it in two days! That is what makes Amazon the default shopping location in our home. If the item is less than $5 or more than $250, it doesn’t matter. It is a “no-brainer” decision.
The membership fee doesn’t work for every retailer. The breadth of Amazon, Walmart, or Target offerings screams convenience and value. Retailers will find it difficult to “sell” a membership program to shoppers who buy only a handful of times a year.
The other problem is free shipping with a minimum. If a shopper comes up a couple of dollars short, do they add an item to make the minimum or abandon the shopping cart? Personally, I abandon it.
Paid membership programs that offer free shipping as a perk may differentiate a few large retailers with broad assortments from the pack, but very few households will enroll in more than a couple.
Amazon Prime and Walmart+ have figured out that offering a popular streaming service as part of the package can help justify the membership expense. Costco and Sam’s offer optional rebate programs that can amortize the membership fees.
Beyond those few, there are very few retailers that can command sufficient share of household transactions to make membership work.
So no, I don’t see free shipping clubs as a viable strategy for the vast majority of retailers.
I think the better question might be “do they “work” for customers?”. The hard truth is in order for retailers to turn a profit on a loss-making process like shipping, the money needs to come from somewhere…and guess where that somewhere is?? Methinks the world would be a better place if everyone acted like adults, faced the reality that nothing – including shipping – is free, and acted accordingly; leave the sleight-of-hand to the cabaret acts.
In my opinion, free shipping is essential in online businesses and there is no doubt about that. Retailers can set a minimum order value to be eligible for free shipping, but they must provide the benefit of free shipping to customers.
Although many brands are rolling out their membership programs, customers will likely choose a select few brands to enroll in rather than signing up for all of them. The decision to choose a membership program will depend on which brand closely fits with the product categories that a customer frequently purchases.
Additionally, offering a membership program that only provides free shipping is not sufficient on its own. I believe it is necessary to provide customers with some additional value to make it worthwhile. Retailers, similar to Amazon Prime and Walmart+ must offer a bundle of offerings in their membership programs that are relevant and genuinely benefit the customers for the price they pay.