DIGITAL STRATEGY & CUSTOMER BEHAVIOUR
The Consumer Psychology behind ‘Free Shipping’ — is it Essential for Online Retail?
Why ‘free shipping’ is such an effective offer, and what to consider before adopting a sitewide policy.
The power of ‘free shipping’ — somehow convincing shoppers that they should spend more just to avoid a small fee.
Are people that averse to paying for the convenience of shopping online? Are we conditioned to expect it? Perhaps there’s more going on.
The height of US online retail growth in 2020 saw a 44.5% increase in sales versus the same quarter in 2019¹. As customers and retailers alike adapted to unprecedented circumstances, many also developed new behaviours and revenue channels that will persist into the future². The critical question facing new digital retailers: whether or not to offer free shipping — and in what format.
Why are We so Susceptible to ‘Free Shipping’?
Online shopping that could otherwise be done in-store leads to a natural comparison. Despite this overlooking some key costs of convenience, 60% of shoppers want free standard shipping from online retailers. An even larger group expects free shipping on orders below US $50³. This supports the idea that shoppers weigh shipping fees as a percentage of the total price in their final buying decision. Any path that reduces fee aversion becomes instantly more attractive.
Reducing the friction of cost perception is one thing, but pricing something at ‘$0’ has an entirely unique outcome: all the benefits with no downside costs. This is known as the zero price effect. It causes a disproportionate attraction towards the free option, even when the alternative has a high perceived value⁴. Online shoppers are naturally drawn towards ‘free’ offers by their own overvalued perceptions.
This effect is powerful enough that 85% of customers regarded free shipping as more important than fast shipping for their holiday season shopping. Only 12% of those same customers are willing to pay $0.50 for 3–7 day shipping, while 30% wouldn’t pay even $5.70 for same day delivery⁵. The challenge to retailers is clear — either ship fast with a nominal fee, or make it free.
Added cost perception plays just as important a role in customer decision making. Encountering additional fees (after being comfortable with the initially displayed price) leaves shoppers feeling that the new total cost is at least underhanded, if not unacceptable. This is a result of sequential pricing evaluation during the buying process⁶. How critical is this particular effect on conversion? It’s the main reason for user abandonment during checkout. 55% of users will leave because extra costs on their order are too high⁷.
Customers falling short of any ‘free shipping’ spend threshold are forced to make a choice. Either buy at the lower cost that includes a stated shipping fee, or spend more to avoid it. A rational shopper would look to limit their overall expenditure, but what if the buying process isn’t rational?
Shoppers may instead look to maximise their emotional satisfaction when purchasing. Extra items offer increased enjoyment; justifying the added cost⁸. It’s worth considering that users may perceive the threshold as a target, making ‘free shipping’ a bonus. With the zero price effect skewing value perception further, there could well be compounding outcomes on customer behaviour.
Setting Your Own Strategy:
Take time to plan before rushing into sitewide free shipping. There’s no single best solution — it’s a unique decision for every retailer.
Know what it’s going to cost.
- ‘Free’ or even reduced shipping may increase conversion rates and revenue, but the same isn’t guaranteed for profitability.
- Model a range of delivery scenarios across category and product margins to understand the wider impacts of different rates. A combination of regional and category-based rules may strike the balance between competitive offer and sustainable costs.
- Preview the effects on revenue and profitability by trialling new offers as promotional incentives.
Be proactive with logistics providers.
- Seek out a range of providers, always ask for better pricing, and compare your options — especially around tracking and insurance. Check with your ecommerce platform for any pre-agreed shipping rates. The better the rates, the fewer costs you (or your product pricing) will have to absorb under any ‘free shipping’ offer.
- Cover a range of product dimensions and weights alongside packaging options. ‘Free’ delivery can always be category-specific; with paid or pick up only options for some products.
- Know where your customers are, as well as the markets you plan on expanding to. Longer distances and international freight will have vastly different costs compared to serving your local market. ‘Free’ delivery might end being cost-prohibitive, but a discussion about expansion could always help to build a healthier supplier relationship — along with access to better rates.
Analyse what your competitors are doing.
- Compare the markets you’re selling to, where competitors are shipping from, and the timeframes for deliveries. Reference your website analytics to gauge the significance of any advantages or weaknesses.
- Evaluate how substitutable their products are with your own. You may have other options to influence conversion: product uniqueness, loyalty rewards, or support for local business.
- Decide whether you want to play by the same rules, or try something new. The first retailer to differentiate from the status quo could have the most to gain.
Communication is everything.
- Clearly display shipping details to avoid the negative effects of sequential price evaluation during checkout. Utilise website banners, product pages, and the user’s cart.
- Stand out amongst news feeds and search results by adding attractive shipping messages to marketing touchpoints.
Be aware of how you’re shaping customer behaviours and expectations.
- Adding free shipping can lift conversion rates and order volumes — especially at lower price points. However, individuals placing multiple small orders can easily become less profitable than if they’d opted for larger, more considered purchases.
- Setting a free shipping threshold above can increase spending by shoppers looking for emotional fulfilment, overvaluing the ‘free’ offer, or simply trying to avoid fees.
- Offering multiple shipping options lets customers make choices that ultimately encourage purchasing behaviour. ‘Free’ may well be more attractive, but last-minute shoppers don’t have the luxury of waiting for slower delivery.
- Sudden changes to free shipping policies have flow-on effects outside of margin and cart size. Abandon cart and conversion rates — as well as future return on ad spend — may all suffer if customers are unhappy with changes.
- Going a step further to offer ‘free returns’ can increase average order values and conversion rates. This also adds risk. Service fulfilment costs can threaten profit margins if shoppers purchase too liberally; later regretting and returning their order.
The impact of ‘free shipping’ on customer behaviour is clear: it’s favourable, if not expected, and it will certainly help to remove friction from the buying experience. Despite this, it isn’t a silver bullet for ecommerce. Nor is it mandatory.
Free shipping is a decision that retailers should carefully weigh as part of their promotional strategies and ongoing customer experience. Get it right and you have a competitive offering that helps to attract and retain customers. Get it wrong and you risk hurting profitability — or worse — making sales at a loss.
Citations
[1] U.S Department of Commerce. (November 19, 2020). Quarterly Retail E-Commerce Sales 3rd Quarter 2020.
[2] McKinsey & Company. (October 26, 2020). Consumer sentiment and behavior continue to reflect the uncertainty of the COVID-19 crisis.
[3] National Research Federation. (January 15, 2019). 2018/2019 Winter Consumer View.
[4] Marketing Science. (November 1, 2007). Zero as a Special Price: The True Value of Free Products.
[5] Deloitte. (October 19, 2020). 2020 Deloitte holiday retail survey.
[6] Harvard Business Review. (June 12, 2014). Adding Fees That Consumers Won’t Hate.
[7] Baymard. (August 22, 2017). Product Pages: ‘Free Shipping’ Should Not Only Be in a Site-Wide Banner (32% Get It Wrong).
[8] Open Journal of Social Sciences. (May 8, 2019). Discussion on the Mechanism of Irrational Online Shopping Behavior―Based on the Perspective of Mental Accounting Theory.
