The Psychology of Free Shipping
Have you ever wondered why a product costing $10 + $5 shipping seems worse than the same product costing $15 with free shipping? The answer is the decoy effect.
The Importance of Free Shipping
Free shipping has been the most popular online sales promotion for over a decade. It has now reached a point, for consumers, where free shipping is not a bonus, but an expectation for consumers.
A study from the Baymard Institute compiling 41 independent studies has found that almost 70% of shopping baskets are abandoned online. As a part of this study, they identified that the main reason for people abandoning their baskets is ‘unexpected costs’. In many cases, these unexpected costs include shipping fees.
The importance of being upfront with shipping costs is therefore clear. But it does not necessarily mean that free shipping is the best option.
Despite being just a meme this image summarises the importance of free shipping. Its popularity on social media outlets demonstrates that seeing the ‘free shipping’ note makes you feel like you have got something extra and are more likely to go ahead with a transaction.
Though not an academic or retail study, the sentiment of the population is shown through the 2,600 ‘upvotes’ on Reddit. This may explain why most large online retailers have free shipping as an option.
So, free shipping is something that people like and want from their online retailers. But the decision making behaviour of preferring a product that has the same total cost but with free shipping is not strictly rational behaviour, in theory, ‘econs’ should be indifferent between these two choices, seeing them as identical.
Framing
The key difference between the two options in the example above is how they are framed. Framing is a bias that presents the same information in different ways to induce different thoughts about that data. For example whilst a 25% uptake in a certain behaviour may seem quite low, by saying 1 in 4 people are now practicing a new behaviour seems like a better success.
In the context of the example above, option 1, with the $10 cost with the $2.39 shipping presents an option that has two separate costs. Although the math is simple to do there is additional friction in place that means identifying the total cost is not as simple as it first seems.
Option 2, does not have this friction and instead allows a customer to know quickly how much they will be expected to pay to receive the product. The use of the capital letters in ‘FREE shipping’ emphasises the point that the customer receives the shipping as a bonus and so rate the product itself at a higher value, thus consumers being more likely to choose it.
Although simple, the re-framing of the decision for the customer and reducing the friction to making their decision results in a more positive experience for the buyer and ensures they are more likely to go ahead with the purchase and return to purchase again in the future.
Decoy Effect
The example used above with a $10 product plus $2.39 shipping vs the same product costing $12.39 has elements that resonate with the decoy effect. This bias shows that we change our preferences between two options when a third ‘asymmetrically dominated’ option is introduced.
The most famous example of the decoy effect comes from Dan Ariely’s study of The Economist’s subscription offerings. The offers were structured like this:
Option A: Online Only, $59
Option B: Print Only, $125
Option C: Online and Print, $125
Here, option B is a dominated choice. Nobody should decide to pick that option as you can get the online version as well as the print version for no additional cost.
When Ariely tested this with his students he found that 84% of participants picked option C, 16% picked option A and 0% (thankfully) picked option B. This made sense, the subjects have a clear preference for the option that offered what was seemingly a great deal. Fortunately, nobody picked the dominated option.
Ariely then re-ran the experiment without the dominated option B. The expected outcome should have been similar to the first outcome as nobody picked that option anyway. However, after re-running the experiment 68% of the subjects picked option A, and just 32% of the subjects had picked option C. So their preferences had flipped dramatically.
In the context of free shipping, the decoy effect offers a change in perception of the product on offer. The change in perception comes from the view that free shipping is offering something different to the original choice. Despite the total costs being identical, the preferences are not. It would be interesting if you could add a third option with a lower cost but with a shipping fee compared to a higher cost with free shipping to see how people’s preferences would change.
The Case For Shipping Fees
Whilst free shipping may be a great choice for retailers to increase their sales of lower value products, in some cases, it could be better to keep or even increase the shipping costs.
If your product is a bespoke, large and one-off purchase shipping becomes a more favourable outcome. In this market, consumers are more likely to take more time to make a more informed choice. For example, when purchasing a large item like a piece of furniture you expect to spend a large amount of money and are less likely to worry about shipping fees as sending a bulky item such as items of furniture is not a cheap endeavour.
In this example, a customer is less likely to be concerned over a small shipping fee. In fact, they may even buy additional products if that shipping fee does not increase to ensure they maximise their value for money. That way they see the shipping fee as a sunk cost and look to buy more to increase their value for money.
Closing Thoughts
The psychology of shipping fees is a fascinating topic. The appropriate use of framing and the decoy effect can influence the decision making of consumers. In some cases, however, shipping fees could be expected and even increase the amount that people buy — it is perhaps worth looking into further.
