Free Shipping: Managing Downstream Consequences

Situation: You’re caught in a trap.

Dilemma: For many, business isn’t meeting expectations. You’re told that you have to offer free shipping. You’re told that you have to hold market share “during these challenging economic times.”

Temptation: Free shipping usually provides a positive bump in sales. Many catalogers see sales increases between 5 percent and 35 percent when offering free shipping to loyal customers or prospects. The impact on profitability varies, depending upon the gross margin of the product being sold by the merchant.

Action: Free shipping promotions aren’t new to catalog marketing. But downstream treatment of customers who respond via free shipping is a reasonably new concept.

For many catalogers, the holiday season is followed by a period of post-holiday sales promotions. By late January, you launch new spring merchandise. And you really want this merchandise assortment to be successful. It’s offered at full price, and you fully expect customers to pay for shipping and handling.

See Through Her Eyes
The customer sees you differently. She just took advantage of free shipping, and then she’s offered clearance-priced merchandise in January. Your full price offering of spring merchandise may not be congruent with her expectations.

I like to segment 12-month buyers into six unique classifications:

1. customers who pay for upgraded shipping, January-October;
2. customers who pay for regular shipping, January-October;
3. customers who take advantage of free shipping, January-October;
4. customers who pay for upgraded shipping, November-December;
5. customers who pay for regular shipping, November-December; and
6. customers who take advantage of free shipping, November-December.

Buyers may fall into multiple segments. They may have paid for regular shipping in April and received free shipping in December, placing them in both segment two and six.

I place customers into segments based on last year’s behavior, and then measure how customers migrate between the segments in the current year. I pay close attention to customers in segment six, because I hope they’re willing to migrate from segment six to segment one or two.

This is important because if customers who purchase using free shipping promotions during the holiday season are unwilling to purchase again between January-October, then you don’t have to mail catalogs to these customers. Also, you don’t have to send nonpromotional e-mail campaigns to these customers. You can scale back, optimizing profitability.

Reinvest the cost savings in customer acquisition activities. Most important, understand the downstream consequences of the short-term strategies impacting the holiday season.

You have an opportunity to view loyal customers differently than you have in the past. Traditional segmentation and RFM strategies have served you well. Now consider using segmentation attributes to help you understand if customers who love free shipping are willing to purchase at other times of the year, or are willing to pay for shipping in the future. If your customers have established habits, don’t waste marketing expenses trying to force them to pay for something they don’t want to pay for.

Kevin Hillstrom is president of MineThatData, a database marketing consultancy. He can be reached at kevinh@minethatdata.com.