How Prepaid Shipping Benefits Consumers and Retailers

For decades, direct marketers enjoyed a steady (and quite profitable) revenue stream of shipping and handling charges. Free shipping, though an indisputable deal-closer, was typically offered to consumers only as a special promotion. E-commerce changed all that.

Today, every retailer with an internet presence is a direct marketer. The audience has grown exponentially, and new prospects view free shipping as a major factor in their purchase decisions, often abandoning their carts when high shipping charges appear at checkout.

Absorbing shipping costs on a mass scale can stress any operating budget, so retailers have been searching for the best ways to balance these expenses against higher abandonment rates. A few companies, including Amazon.com and Sears, have found solutions via pre-paid shipping programs. These programs charge consumers an up-front fee that helps fund ongoing shipping options and keeps consumers committed.

Many retailers remain apprehensive about pre-paid shipping solutions, but Amazon Prime's success validates the model. Prime customers spend 130 percent more than non-Prime customers; customers more than double their order frequency after joining the Prime program; and comScore found that 80 percent of Prime customers are very or somewhat satisfied with the program, which strengthens Amazon's brand loyalty.

Any free shipping offer can be extremely effective. According to Compete, 90 percent of shoppers say that free shipping would encourage them to buy more products online, and Shop.org found that 70 percent of consumers have increased their basket size in order to receive free shipping. In fact, the power of free shipping is so obvious that there's already a "holiday" for it.

While a limited-time or threshold-based free shipping offer may be a worthwhile promotion, an ongoing pre-paid shipping program spreads shipping costs more evenly between the retailer and its customers, and it gives those customers a strong incentive to choose that retailer over less charitable competitors over and over again. Pre-paid shipping programs benefit both the retailer and its customers in several ways. Consider the following:

• Consumers know how much they'll pay. Whether shipping is free or provided for a nominal fixed fee, consumers can factor that cost in beforehand and make purchase decisions with greater speed and accuracy.
• Retailers can fund their shipping services up front. They also enjoy a steady revenue stream to help them deliver purchases to their customers.
• Subscribers to pre-paid shipping programs have higher sales frequency and average order values (AOV). Program members essentially invest in shopping at the retailer on a recurring basis, and studies have shown that pre-paid shipping programs can triple a customer's AOV. For example, before joining Amazon Prime, customers spent an average of $24.98 per order; after joining, they spent an average of $75.31.
• It enhances the consumer experience with the retailer. A better experience heightens customer satisfaction, which increases the likelihood of repeat business.
• Consumers become more receptive to the retailer's messages. According to a Forrester Research study, consumers are more willing to read retailer emails than ever before, especially when the emails are personalized. Pre-paid shipping programs allow retailers to gather in-depth customer data that can be used to tailor communications and create additional benefits that can cement their audience's purchase habits for years to come.
• It builds brand loyalty among customers. Brand loyalty increases when customers believe they're receiving extra value through special offers, for example, or even via an exceptionally smooth and easy checkout process (as Amazon and iTunes provide with their one-click payment methods).

In an era when many consumers consider free shipping a prerequisite to shopping online with any retailer, a pre-paid shipping program can create a virtuous cycle that rewards both the retailer and its most loyal customers. A well-designed, well-tended program can even become a profitable revenue source in the long run.

Claire Fennessey is the chief marketing officer at Clarus Marketing Group, which creates and markets high-value subscription websites designed to save consumers time and money.