When it comes to ecommerce, there is no overselling the importance of shipping fees when it comes to driving and dissuading transactions. After all, the No. 1 reason that users subscribe to Amazon Prime is for free shipping, and even non-Prime users will often intentionally spend at least $35 just so they can unlock free shipping.
However, how do consumers respond to a retailer that offers a flat shipping fee, regardless of whether the customer spends $10, $100 or $1,000? A new study from Subodha Kumar, the Paul R. Anderson Distinguished Chair Professor of Statistics, Operations and Data Science and the founding director of the Center for Business Analytics and Disruptive Technologies at Temple University’s Fox School of Business, attempts to answer that question.
Recently published in Management Information Systems Quarterly, “Disentangling the Customer-Level, Cross-Channel Effects of Large-Order-Advantaged Online Shipping Policies," analyzes how a company is affected when it moves from tiered online shipping policy (the shipping cost goes up depending on the purchase price) to a flat-rate policy. The study was co-authored by Vamsi Kanuri of the Mendoza College of Business at University of Notre Dame and Andrew Crecelius of the Ivy College of Business at Iowa State University.
In compiling the study, Kumar and his colleagues worked directly with an upscale clothing retailer, tracking its shift from a tiered online shipping policy to a flat-rate policy across a 16-month period. Specifically, they focused on the purchasing habits of 21,028 specific customers in five different states, and while they found the flat-rate policy increased sales, it did so in unexpected ways.
“The flat-rate shipping policy unexpectedly started driving multichannel behavior,” Kumar said. “So, the people who were previously not going to the physical store started to do so because of this flat fee. For a retailer, that’s good because when a customer goes to the store, they often have a lot of impulse purchases. So, the biggest finding of this study is that while moving from a tiered system to flat-rate system was meant to increase online purchases, the biggest advantage came from people visiting the physical store more frequently.”
In total, the study found that the move to a flat-rate policy increased offline, in-store sales by 23% across this 16-month period.
“The other thing we found was that because of the flat-rate shipping fee, customers were placing larger orders online, but they would end up returning some of the items. To do so, they would just go to the store because that's a lot easier than packing it all up themselves. And when they went to the store, they would purchase another item that they did not plan to previously purchase earlier,” Kumar said.
While the flat-rate shipping policy led to an increase in in-store sales, the study finds that customers were spending $242,000 less per month in online sales across the five states, which represents an 11% reduction from the tiered shipping policy. However, because of the drastic increase in in-person sales—23% or $975,00 per month—they saw an overall total sales increase of 12% or $733,000.
According to Kumar, these findings are immensely beneficial for multichannel retailers that sell their products both online and through physical storefronts.
“Retailers should adopt flat fee policies, but they should also understand that flat fees are not all about the online channel. The bigger impact comes from customers becoming multichannel customers, who end up buying more in the store,” Kumar said. “They must be ready for that, because that will also impact where they open stores and what kind of assortments they keep in stores. You can’t just change the shipping fee, other strategies must go along with that, and that is one of the key messages of our study.”