October 19, 2011
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Affordably Build Your Brand
FedEx Global Brand Management Director Monica Skipper shares a cost-effective way to build a bigger brand for your small business.
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If your company sells online, you have one significant disadvantage to your brick-and-mortar competitors: shipping costs. Most consumers don’t like the idea of having to pay extra fees after they already agreed to a certain price. But the obvious need to move product from point A to point B comes at a cost. This cost is explicit in online sales. Sure, buying from a store also has its costs: gas money, wear and tear on the car, opportunity cost for the time it takes to go to the store, etc. But these costs aren't as evident as a “Shipping and Handling” fee on a website's Check Out page. So it's no surprise that, according to the National Retail Federation, 40 percent of online shoppers didn’t commit to a purchase because of the shipping costs associated with the transaction.
Some online retailers have made the decision to confront this issue head on by offering free shipping and handling on certain online orders. That is no small feat. Shipping costs are very real.
The realities of shipping costs in 2011
Shipping has gotten significantly more expensive. Over the past year the cost of shipping a 20 pound package has gone up between 5 percent and 7 percent. If you sell low-margin items on your website or have significant handling costs, that increase could have a material impact on your profitability. As the United States Postal Service reduces services and increases prices to compensate for its huge deficit, there will be less competition among shippers, further stimulating the rise in costs. The significant increase in energy costs will also continue to have a negative impact on online sales.
If you are a small business, then the problem is further exacerbated by your size. On average, small businesses—defined as those with less than 20 employees—pay 50 percent more for shipping compared to their larger counterparts.
The decision to offer free shipping
If you do decide to offer free shipping, then it’s going to be more expensive for your business today than it would have been several years ago. Whether or not it’s a good decision comes down to your belief that profitability from the incremental revenues will offset the additional shipping costs. That is no small hurdle. If you expect the increase to come from pure unit sales increases, it will require a tremendous impact. If instead you believe that it will help increase revenue and sell more high-margin products, then the boost wouldn’t have to be so large. Consider this simplified example:
| |
Customers pay for shipping
|
Scenario A
|
Scenario B
|
|
Company pays for shipping
|
| Units sold |
1,000
|
3,000
|
2,500
|
| Average price |
$ 10.00
|
$ 10.00
|
$ 12.00
|
| Revenue |
$ 10,000
|
$ 30,000
|
$ 30,000
|
| COGS |
$ 2,500
|
$ 7,500
|
$ 7,500
|
| Shipping |
$ -
|
$ 15,000
|
$ 25,000
|
| Gross margin |
$ 7,500
|
$ 7,500
|
$ 7,500
|
In this example, you would need to triple your sales just to break even. If instead you could generate a 20 percent increase in your revenue and gross margin then a smaller increase in sales brings you back to break even.
A hybrid that may work for you: membership fees
Amazon.com offers free shipping, but it’s not entirely free. In order to qualify for free shipping you have to sign up for their Prime service. The membership costs $79 per year. This helps Amazon offset the losses that result when someone inevitably orders 18 gallons of drinking water via their website. Even if you pay the membership fee, only the two-day shipping method is free. The faster one-day shipping charges a small per-item fee. Amazon has been offering Prime since 2005. It began as an experiment to offer customers an incentive to shop for their goods online instead of at the usual brick-and-mortar store. The goal was to get customers to think of Amazon as a marketplace for products beyond just books. The result? Millions of membership fee-paying customers.
Another tip from Amazon.com: subscribe and save
As if Amazon Prime wasn’t enough, the company recently launched "Subscribe and Save." Under this program, customers make a nonbinding commitment to automatically have certain items delivered at pre-determined intervals. In exchange for making this commitment the company offers an additional discount of 15 percent or more. Subscribe and Save can also work in conjunction with Prime products, thereby giving the consumer an additional discount and free shipping if they agree to the terms.
If your product is a recurring purchase for consumers, offering a "subscribe and save" clone could be an additional way to boost revenues.
Are you thinking of offering free shipping? What are your biggest concerns about doing so?
Check your balance, review recent transactions and pay your bill on the go.
Jewish Family Fun 7 months ago
Would love to hear more about this, because I need to deal with the potential for customers of my new business to abandon the shopping cart when they see shipping charges. So we have ends of the continuum -- huge retailers, like llbean.com where shipping is free; also huge retailer like amazon.com where you get free shipping with minimum purchase; and also-large places that still use shipping as profit center. Do you think the retailers that charge significant amounts in shipping are mostly niche players with devoted followings (e.g., Travelsmith) who believe they can't get what they want elsewhere? What are some guidelines to determine customer mindset?