Amazon's free shipping pressures other dot-coms
Published: Tuesday, January 28, 2003 at 6:01 a.m.
Last Modified: Monday, January 27, 2003 at 11:35 p.m.
SEATTLE - Free shipping has become the online shopping equivalent of frequent flier miles for travelers.
Take it away, and you're likely to have customer rebellion, analysts say. Keep it, and you could be eating millions in costs.
But like it or not - and customers love it - online companies are having to offer and keep free-shipping promotions to lure more mainstream buyers onto the Internet. And Amazon.com's announcement Thursday that it will keep free shipping for orders over $25 only turns up the heat on those who don't.
''It absolutely does increase the pressure,'' said Scott Silverman, executive director of Shop.org, the Washington, D.C.-based online division of the National Retail Federation. ''Certainly consumers can get addicted to free shipping and a retailer may be loathe to take it away from them.''
Since last year, Amazon.com has been experimenting with free shipping for customers who place orders above a certain threshold. Initially, the Seattle-based seller of books, CDs, videos and other items required purchases totaling $99 to trigger free shipping. The company then lowered it to $49, and even lower to $25 last fall.
The free shipping promotion drove sales higher, Amazon executives said, though they would not give specifics. After experimenting with various levels, the company settled on a $25 order threshold, spokesman Bill Curry said. ''When customers love something it's our job to figure out how to do it,'' he said. ''And we can afford to do this.''
But it is costly.
Keeping the threshold at the $25 level cost Amazon $30 million in its fourth quarter. That amount becomes even more significant in that Amazon eked out a slim $3 million profit - itself, only the second time that the company has turned out a quarterly profit in its eight-year history.
''Amazon had no choice but to continue offering free shipping,'' said Ken Cassar, senior analyst at Jupiter Research. But Amazon could potentially be leaving money on the table by leaving the threshold so low. ''I believe that Amazon might not sacrifice substantial demand by increasing the minimum order size to $30 or $40.''
Amazon is neither the first nor the only retailer to offer free-shipping promotions, which have been around in some fashion since the dot-com industry's earliest days.
But with companies such as BarnesandNoble.com - which adopted a free-shipping promotion for orders of two items or more in 2001 - and other major retailers such as BananaRepublic.com offering it with purchases totaling $100, it's becoming a regular business cost for companies selling everything from diamond rings to computers.
''There's a herd mentality going on among retailers,'' said Chuck Davis, chief executive of BizRate.com, a shopping comparison site that also tracks consumer spending across 2,000 Web sites.
On the day after Thanksgiving, 120 retail sites listed free-shipping promotions for a limited-time, Davis said. Now, 158 sites have active promotions, and many elected to extend the expiration date for the promotions to continue through 2003, he said. The company does not track the average threshold level that triggers free shipping.
Free shipping also can help build customer loyalty.
Ivan Dunmire, 44, of New York, said he regularly shops online and favors sites that offer free shipping. ''I would buy more online if I knew shipping was going to be free,'' he said.
While free shipping ranks as the top lure for consumers - even higher than special sales or discounts - consumers need to be aware of various restrictions on promotions, Davis said.
''Merchants have figured out that the words 'free shipping' get consumers into their online stores,'' said Davis. ''But they build walls up or conditions so that many of those consumers will not qualify for free shipping.''
He noted statistics, drawn from BizRate.com customers surveys, that show 39 percent of online shoppers said they were drawn to order at the Web site by an offer of free shipping, although only 9 percent of orders ended up being eligible.
And Amazon.com, for instance, lists numerous exceptions to free-shipping on its Web site, including toys, clothing, and video games. Others, including TheSportsAuthority.com have free shipping policies for only selected items.
But it's still a psychological tool to help Amazon and others attract new online shoppers, said Carrie Johnson, senior retail analyst with Forrester Research. Those shoppers tend to be more price-sensitive, have generally lower incomes than frequent online shoppers and are used to the bricks-and-mortar world than surfing the Internet.
Online shopping - which totaled $78 billion including travel - amounted to only 3.4 percent of total retail dollars spent by consumers in 2002, she said. Forrester projects that figure to grow to $95 billion, or 4 percent of the total, in 2003.
Johnson added that the $100 million that Amazon expects to spend on subsidizing the free-shipping offer is ''not an outrageous cost when you consider the price of a Super Bowl ad'' - which averaged about $2.2 million for 30-second spot this year.
And it keeps customers loyal, she said: ''Free shipping absolutely is a drug(like) promotion.''
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