Shipping fees

January 21, 2009

Let’s talk about shipping fees. I admit they’re not as exciting as talking about Need For Uniqueness or price-quality inferences, but they can be an important overlooked factor for folks running online shops.

There are a few different ways you can do it:

  • The more stuff they buy, the more shipping fees they have to pay.
  • One shipping fee, no matter how much they buy.
  • Free shipping when they buy over a certain amount.

Personally, I’ve always taken the first approach– a low initial fee that increases a little for each item they buy. Makes sense, since I try to keep it close to my actual shipping costs, which of course increase with weight.  And in the Etsy store setup, it’s pretty easy to make it work (though the flat fee option is equally easy to set up).  The third option would involve having to send people a revised invoice or refund after the fact. A little bit of a pain for us moderately lazy types.

Notice that these provide different types of incentives– a gradually increasing fee structure penalizes people for making larger orders. Um, yeah, that’s probably not good!  And the free shipping over a certain amount encourages people to increase their order size in order to qualify, resulting in bigger orders!  With the intermediate option, a flat fee, the incentive increases as the order size increases, as the percentage of the total price spent on shipping becomes smaller and smaller.

Enter the research article*. This one looked at the relationship between shipping fee schedule, the occurance of orders, size of order, and the acquisition of new customers.  The fee schedules used in the study were the graduated shipping fees, promotional free shipping, and free shipping for large orders only. 

New customers, it turns out, pay more attention to the incentives or penalties built into the system– how steep the fee schdule is, for example.  In contrast, returning customers are more sensitive to the overall price level. 

They found that the graduated shipping fees structure generated the most orders, but attracted fewer new customers; free shipping attracted new customers but results in smaller orders (since online buyers are often reluctant to place large orders for items they’re unfamiliar with), while  free shipping on large orders brought the highest order sizes.

Oh, and high shipping fees resulted in fewer orders. Surprise!

I think I’m going to change to the flat fee schedule in my Etsy shop.  One low flat fee will bring in new customers and encourage them to make larger purchases (or at least not punish them for doing so), while a low base fee will keep the returning customers happy. If you want some fat, juicy orders, incentivize larger orders with free shipping (I do this on my wholesale site).  If you’re trying to get new customers though a free shipping promo, go for it, but if you have other, cheaper ways of attracting new customers, stick with those instead– free shipping isn’t the most cost effective approach, since it results in smaller orders.

 

* Lewis, M. 2006. The effect of shipping fees on customer acquisition, customer retention, and purchase quantites. Journal of Retailing 82: 1, 13-23.