Tuck study finds free shipping has high costs

by Maria Harrast | 4/4/18 2:00am

Free shipping does not come cheap — at least not for online retailers. In a working research paper for the Tuck School of Business, updated in Jan. 2018, researchers found that free shipping promotions not only lead to lost shipping revenue for “a leading retailer,” but also result in higher rates of returns. The study was led by Edlira Shehu, marketing and management professor at the University of Southern Denmark; Dominik Papies, the chair of marketing at the University of Tübingen in Germany; and Scott Neslin, marketing professor at Tuck.

While free shipping promotions may lead to greater sales, the researchers found that because these promotions result in higher returns, profitability decreases.

“Product returns in general have become a big, big issue for online retailers,” Neslin said. “Returns are a real problem for retailers, and it costs a lot even if they’re not giving free shipping. With free shipping, you just get more returns, plus you don’t get any revenue.”

The researchers found that the online retailer they studied lost money due to its free shipping promotions. However, other retailers may find that free shipping promotions can be profitable, Neslin said. These retailers must counteract the high rate of returns by attracting enough customers.

According to the researchers, free shipping promotions lead to greater consumer exploration, which ultimately result in greater returns. When shipping is free, consumers are more likely to explore purchasing products of uncertain quality, known as “experience products,” Neslin said.

Shehu wrote in an email statement that since consumers cannot evaluate these riskier products’ quality until after purchase, they are more likely to be returned. Experience products typically include clothes and electronic products that cannot be fully evaluated until they are worn or tested in person.

Free shipping promotions are attractive to consumers for different reasons, Shehu wrote, one of which is because shipping fees are “generally a pain point” for online shoppers.

“Different industry studies show that shipping fees are one of the most common reasons for [online shopping] abandonment, and that customers would be willing to trade longer delivery time for free shipping,” Shehu said.

The cost of shipping is an additional consideration for consumers, Papies wrote in an email statement. He added that free shipping promotions relieve consumers of worrying about the extra shipping cost of a product they may not like.

“If we think about free shipping promotions, where the shipping and handling fees are waived for a week, this may put consumers in a more positive mindset,” Papies wrote.

While free shipping results in consumers buying more products, the increased rate of returns counteracts these sales.

“The positive effects of free shipping promotions are ‘erased’ by their negative return effect,” Shehu wrote. “Thus, free shipping promotions are a double-edged sword.”

While there is no “one-size-fits-all recommendation” for online retailers, Papies wrote, retailers have several options when considering free shipping promotions. For retailers who do not typically offer free shipping, a free shipping promotion can strategically increase sales. To account for high returns of experience products, retailers could consider restricting promotions to products that are less likely to be returned.

Papies added that most retailers should not offer free shipping permanently.

“There will be some actual shipping costs for the retailer, but most retailers are likely to make a profit on shipping fees,” Papies said. “If you decide to waive it or offer free shipping permanently, then you either forgo this profit, or you will have to try to increase prices.”

When considering free shipping promotions, online retailers must anticipate the resulting higher returns, Shehu wrote. Since free shipping leads to consumers purchasing more experience products, online retailers should focus on decreasing these kind of products’ return rates.

Shehu suggested that online retailers might consider options such as live chats, videos and user recommendations to provide consumers with as much information as possible before purchase.

Neslin added that retailers such as Amazon, Bonobos and Warby Parker have opened physical stores where consumers can familiarize themselves with products in person before making online purchases. The goal of such stores is to decrease returns of experience products, making free shipping promotions and online sales more profitable.