Inside The Decision To Offer Free Shipping Every Day

Detailed Image Ship & Save

On Thursday we announced that we are now offering two new every day shipping options. Customers who spend $49 or more and use coupon code DI499 will get $4.99 flat rate ground shipping. Customers who spend $149 or more and use coupon code DIFREE will get free shipping. These are just two new coupon codes in addition to the many codes that we have out there, but in many ways they completely change how we do business.

The Background

We’ve always believed in charging our customers what we’re being charged for shipping. No more, no less. We’re in somewhat of a unique industry where cost doesn’t correlate at all to weight. We have heavy gallons that sell for $15.99 and we have light waxes that sell for $274.99. Charging based on the size of the box, weight of the box, and destination always seemed to be the most fair thing to do. Our shipping study in 2009 (and subsequent follow-ups) confirmed that we were doing just that. We were content with running shipping promos from time to time, but otherwise sticking to our “you pay what we pay” philosophy.

Customers Overvalue Shipping

There’s one big caveat to this: customers as a whole tend to vastly overvalue shipping discounts. Regardless of the “fairness” of our shipping, it became clear to us that consumers really want free or low-cost shipping…even if it means paying comparably more for products. A customer would rather buy a $100 item with free shipping than an $85 item with a $10 shipping charge. It might not be logical, but it sure presents an interesting opportunity.

Our Data

At this point, I’d expect you to say “but Adam, do you really know that your customers overvalue shipping discounts?” There’s industry data. There’s our years of data showing that shipping promotions are more effective than product discounts (we’ve split-tested the two and shipping always wins). And there are years of conversations with our customers that back this up. But the most conclusive evidence is from a gigantic test that we ran.

For the past few years we had been showing a variety of random promotional offers to first-time visitors that arrived via search engines. If customers had a cookie from our site on their browser, they weren’t shown an offer. If their search included “Detailed Image” we assumed they weren’t a first-time visitor and didn’t show them the offer. Everyone else that came in from a search engine saw an offer.

One of these offers was a 15% off code with no shipping discount. Another offer was free shipping with no product discount. We’ve offered each over 99,000 times (that’s not a typo). On the average order, customers would have saved close to 50% more using the 15% off code, however the free shipping code got used almost twice as often. Wow. Nothing closes the deal like free shipping.

Our Hypothesis

Due to this discrepancy of perceived value vs. actual value it wasn’t a stretch to think that we could figure out a way to maintain or increase profitability by offering a free and/or low-cost shipping option while also boosting volume and consumer happiness. It was just a matter of playing with all of the variables until we came up with the right solution.

It turns out that using coupon codes was the best solution. We didn’t want to stop offering our current promotions, but we also had to ensure we maintained profitability. We were clear up front that we weren’t willing to trade profit margins for volume. Anyone can come along and blindly offer free shipping in attempt to boost sales. The challenge is doing it without negatively affecting your margins. In 2010 I wrote about our coupon code system:

The key to our entire sales philosophy lies within our coupon code system. We’re able to run an unlimited number of sales concurrently without fear of losing money because we only allow one coupon code per order. Each code is designed to give one advantage without another.

This is kind of the best of both worlds: these codes can be combined with other non-coupon code offers like our Daily Special, Monthly Specials, quantity discounts, and sale items. We can still continue to offer aggressive discounts with other coupon codes, and customers can choose those offers over the shipping offers if they want to. But if they do choose the shipping offers, they aren’t able to tack on additional coupon codes. That’s the key to doing this profitably.

The Decision

Where did we come up with $4.99 shipping for $49 or more, and free shipping for $149 or more? That involved another round of data analysis. Bobby and I studied the distribution of our purchases, coupon code usage, savings on the average coupon code, shipping costs, handling costs, and more. After quite a bit of analysis, it became pretty evident that these were the right offers from a mathematical perspective.

The data certainly wasn’t 100% conclusive though. What if our order distribution and coupon code usage completely change? What happens if everyone buys heavy stuff and only spends $53? What if shipping costs rise higher than we anticipate? There’s a lot we couldn’t account for.

This is where we had to put on our business owner hats, take a step back, and look at this in it’s totality. The ability to market “free shipping available every day” is huge. Having these codes would certainly be seen as a positive by our customers. Yes, the system can be gamed, but we hoped that would be offset by all of the people who spent more to reach a discount tier (the $120 order that becomes a $150 order to get the free shipping).

Ultimately you can analyze all of the data in the world but sometimes you just have to take a risk. There are an infinite number of ways that this can affect our business in both the short term and the long term. After looking at the numbers and thinking through the most likely scenarios, we think that the likelihood of this being a boost for our business outweighs the chances of it hurting us. At the end of the day, that’s the best you can do when it comes to decisions like this.

The response thus far has been great from our customers. I’m looking forward to getting a few months of data to really evaluate how these codes impact things!

I’ll wrap this up with the letter that we sent out our customers on Thursday:

DI Ship & Save Letter

16 comments on Inside The Decision To Offer Free Shipping Every Day

  1. Rob says:

    Wow, that’s a massive change for you guys. However, if it’s a data-driven decision I expect it’s for the best.

    There’s (at least!) one question I have though – why coupon codes rather than just presenting it automatically at checkout? Is it because you expect some people to neglect to use them? In my experience that’s certainly been the case – for example on certain product pages we have a clearly listed coupon code right at the top that will get the buyer free shipping. It’s used by less than 1% of the people it’s shown to..

    • Adam McFarland says:

      Good question Rob. We do expect some people to miss it, although our coupon code usage rate in general is very high (most people use one when checking out) and these codes are on top of every page now so we expect them to be used whenever people are eligible.

      The primary reason we used a coupon code is because it prevents customers from using another coupon code. We limit one per order. We have a lot of codes out there – 10% off all items, 20% off a brand, free products, etc – and if those were to be combined with the shipping offers we’d be losing money. We could make those codes inactive, but some people may prefer those codes to free shipping, for one reason or another so instead we decided to make it a code and let the customers choose.

      Almost all of our existing customers seem to be reacting positively. There have been a few “why can’t I combine this with other codes?” questions, but that was expected. I think the biggest impact will be with brand new customers who from the start know about these shipping deals. We have no idea what the abandonment rate due to high shipping charges was, particularly from first time customers who didn’t know about other codes/specials, but based on emails we get it likely accounted for a large portion of cart abandonments. Once we get some data I’ll let you know for sure 🙂

      • Rob says:

        I didn’t think of that – that reason for doing it as a coupon makes sense.

        Do you track cart abandonment stats? Presumably there’s a way of segregating them somehow and seeing which are due to the shipping charges, perhaps by emailing them with a free shipping coupon if they haven’t checked out within 3 days or something like that?

        • Adam McFarland says:

          Interesting idea Rob. We can track cart abandonments, and we do plan on following up with an email at some point if they don’t check out, but I’m not really sure how we’d differentiate why they abandoned their cart. All of the data I’ve seen has just been surveying people who abandoned their cart, which is something we could also do at some point.

          It is a bit of a slippery slope sending people a free shipping offer 3 days later after they abandon their cart, because if they catch on they might always wait 3 days to purchase. I haven’t talked it over with the guys, but I would prefer to just do a more generic follow-up where we ask if there’s anything that we can do to help or if they have any questions for us. Maybe direct them to similar items they’d be interested in. Or what are current specials are. Just no special offer that could be abused if someone figures out our system.

          • Rob says:

            Oh, if you’re always sending the free shipping thing then sure that’s a risk, however if you did a split test between no offer/shipping offer/something else along with your generic “how can we help you finish this transaction” type message you might get some useful data from this. I’d also guess that research has been done on this – perhaps getelastic or someone might have recommendations and things that others have tried.

          • Adam McFarland says:

            Good point. As a short-term study or test it would work. I was thinking as a permanent feature 🙂

  2. One thing that is consistent, and was observed when I was VP/Database Marketing at Nordstrom, is that the benefit of free shipping is forgotten by the customer after 7-12 months. This negates the financial benefit of free shipping observed in the short term.

    I’m not saying that will or will not happen with your business, each business is different, and you know your customers better than anybody. I’m just saying that you’ll want to carefully evaluate your p&l six months from now, and again twelve months from now. My clients see all sorts of interesting trends when they extend free shipping beyond a promotional period of time.

    • Adam McFarland says:

      Hey Kevin –

      Thanks for commenting. You bring up a great point. That was definitely one of the risks we took.

      Short-term free shipping sales have always worked well for us. We largely eliminated those from our repertoire when we came out with this. Then again, we hope that those spikes in sales smooth out and are more consistent over time. We will be monitoring the numbers very closely, and we won’t just assume that the 3 month numbers will be consistent with 12 months, 24 months, etc.

      It will be interesting to study for sure. As I mentioned in the post, they’re just two coupon codes but they really do change a ton about our business!

  3. It’s a great marketing technique. Honestly, when I purchase clothes myself online….I feel like I am forced to spend whatever the minimum limit is just so I can avoid paying for shipping costs. However, I end up spending more money than I want to and I also end up with clothes that I didn’t love.

  4. Dale says:

    Timely post for me Adam, trying to figure out the right shipping model for the smoker (www.breezebbq.com) and the bathroom cleaner (www.powerprocleaner.com). I was Googling all over for studies like you just posted, so this is really helpful. I ended up going free shipping when buying 2 bottles for Power Pro and pay what we pay for the Tremore Breeze smoker, but I’m starting to reconsider the smoker shipping costs. The issue with the smoker is it’s like $400-500 shipping, so I’m guessing it might be in a different data regime.

    Now I’m brainstorming what else I can do with the data you’ve given me in this post. @Kevin Hillstrom makes a really interesting point, Adam I’d be interested to see what happens after the promotional period wears off.

    • Rob says:

      Wow, that’s a lot of shipping. Would it be worth A/B testing something as simple as $5k + $500 shipping vs $5.5k with free shipping ?

      • Adam McFarland says:

        Dale, you’re in a tough spot for sure with the smoker. Rob has a good point, it might be just as simple as a split-test like that. My only concern would be a lack of data since it’s such a big ticket item…it could take a long time to get enough to make a conclusion.

        My guess would be that the $5.5k with free shipping would win. The larger, heavier, and pricier the item, the more weary I think people are about buying it online. “Free” shipping always eases their concerns, as opposed to seeing $5k plus “contact us for a shipping quote” which can make you think you’re in for really expensive shipping.

        I think in general when people spend that much there’s an expectation of getting a bunch of value added perks. I think it helps justify the purchase. Anything you can include like a warranty, repair services, cookbook, online training courses, and of course free shipping, will probably result in people valuing it much more than it costs you to provide.

        Keep me posted on how it goes…and if there’s ever any specific data we may have that can help you out, just shoot me an email and I’ll dig it up for you.

        As an aside, I really like the site. I think you do a really good job of conveying everything someone would want to know when buying a big ticket item like this.

  5. nethy says:

    Hi Adam,

    nice post.

    “Customers overvalue free shipping” is a notion that has been going around for a long time. My pet theory about it is 80% about simplifying.

    A parallel is flat fee mobile phone/internet plans that turned markets upside down. Most plans are impossible decipher or compare and are full of gotchas. “Top up with $30 & get $45 credit expiring after 30 days at the rate in table 1 and this phone for $65. Top up with $50 & get $90 credit expiring after 45 days at the rate in table 2 and this phone for $12.” Everyone I know has been burned at least once on these. Making a decision is an unpleasant thing that people avoid doing without a shiny new phone and a pushy saleswoman to push them along.

    Shipping is similarly problematic. There are complex interacting rules: destinations, shipping options, weight, order value, coupons, special cases…. Most sites make UX mistakes like displaying shipping costs only after you have chosen your shipping option (forcing users to make a blind choice) or otherwise forcing users to do a mock checkout to get shipping costs. It’s a minefield and even superstars like Amazon can’t make it perfectly easy. Even if your site makes shipping easy & sensible, users subconsciously assume that it won’t.

    A site with an easy to understand shipping policy that can be fully explained in few words lowers the mental overhead. Free Shipping is just two words.

  6. […] the full “Detailed Image” in to the test version. To conserve space, we removed the Ship & Save promo […]

  7. […] continued to analyze our shipping numbers and take calculated risks, the most notable being our DI Ship & Save coupons in 2012 where we offer free shipping over $149 and $4.99 shipping over $49. We’ve recently unveiled a […]

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