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.
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.
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.
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.
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: