Don’t give free shipping, offer coupons instead

Topics: Ecommerce | Promotions 
For: B2C. Can be tested for B2B.
Research date: August 2020
Universities: Copenhagen Business School, University of Tuebingen, Dartmouth College

📝 Intro

There’s a crucial question every ecommerce marketer will ask themselves at some point: 

Should I charge a shipping fee, or offer free shipping?

Each option has its drawbacks.

Charging for shipping hurts sales.

Free shipping (i.e. baking the shipping cost into the product price) boosts sales but often increases product returns even more, hurting profits.

Scientists have found a solution that gives you the best of both worlds - without the drawbacks.

📈 Recommendation

Don’t communicate that shipping is free (e.g. don’t mention “Free shipping” on your product pages).

Instead, when people reach the checkout page where you display shipping costs, or are in the final phase of placing their order, automatically apply a discount coupon for the same amount of the shipping costs (e.g. “$5.99 credit for your basket”) - effectively making shipping free.

You will increase sales of your products while avoiding a disproportionate increase in product returns. This is especially effective if you sell products that are at high risk of being returned (e.g. shoes, because they don’t fit well).

🎓 Findings

• Free shipping makes people more likely to purchase risky items (e.g. shoes, clothing which might not fit as expected). However, they become more likely to return them too, which, overall, reduces profitability. Credit coupons do not make people more likely to return products. 

• In experiments both in the lab and with 771,776 customers of a large European online retailer, researchers found that: 

  • Free shipping increased spending by 0.83%, but increased returns by 1.2%

  • The increase in returns was driven by more sales of products that are at high risk of being returned (e.g. fashion, cosmetics), but sales of products at low risk of being returned (e.g. vacuum cleaner bags, storage boxes, mirrors) did not increase

  • Credit coupons increased sales of both types of coupons, without increasing return rates

  • For every 10,000 customers, the company that uses:

    • Free shipping (vs paid shipping), causes a loss of €80.42 (or .7%).

    • Credit coupons (vs paid shipping), increase profit by €701.99 (6%).

🧠 Why it works

• Free shipping feels like an additional benefit and compensation for the risk we take on when buying products that may not fit.

• It makes us feel safer (e.g. “I can try it on for free and return with no shipping cost loss”) and more likely to buy high-risk items.

• Because of that, it also increases the returns, because we buy products that we were unsure about.

• On the other hand, coupons do not feel like compensation for risky purchases. They simply feel like a credit and good reason to buy more of any type of product - high or low risk.

• This boosts sales and profits without increasing returns.

✋ Limitations

• The research only compared free shipping with coupons, there may be other promotions that are even more effective. 

• The company in the studies had a standard model of shipping (e.g. paid shipping, free returns). The results may be different for companies with different shipping policies (e.g. paid shipping and returns, flat monthly fees like Amazon Prime, etc.). For example,  someone with a Prime membership may not perceive free shipping as “a risk compensation” anymore. 

• The research did not consider people ordering the same items in different sizes/colors, and only keeping the best fit - this likely makes the effect even stronger.

• The long-term implications of free shipping or discount coupons are unclear. They could become stronger or weaker as people get used to them.

🏢 Companies using this

• Many retailers use free shipping promotions. Shipping credit coupons, while present in some cases (e.g. “-$5 off for purchases over $50”) are more rare.

• For example:

  • Gap offers free shipping over $50, when they could offer a credit coupon for the shipping amount instead.

  • FreePeople clothing retailer gives free shipping on all US orders. They might benefit from switching that with a credit coupon.

  • Velour Garments retailer does not offer free shipping at all. Including a coupon at the checkout may boost their sales.

Temu, a wide product range retailer, often offers limited-time free shipping while offering a coupon would likely work better.

⚡ Steps to implement

• If you’re selling high-risk products (e.g. clothing, accessories, home decorations), don’t offer free shipping.

• Instead, give credit coupons off the entire basket - and automatically apply a discount coupon as the person is checking out. Make the value of the coupon the same as the shipping costs (e.g. “$5.99 credit for your basket”) - effectively making shipping free.

• If you primarily sell low-risk products, or if shipping and handling costs are low (e.g. smaller countries may have cheaper shipping) free shipping might work.

• To further reduce the chance of returns due to products not fitting right, give comprehensive product descriptions, photos, videos, measurements, and recommendations that reassure the buyer.

• Consider introducing free-shipping subscriptions like Amazon Prime. Profitability will dip in the first months after launch, then sales and profits will increase.

• Make sure your shipping and returns are frictionless. Amazon’s smooth customer experience shapes people’s expectations, and people are often dissatisfied with the return and refund handling of non-Amazon retailers.

🔍 Study type

Online and field experiments and market observation (of 771,319 customers of a large European online retailer).

📖 Research

Free Shipping Promotions and Product Returns. Journal of Marketing Research. August 2020.

🏫 Researchers

• Edlira Shehu, Copenhagen Business School

• Dominik Papies, University of Tübingen

• Scott A. Neslin, Dartmouth College

Remember: This is a scientific discovery. In the future it will probably be better understood and could even be proven wrong (that’s how science works). It may also not be generalizable to your situation. If it’s a risky change, always test it on a small scale before rolling it out widely.