RealTime IT News

Adventures in the Shipping Wars

Will free or low-cost shipping charges be the key to taking e-commerce mainstream? Or is shipping just a gimmick for the big players, designed to win customers away from the little guys in the short term, but not sustainable over the long haul?

This week Seattle-based Amazon.com cut its free shipping threshold from $99 to $49 and privately held Buy.com, based in Aliso Viejo, Calif., turned around a day later and one-upped the retail giant by offering free shipping on everything, regardless of price.

Shipping charges have long been one of e-commerce's bugaboos and some analysts have said that online sales growth will never reach its full potential until shipping is universally free, or nearly free.

Forrester Research said two years ago that once retailers start down the free shipping path, they will have a tough time turning back. In fact, Forrester found that 82 percent of consumers said that shipping costs really matter.

Which, of course, makes free shipping a great marketing tool.

"There is no single better tactic to bolster sales and conversion rates than free shipping," said Geoff Wissman, vice president of Columbus, Ohio-based Retail Forward, a consulting and market research company.

Nevertheless, it's unlikely that free shipping will become ubiquitous, said James Crawford, a retail analyst at Forrester Research. "It absolutely won't become the norm," he told InternetNews.com

There is definitely an effort on Amazon's part to raise order size, Crawford said, adding that he might be more inclined to buy heavier and bulkier items if shipping is free.

But, "We'll have no return to the salad days of e-commerce," when online merchants were spending wildly to attract customers, Crawford said. "Retailers need to make and recover the cost of their shipping, or make it a cost of doing business."

As for Buy.com, he said that its cost of shipping tends to be less because they are selling smaller items that are less costly to ship. The bottom line, he said is that the announcement of free shipping on everything is "better PR than it is reality."

E-shopping is still a chore, however, so knowing that a site has free or cut-rate shipping -- at least for now -- will certainly help to predispose some shoppers to visit.

How much of a chore? Consider this: a recent visit to price-comparison site DealTime for a check on digital cameras found one popular model on sale at 31 different online stores, not including Amazon or Buy.com, with price differentials ranging as high as $200. To find out which is ultimately cheapest, a consumer would have to visit a half dozen sites or more and probe deeply to search out the shipping policies.

Another potential problem with shipping charge reductions is what happens if and when the candy is taken away? Could there be a consumer backlash? Both Amazon and Buy.com put limits on their offers, just in case things don't work out as planned on the bottom line, although Amazon CEO Jeff Bezos said the company "hopes to be able to make it permanent."

Amazon said its offer was a six-month trial, and added other restrictions to exclude toys, video games and accessories, baby products and goods offered through its partnership with Target. Buy.com said "this offer is for a limited time only. Buy.com reserves the right to end or change this free shipping offer at any time."

Amazon reportedly took in about $89 million from shipping charges in the first quarter, up from $82 million in the year-ago quarter, and it still lost $1 million on shipping. So further reducing shipping is simply a bet that volume will make up for the loss. And it has the added advantage of putting pressure on rival e-tailers.

"Recent movements by the major players, with Amazon.com dictating the pace and Buy.com upping the ante, indicate that e-retailers classify shipping and handling as a competitive factor as much if not more than a marketing or promotion tactic," said Wissman of Retail Forward in an e-mail interview.

"While it's feasible to make money with an average order size approaching three figures, the challenges increase significantly as that metric is ratcheted downward, particularly below the $50 level, even though this varies by product category.," he told InternetNews.com. "For this reason, the recent movements have not been described as permanent, and I would expect Buy.com's "no minimum purchase" free shipping promotion to be short-lived."

The shipping charge reductions certainly didn't faze the financial markets, where investors have seen Amazon's stock climb from $10 a share into the $18-plus range over the past six months.

In fact, a day after Amazon cut shipping charges, Zacks.com issued a "buy" rating on Amazon stock.

What are other e-tailers doing?

Amazon's rival bookseller Barnes & Noble.com offers free shipping to a single U.S. address if you buy two or more items.

K mart's BlueLight.com (just renamed and relaunched) appears to charge the customer to ship everything, but offers in-store pickup.

"BlueLight.com has offered both free shipping and dollars-off promotions in the past," said Dave Karraker, vice president of communications, told InternetNews.com. "In fact, we are currently offering 10 percent off any order over $99 as part of our site re-launch this week

"We prefer to offer the best value on products across the site, rather than raising costs on some items to cover the cost of an ongoing promotion, such as free shipping," he said. "Consumers should be aware that never-ending promotions such as these have to be paid for somehow. Companies are not sacrificing margins to keep these running indefinitely."

Walmart.com (look out, Expedia, today they were pitching vacation getaways) charges to ship everything, and says that "for each item, there is a fixed charge plus a per-item charge." Interestingly, in-store pickup is not an option.

As for Buy.com, the so-called Internet Superstore that was taken private last year, founder and CEO Scott Blum is nothing if not in-your-face. "Once again, Buy.com is improving the way the world shops online ... (setting) the new standard for other retailers to follow," he said.

Blum was quoted recently as saying that Buy.com was able to turn a profit from about $80 million in sales generated in the first quarter of 2001 and can afford to pay for the free shipping, which runs about 2.5 percent of sales. But whether smaller online retailers can take that kind of a hit and remain in business remains to be seen.