Does free freight really convert (and is it so great?)/
February 12, 2006
Last night, my daughter announced that she’d purchased an external hard drive for her Mac on eBay. She pointed out that she only had to pay $6.99 for the drive but $10.00 for the shipping.
I didn’t think much about it until I saw this morning’s New York Times, which included an article about Amazon’s financials, their free freight policy and free freight in general:
“Academic research shows pretty convincingly that people have separate accounts in mind, one for the item itself and one for shipping,” said John Morgan, an economist who teaches at the University of California, Berkeley. Using eBay auctions as his real-world laboratory, he showed that changing the ratio of item price to shipping charge, while keeping the total price constant, produces sharply different customer responses.
On eBay, Mr. Morgan found that bidders happily accepted outrageously high shipping charges if they thought they were getting a good deal on the item price of a used CD. Amazon, however, faces the opposite problem: its customers accord more weight to the shipping charge, even if modest, than to the discount on the item itself. Why should this be? Perhaps it is the online customer’s chafing at being asked to pay for the privilege of waiting for a delivery.
Everything about that from Professor Morgan was interesting – I just don’t agree with his supposition at the end. If the Amazon or similar customer demands free freight to compensate him for waiting for his delivery, why doesn’t the eBay customer demand the same? After all, anyone who has ordered from eBay knows that some vendors are prompt and others are not. Furthermore, some vendors are close to you (and so the product gets there the next day) and others are on the other coast, or the other side of the world.
No, this is really about the psychology of the transaction. A customer who purchases on eBay gets a thrill out of paying so little. After all, what words did my daughter greet me with last night? “Guess how little I paid on eBay!!” But the Amazon customer does’t say, “Guess what, I saved $3!” They are looking for a good deal, a fair deal, but not a bargain basement, guess-what-I-found-at-the-rummage-sale price. Furthermore, the Amazon customer is comparing the transaction to going to Borders (and if you are driving by Borders, the delivery feels like it is free) whereas the eBay customer is in the most amazing marketplace of garbage (after all, one man’s garbage is another man’s treasure, right?)
Which takes me to the issue of — who should have free freight? One of my e-commerce customers sells an industrial product and we did a free freight test for a month last year. The test did not pay for the cost of the freight charges we left on the table. So once again, free freight might really matter for ladies clothing, or books, but in some areas, it matters not at all.
No one has really figured out this free freight problem. But a few things seem clear to me:
- If you are in the “Look what an amazing deal I got” business, you should test lower pricing and higher freight. eBay isn’t the only company in that space — how about the seconds business? (“Seconds” are products that aren’t quite nice enough to sell on the floor of the store, like open-box returns, or pantyhose that roll off the production line with snags at the waistline, or anything that was mis-packaged.)
- If you are in the commodity retail business, like Amazon is with books and CDs, you should test conditional free freight at various price points, set slightly above your current average order size.
- If you sell a niche product without any direct competition, you shouldn’t look to free freight to increase your conversion rate, but test anyway. (Always test.)
Anyone have any great free freight stories?