Image Credit: Mike Mozart
As a product manager, our goal is to get more people to buy our products. This can be a challenging thing to make happen! If you happen to be selling your products online, both you and your customers are very aware that your advertised price is not what they’ll end up paying – they also have to pay shipping costs. Depending on the size and the weight of your product, this could turn out to be a lot of extra money. However, some product managers are starting to offer their customers free shipping. Is this really a good idea?
The Allure Of Free Shipping
If you are a product manager who is offering your products online, then you know that you are up against a lot of competition. It really does not take all that much these days to set up a website to advertise your product. Once it’s up, the customers can be expected to start to show up. However, there is always the possibility that your competition will have a product that is cheaper than the product that you are offering especially once you figure in shipping costs. If only there was some way to make your product appear to be cheaper.
It turns out that there is. Online product managers have long used free shipping to encourage customers to buy more products. However, a new study is suggesting that free-shipping promotions can reduce a company’s profits.
In all honesty, I think that we’ve all realized this. However, what we may not have realized is just how much it may have had an impact on our profits. The paper, analyzed purchases made from one large European retailer and found that free shipping did incentivize customers to buy more. Its things like this that tend to make product managers happy. But it turns out that it also increased purchases of items that historically have higher return rates. These types of products can include such items as clothing or products from lesser-known brands. When products like this are purchased, returns also increased as a result of the promotions, to the point where profits were erased.The study conducted by the paper went even further. During the typically four-week periods when free shipping was offered by the product managers, the good news was that online order volumes rose 11%. But when the cost of returns was tallied against the sales proceeds, it was calculated that on balance the results for the promotion periods amounted to an average 0.7% loss. Clearly what had seemed like a brand-boosting promotion had turned out to be a money loser.
Why Free Shipping Might Be The Wrong Answer
In the study, the company averaged a 37% return rate for the three-year period over which data was collected for the study. What product managers need to understand is that for every $100 worth of goods a customer bought, $37 of goods were returned. In one analysis documented in the paper that ran for two months, the researchers found that the return rate for customers who bought low-risk products – these were things like office supplies, or products from well-known brands – averaged about 22%.
In another part of the analysis that should capture the attention of any product manager, the researchers attempted to better understand what motivated online shoppers by measuring their attitudes toward free shipping. They found two different things were happening. First, consumers saw free shipping as compensation for being willing to take a risk on a product. And second, feelings of gratitude for having shipping costs eliminated made them happy and thus they were more willing to make a risky purchase.
So what does all of this mean for product managers? Product managers are advised to look at whether their own free-shipping promotions are profitable before they launch such campaigns. They should also identify which products get returned more often than others and try to provide customers with more information about those products, so they can make more-informed choices. When offering free shipping a product manager’s goal should be less about trying to maximize sales and instead, they should be trying to maximize final sales. More information can help educate the consumer, reduce the risk of them being unhappy and lower the likelihood of returns.
What All Of This Means For You
Trying to sell products online can be a real challenge. Sure, it’s easy to get things set up, but then the real work starts. It’s all too easy for your competitors to get set up and selling their products online also. Product managers who are selling online are always looking for ways to compete better. They realize that online customers are very price sensitive. Anything that they can do to reduce the price of their product can boost sales. That’s why free shipping can look so very attractive.
If you start to offer free shipping, then there is the possibility that you can make your product cost less than the competition can. A study has been done that revealed that when free shipping is offered, product managers start to get a lot more returns. When the cost of those returns is measured against the increased sales generated by free shipping, often times the companies ended up losing money. When customers are presented with free shipping, they are willing to take more risks in what they buy. Product managers need to carefully consider if offering free shipping is going to end up being too expensive.
In all honesty, the success of Amazon’s Prime service has sorta conditioned all of us to expect that shipping should be free. However, product managers need to understand that free shipping comes with its own set of hidden costs. We need to be very aware of what these costs are and make sure that we are making enough profit from our sales so that it will be worth our while to offer free shipping. We don’t want to be left holding the returns.
– Dr. Jim Anderson
Blue Elephant Consulting –
Your Source For Real World Product Management Skills™
Question For You: Under want conditions do you think that product managers should offer free shipping?
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