Offer a free shipping subscription
Sell customers a paid subscription to access free shipping of your products (e.g. Amazon Prime). Profitability will dip in the first months after launch, then soar.
Thomas McKinlay
July 11, 2023
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📝 Intro
What is one of the main reasons that 48% of people in the US abandon online shopping carts? (Statista, 2022)
You guessed it. Shipping fees.
Free shipping is one solution, but it’s expensive.
So what happens if, instead of charging for shipping by order, you charge a flat-rate subscription to access free shipping?
For example: pay $39 / year, and get unlimited free shipping on all your orders. As we’ve seen before, people love flat rates.
Amazon Prime is the most famous example of this, but online retailers from fashion to electronics to beauty products all offer this.
But how does this technique impact revenue, and most importantly - profits?
Scientists asked themselves exactly that. Here is the answer.
P.S.: Keep an eye out next week for Ariyh’s Science-based Playbook of Ecommerce Optimization!
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Previous insight: Don’t ask for reviews too soon (more insights here)
Free shipping subscriptions increase sales and revenue per customer
Channels: Ecommerce | Shipping | Pricing | Loyalty
For: B2C
Research date: February 2023
📈 Recommendation
Offer a flat-rate subscription to access free shipping of your products. People will order more, and over time spend more.
To maximize profits, target the subscription to occasional buyers and those who buy a wide variety of products (e.g. one book of clothing item every 3 months), and could buy more from you. Try to avoid targeting frequent buyers who are already buying everything they would from you (e.g. bulk purchases of coffee for the office kitchen).
🎓 Findings
When people pay a subscription to get free shipping, they make more purchases, buy a larger variety of products, and make more impulse purchases.
Initially, the subscription won’t boost profitability, as customers break down their purchases into smaller orders. Over time, this stabilizes but customers keep spending more, so profitability increases.
Researchers analyzed ~175,000 orders from ~5,300 customers of a large Asian B2C retailer. They found that subscription members (vs non-members):
In the first 6 months: placed 17% more orders on average, but spent 10% less per order
From the 7th month: order sizes increased (vs non-members) and customers spent 17% more per month
After 1 year: spending was 25% higher, and overall revenue (including membership fees) was 32% higher per customer
If we also count the revenue from the subscription fee, the program was already profitable from month 2 onward
Light buyers spent 92% more after becoming members, while heavy buyers spent 15% less.
The effect is:
Most profitable for people who occasionally buy a wide variety of products (e.g. seasonal buyer of pants, accessories, and hats at a fashion retailer)
Least profitable for heavy buyers, who already try to group as many products as possible into large orders, to minimize their shipping fees (e.g. large online groceries order every 2 weeks)
🧠 Why it works
When we first pay to start the subscription, that cost feels like a sunk cost.
So we try to use the benefits - free shipping - as much as possible, to maximize the benefit we get, even if they are smaller orders that we would normally not have placed individually.
Over time, this feeling gradually reduces and all but disappears, and we start placing larger orders at a time again.
At the same time, we develop stronger attitudes toward the company, as the cost of switching feels larger and larger. This makes us more likely to explore other products they offer and to make impulse purchases.
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✋ Limitations
The research is based on transaction data from an anonymous single Asian retailer. The company sells a broad range of products (e.g. apparel, electronics, beauty products, home goods, books) but the technique may apply differently to other types of retailers, especially those that sell only few products that are not frequently purchased.
In this study, non-members of the free subscription could still qualify for free shipping if they bought above a certain amount (e.g. order $100 or more and get free shipping). If the retailer does not offer any free shipping options at all, a free shipping subscription may be even more profitable. This was not tested.
In the experiment, the only benefit of a paid membership was free shipping. It’s likely the effects would be stronger when other perks, such as discounts or additional services (e.g. priority support), are also included in the membership.
🏢 Companies using this
This technique is common among large retailers such as Sephora, Urban Outfitters, and Barnes & Noble. Many offer additional perks on top of free delivery. It is much less common among smaller retailers.
Fashion retailer ASOS offers a free delivery subscription called Premier Delivery service to its UK customers.
⚡ Steps to implement
Set up a subscription program in which customers pay a flat fee in exchange for free shipping.
Price it attractively. The goal is not to cover all your shipping costs, but to drive customers to buy more from you - rather than competitors.
You can test additional benefits (e.g. discounts, priority support, free gifts) to make the subscription more attractive, while keeping it profitable.
🔍 Study type
Market observation (over 36 months of 176,602 orders by 5,354 customers of an anonymous large Asian B2C retailer).
📖 Research
The Effectiveness of Membership-based Free Shipping: An Empirical Investigation on Consumers’ Purchase Behaviors and Revenue Contribution. Journal of Marketing (February 2023).
🏫 Researchers
Fangfei Guo. Poole College of Management, North Carolina State University
Yan Liu. Mays Business School, Texas A&M University.
Remember: This is a new 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.
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