Amazon's free shipping pressures other dot-coms
Associated Press
HELEN JUNG AP Business Writer
January 28, 2003
SEATTLE (AP) - Free shipping has become the online shopping
equivalent of frequent flier miles for travelers. Take it away, and you're likely to have customer rebellion,
analysts say. Keep it, and you could be eating millions in costs. But like it or not - and customers love it - online companies
are having to offer and keep free-shipping promotions to lure more
mainstream buyers onto the Internet. And Amazon.com's announcement
Thursday that it will keep free-shipping for orders over $25 only
turns up the heat on those who don't. ``It absolutely does increase the pressure,'' said Scott
Silverman, executive director of Shop.org, the Washington,
D.C.-based online division of the National Retail Federation.
``Certainly consumers can get addicted to free shipping and a
retailer may be loathe to take it away from them.'' Since last year, Amazon.com has been experimenting with free
shipping for customers who place orders above a certain threshold.
Initially, the Seattle-based seller of books, CDs, videos and other
items required purchases totaling $99 to trigger free shipping. The
company then lowered it to $49, and even lower to $25 last fall. The free shipping promotion drove sales higher, Amazon
executives said, though they would not give specifics. After
experimenting with various levels, the company settled on a $25
order threshold, spokesman Bill Curry said. ``When customers love
something it's our job to figure out how to do it,'' he said. ``And
we can afford to do this.'' But it is costly. Keeping the threshold at the $25 level cost Amazon $30 million
in its fourth quarter. That amount becomes even more significant in
that Amazon eked out a slim $3 million profit - itself, only the
second time that the company has turned out a quarterly profit in
its eight-year history. ``Amazon had no choice but to continue offering free shipping,''
said Ken Cassar, senior analyst at Jupiter Research. But Amazon
could potentially be leaving money on the table by leaving the
threshold so low. ``I believe that Amazon might not sacrifice
substantial demand by increasing the minimum order size to $30 or
$40.'' Amazon is neither the first nor the only retailer to offer
free-shipping promotions, which have been around in some fashion
since the dot-com industry's earliest days. But with companies like BarnesandNoble.com - which adopted a
free-shipping promotion for orders of two items or more in 2001 -
and other major retailers as BananaRepublic.com offering it with
purchases totaling $100, it's becoming a regular business cost for
companies selling everything from diamond rings to computers. ``There's a herd mentality going on among retailers,'' said
Chuck Davis, chief executive of BizRate.com, a shopping comparison
site that also tracks consumer spending across 2,000 Web sites. On the day after Thanksgiving, 120 retail sites listed
free-shipping promotions for a limited-time, Davis said. Now, 158
sites have active promotions, and many elected to extend the
expiration date for the promotions to continue through 2003, he
said. The company does not track the average threshold level that
triggers free-shipping. Free shipping also can help build customer loyalty. Ivan Dunmire, 44, of New York, said he regularly shops online
and favors sites that offer free shipping. ``I would buy more
online if I knew shipping was going to be free,'' he said. While free shipping ranks as the top lure for consumers - even
higher than special sales or discounts - consumers need to be aware
of various restrictions on promotions, Davis said. ``Merchants have figured out that the words 'free shipping' get
consumers into their online stores,'' said Davis. ``But they build
walls up or conditions so that many of those consumers will not
qualify for free shipping.'' He noted statistics, drawn from BizRate.com customers surveys,
that show 39 percent of online shoppers said they were drawn to
order at the Web site by an offer of free shipping, although only 9
percent of orders ended up being eligible. And Amazon.com, for
instance, lists numerous exceptions to free-shipping on its Web
site, including toys, clothing, and video games. Others, including
TheSportsAuthority.com have free shipping policies for only
selected items. But it's still a psychological tool to help Amazon and others
attract new online shoppers, said Carrie Johnson, senior retail
analyst with Forrester Research. Those shoppers tend to be more
price-sensitive, have generally lower incomes than frequent online
shoppers and are used to the bricks-and-mortar world than surfing
the Internet. Online shopping - which totaled $78 billion including travel -
amounted to only 3.4 percent of total retail dollars spent by
consumers in 2002, she said. Forrester projects that figure to grow
to $95 billion, or 4 percent of the total, in 2003. Johnson added that the $100 million that Amazon expects to spend
on subsidizing the free-shipping offer is ``not an outrageous cost
when you consider the price of a Super Bowl ad'' - which averaged
about $2.2 million for 30-second spot this year. And it keeps customers loyal, she said: ``Free shipping
absolutely is a drug(like) promotion.'' --- On the Net: Amazon.com: http:www.amazon.com BizRate.com: http:www.bizrate.com Shop.org: http:www.shop.org
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