Membership-fee shipping programmes are the way to go for retailers

Notably, this approach could help to reduce the significant problem of abandoned items in online shopping carts. Current international research indicates that shipping cost is the top reason 50% of customers abandon items in their carts at the final stage of purchase, incurring an annual loss for e-commerce brands of about US$18-billion.

The study is published in the American Marketing Association’s peer-reviewed Journal of Marketing and authored by Fangfei Guo and Yan Liu.

According to the authors, online retailers have shown a growing interest in membership-based free shipping (MFS) schemes to help them recover high shipping costs and satisfy consumers’ expectations of free shipping. 

In this model, consumers pay an upfront membership fee in exchange for unlimited free shipping. Nearly 40% of the world’s top retailers have adopted MFS or advertised it as a premium service in their paid membership programmes, the authors say.

“We find that average MFS members may not initially increase their purchases, but do so over time,” Guo states.

Revenue increase may not be immediate

Initially, consumers are more likely to exploit unlimited free shipping benefits at the beginning of enrolment, when they break down large orders into smaller ones without increasing their total spending. As a result, retailers may not immediately gain incremental revenue due to the reduced profit margin caused by increased shipping costs.

“However, over time the free shipping benefit builds a switching barrier that motivates consumers to increase spending and purchase more frequently with larger order sizes,” Guo adds.

Also, MFS changes consumers’ purchase variety and the component of shopping baskets; in other words, members purchase from broader product categories and make more impulse purchases.

The study finds a monthly increase in net customer revenue of 12.75%, which indicates that the membership fee could compensate for the increased shipping costs and be a major net revenue source.

“MFS is an effective marketing instrument to increase customer retention. It is particularly helpful at increasing the retention of consumers who like to purchase from diverse product categories,” says Liu.

The authors offer the following suggestions for retailers:

• Online retailers should adopt MFS as their shipping policy. Such schemes can enhance retailers’ revenue because the membership fees recoup the shipping costs. Moreover, MFS programmes lead to increased spending and revenue contribution over time.
• When promoting the MFS programme, managers should target light buyers.
• Managers should avoid promoting MFS to heavy buyers, as the programme could lose money from this market segment.
• MFS schemes helps retailers retain customers and consolidate customer spending.

You can find out more about the study The Effectiveness of Membership-based Free Shipping: An Empirical Investigation on Consumers’ Purchase Behaviors and Revenue Contribution’ here.