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E-COMMERCE

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

By our News Team | 2023

Academic study finds ‘free’ shipping combined with paid membership reduces problem of cart abandonment at final stage of purchase.

Researchers from two US universities – North Carolina State and Texas A&M – have published a new article that examines membership-fee shipping programmes and the effect on consumers’ purchase behaviours and company net revenue.

Their findings may surprise some online retailers, as the study indicates that providing ‘free’ shipping, but at the same time charging customers a membership fee, is good for business.

E-Commerce

Photo by Kindel Media from Pexels

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.

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    Dr Kin Kariisa

    Group CEO - Next Media

    Dr. Kin Kariisa is an extraordinary force at the helm of Next Media Services, a conglomerate encompassing NBS TV, Nile Post, Sanyuka TV, Next Radio, Salam TV, Next Communication, Next Productions, and an array of other influential enterprises. His dynamic role as Chief Executive Officer exemplifies his unwavering commitment to shaping media, business, and community landscapes.
    With an esteemed academic journey, Dr. Kariisa’s accolades include an Honorary PhD in exemplary community service from the United Graduate College inTexas, an MBA from United States International University in Nairobi, Kenya, a Master’s degree in Computer Engineering from Huazong University in China, and a Bachelor’s degree in Statistics from Makerere University.
    Dr. Kariisa pursued PhD research in Computer Security and Identity Management at Security of Systems Group, Radboud University in Nijmegen, Netherlands. As a dynamic educator, he has shared his expertise as a lecturer of e-Government and Information Security at both Makerere University and Radboud University.

    Dr Kin did his PhD research in Computer Security and Identity Management at Security of Systems Group, Radbond University in Nigmegen, Netherlands. He previously served as a lecturer of e-Government and Information Security at Makerere University in Kampala, Uganda and Radbond University in Netherlands.

    Dr Kin did his postgraduate courses in Strategic Business Management, Strategic Leadership Communication and Strategies for Leading Successful Change Initiatives at Harvard University, Boston USA.

    • Other current and previous roles played by Dr Kin Kariisa:
    • Lecturer of e-Government and Information Security to graduate students at Makerere University, Kampala and Radbond University in the Netherlands
    • Director of Eco Bank Uganda Limited, one of the largest banks in Africa
    • Chairman of the National Association of Broadcasters, an umbrella industry association for all Television, Radio and online broadcasters in Uganda.
    • Chairman of Board of Directors of Nile Hotel International, that owns the leading hotel in Uganda, Kampala Serena Hotel.
    • Chairman of Board of Directors of Soliton Telmec Uganda, the leading telecom company in Optic fibre business managing over 80% of optic fibre in Uganda.