Newswise —
A recent article in the Journal of Marketing, authored by researchers from NC State University and Texas A&M University, delves into the impact of membership fee shipping programs on consumers' purchasing behavior and a company's net revenue.
The upcoming article in the Journal of Marketing, titled "The Effectiveness of Membership-Based Free Shipping: An Empirical Investigation of Consumers' Purchase Behaviors and Revenue Contribution," is authored by Fangfei Guo and Yan Liu, researchers hailing from NC State University and Texas A&M University, respectively.
What is the top reason 50% of customers abandon items in online shopping carts? Why do e-commerce brands incur an annual revenue loss of about $18 billion?
The answer: shipping fees.
For this reason, shipping fees have been identified as a significant factor contributing to cart abandonment in online retail. To counteract this, many online retailers have turned to membership-based free shipping (MFS) programs as a strategy to recover high shipping costs while meeting consumers' expectations of free shipping.
In MFS programs, customers pay an upfront membership fee in exchange for unlimited free shipping on eligible items. This approach has gained popularity, with nearly 40% of the world's top retailers adopting MFS or promoting it as a premium service within their paid membership programs. By offering MFS, retailers aim to incentivize customers to complete their purchases by eliminating shipping fees, which can be a deterrent during the checkout process. This strategy not only helps reduce cart abandonment rates but also encourages repeat purchases from members who avail themselves of the free shipping benefit, potentially boosting customer loyalty and increasing overall revenue for the retailer.
This new study investigates the effectiveness of MFS. Collaborating with a top online retailer, the researchers utilized real-world data to study how MFS impacts consumers’ purchase behaviors, including:
- how much they buy (total spending, purchase frequency, average order size),
- what they buy (purchase variety and impulse purchases), and
- net customer revenue.
Switching Barrier
According to Guo's research, average members of a membership-based free shipping program, known as MFS (Membership-based Free Shipping), may not show an immediate increase in their purchases upon enrollment, but tend to do so gradually over time. Initially, consumers may take advantage of the unlimited free shipping benefits by placing smaller orders more frequently, without necessarily increasing their total spending. However, this behavior could result in reduced profit margins for retailers due to the increased shipping costs associated with processing smaller orders.
In other words, consumers may exploit the free shipping benefit by breaking down larger orders into smaller ones, which could lead to higher shipping costs for retailers without an immediate corresponding increase in revenue. It's important for retailers to carefully analyze the costs and benefits of such behavior, taking into account the specific dynamics of their MFS program and the purchasing patterns of their target market.
She adds, “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.” 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.
Furthermore, the findings of this study reveal a substantial monthly increase in net customer revenue by 12.75%, equivalent to $19.93 per month. This significant increase suggests that the membership fee could offset the rise in shipping costs and potentially serve as a significant net revenue source.
The profitability of MFS (Membership-based Free Shipping) may exhibit variability across different customer segments. Notably, light buyers, who previously demonstrated a higher willingness to pay shipping fees or make purchases across a broad range of product categories prior to enrollment, contribute the most significant percentage change in revenue contribution after enrollment. This can be attributed to the fact that these consumers tend to consolidate their spending behavior, resulting in a higher purchase frequency and a reduced order size without fully exploiting the free shipping benefit.
In contrast, heavy buyers, typically considered the best-value segment, do not exhibit a significant increase in revenue contribution after enrollment in the MFS program. This is because they are more likely to take advantage of the free shipping benefit by splitting their large orders into smaller ones or purchasing items from categories with lower price levels. As a result, the MFS program may even incur losses from heavy buyers who were previously unwilling to pay shipping fees or purchase from limited product categories prior to enrollment, further highlighting the variation in profitability across different customer segments.
“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.
Lessons for Retailers
We offer the following suggestions for retailers:
- We suggest online retailers adopt MFS as their shipping policy. MFS can enhance retailers’ revenue because the membership fees can recoup the shipping costs. Moreover, MFS leads to increased spending and revenue contribution over time.
- When promoting the MFS program, managers should target light buyers.
- Managers should avoid promoting MFS to heavy buyers. The MFS program can even lose money from heavy buyers.
- MFS helps retailers retain customers and consolidate customer spending.
About the Journal of Marketing
The Journal of Marketing develops and disseminates knowledge about real-world marketing questions useful to scholars, educators, managers, policy makers, consumers, and other societal stakeholders around the world. Published by the American Marketing Association since its founding in 1936, JM has played a significant role in shaping the content and boundaries of the marketing discipline. Shrihari (Hari) Sridhar (Joe Foster ’56 Chair in Business Leadership, Professor of Marketing at Mays Business School, Texas A&M University) serves as the current Editor in Chief.
https://www.ama.org/jm
About the American Marketing Association (AMA)
As the largest chapter-based marketing association in the world, the AMA is trusted by marketing and sales professionals to help them discover what is coming next in the industry. The AMA has a community of local chapters in more than 70 cities and 350 college campuses throughout North America. The AMA is home to award-winning content, PCM® professional certification, premiere academic journals, and industry-leading training events and conferences.
https://www.ama.org
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