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Shipping-fee schedules are an important but underresearched element of the marketing mix for direct marketers. This paper provides an empirical study on the impact of shipping and handling charges on consumer-purchasing behavior. Using a database from an online retailer that has experimented with a wide variety of shipping-fee schedules, we investigate the impact of shipping charges on order incidence and order size. We use an ordered probability model that is generalized to account for the effects of nonlinear and discontinuous shipping fees on purchasing decisions, and to accommodate heterogeneity in response parameters. Results show that consumers are very sensitive to shipping charges and that shipping fees influence order incidence and basket size. Promotions such as free shipping and free shipping for orders that exceed some size threshold are found to be very effective in generating additional sales. However, the lost revenues from shipping and the lack of response by several segments are substantial enough to render such promotions unprofitable to the retailer. Heterogeneity across consumers also suggests interesting opportunities for the retailer to customize the shipping and other marketing-mix promotion offerings.
Key words: shipping fees; direct and Internet retailing; nonlinear pricing; promotions
History: This paper was received August 22, 2003, and was with the authors 14 months for 3 revisions; processed by Eugene Anderson.
To be sure, understanding the connection between online consumer behavior and shipping costs is something of a Holy Grail for companies like Amazon and Buy.com. And both companies are largely in the dark as to where the sweet spot lies. "It's a test," says an Amazon spokesperson. "It's very expensive to do this. We'll find out if the customer response is great enough to make it work, but it's the right thing to do."-From CNN Online June 24, 2002
1. Introduction
Shipping charges are an important but underresearched element of the marketing mix for online and direct retailers. A characteristic of these businesses is that at the time of purchase the physical products are spatially separated from the customer. In contrast to traditional retailing where customers absorb many order assembly and transportation costs, when transactions take place with a distance between customers and products the firm incurs the costs of order assembly and delivery (Rosen and Howard 2000). Therefore, a...