But here’s the thing: many of Amazon’s advantages are shared by e-commerce operations of all
types, but Amazon seems to be quicker to recognize and capitalize on
those advantages than everyone else.

This morning, I pulled up the Amazon home page and was greeted by yet
another letter from Jeff Bezos announcing Amazon’s latest brilliant
innovation. This time, it’s “Frustration Free Packaging” – just in time
for the holiday season when those of us who are parents still haven’t healed the scars from last year’s unbelievable frustration with trying to release our kids’ new toys from wicked constraints that would have defied Houdini (all while the kids are jumping up and down with excitement to play with the new toys).

The secure packaging we’ve been fighting with is designed for physical stores to allow for attractive displays while at the the same time preventing theft. You can see all gory details in this patent filing for toy packaging. But the need for that type of packing in an e-commerce warehouse is moot. So, why not push manufacturers for “e-commerce packaging” that is designed to protect items in shipping but allows for easy removal from the package? Amazon’s size probably gives them an advantage in pushing for this type of action from manufacturers, but many of today’s biggest multi-channel retailers certainly have massive pull with manufacturers and probably could have pulled this type of thing off either individually or collectively — had they thought of it.

And, of course, Amazon has been the trailblazer for many of today’s e-commerce innovations, including customer reviews, affiliate programs and recommendations. So, you might say, let them bear the costs of the innovations and we’ll just capitalize on them after Amazon has proven the way.

While that strategy may work sometimes, it’s fraught with risk because Amazon doesn’t often relinquish market share once they’ve gained it (particularly if they hook customers into Amazon Prime), and they tend to gain that market share during the holiday season. Check out their quarterly results in the “North American Media” category over the last 22 quarters in comparison to Barnes and Noble and Borders:

You can see it’s the fourth quarter where they gain market share. They don’t gain much in the other three quarters, but they certainly hold on to a lot of the share they gained the prior holiday season.

So, what can the rest of us do about it?

For starters, we might want to put innovation on the front burner. Yes, there are costs and risks associated with innovation. But the costs of doing nothing or simply following the crowd might be greater. And successful innovations don’t always have to be earth-shatteringly new, whiz bang technology. They simply need to solve problems better than current solutions.

I believe the most successful innovations have at least one of the following characteristics:

1. They create convenience for consumers
   We love convenience, and we’ll sacrifice quality and spend more money to get it. I’ve talked about this previously in my post “Predicting the Future of Retail.”
2. They create efficiencies for businesses
   Efficiencies allow us to make more money faster, and we love that. Given the unusual shapes some toy packaging can take, I wouldn’t be the least bit surprised if Amazon’s Frustration Free Packaging is also alleviating frustrations in their warehouse and giving Amazon added efficiency in the supply chain.

It’s important to carefully examine our businesses to truly understand where we have advantages and disadvantages. As is the case with packaging, these advantages might not always be immediately obvious. We really need to dig deep to understand the problems our customers and businesses are facing and then carefully look for ways to solve those problems by leveraging our inherent strengths. In this process, we need to listen hard to our customers to understand their needs. Steve Jobs once famously said, “You can’t just ask customers what they want and then try to give that to them. By the time you get it built, they’ll want something new.” He’s right. Customers often can’t give us the specific solution, but if we listen properly they can describe their problems well enough to give us the basis for developing effective solutions.

Innovation usually takes time and money. What can we do this holiday season?

There are lots of little things we can do to improve the experience for customers who come to our sites this holiday season.

1. Truly look at our sites from our customers’ perspective.
   Go to Google and click on one of your search terms. Is the experience what a customer should expect? Try taking a different path on your site to a product than you normally do. How is the experience?
2. Get more product front and center
   Physical stores pack the front of store and end caps with gift ideas. How well does your site parallel this sort of technique?
3. Review your error messages
   A poorly written error message is a shameful way to lose a sale. Go through your site and intentionally generate errors. Put yourself in your customers’ seat. Are those error messages clear and easy-to-understand?

While it may be too late to implement huge changes for this holiday season, it’s certainly not too late to pay attention to customers’ needs and start thinking about what can be done for next holiday season. We can carefully consider our advantages and think about how we could better leverage them next year. And we can carefully consider our disadvantages and think about how we can better mitigate them next year. I’m confident Amazon’s already actively considering their next moves.

What do you think? What tips do you have for retailers for this holiday season? What types of innovations do you see coming?

So, free shipping promotions are a powerful tool for retailers. But, if we’re not careful, overuse of free shipping offers could lead us down a path where free shipping becomes more an expectation than an attractive benefit. At that point, we’ll be left with the huge costs of subsidized shipping without incremental sales to support those costs. And that ain’t a pretty equation.

That said, strategic use of free shipping incentives can lead to incremental sales and greater brand loyalty. We’re probably all familiar with the various “free shipping when you spend $X” offers that are out there, so let’s consider some of the more innovative strategies in use today for free shipping:

Free shipping as part of the business model

Zappos really uses free shipping on purchases and returns as a key component of their business model. They encourage people to order multiple sizes of the same pair of shoes and return those that didn’t fit (or those they just didn’t like, for that matter). Free shipping removes a key disadvantage Zappos has to physical retailers, and in fact even provides an advantage for customers who can try on shoes in the comfort of their own homes.

Zappos’ CEO Tony Hseih has said Zappos is a customer service company not an e-commerce retailer, and free shipping is a big part of their customer service strategy. He’s also said Zappos looks at customer service as a marketing expense, which I think is an interesting perspective that might help the cost make business sense.

But free shipping both way at all times is not a sustainable business strategy without trade-offs. Zappos is not the low price leader in their category by any means. Even with their higher prices, public filings from the recent Amazon acquisition of Zappos exposed their relatively low profits as a percentage of sales. Zappos has certainly built a powerful brand with a loyal following so it looks to me like they’ve made the trade-offs work, but theirs could be a tough model for others to follow. I’ll be curious to see if the model continues to work within the Amazon business model.

Speaking of which…

Free shipping as a loyalty program

Amazon Prime is one of the more brilliant loyalty program innovations to come along over the last several years. For an annual fee of $79, customers can get free 2-day shipping on many key items and free standard shipping on many more. Again, this is a case of a pure-play e-commerce retailer looking to mitigate one of its disadvantages to physical retail. Amazon sunk some money into this program by giving away a lot of free trials, but they’ve since hooked people in to the fee. A recent Piper Jaffray analysis estimates Amazon Prime’s membership at 2 million people and growing at 24% annually. And once you pay $79 to get free shipping, you’re going to make the most out of it. Piper Jaffray found member spend growing from $400 annually to $900 annually!

But this again is an expensive proposition that wouldn’t be sustainable for most businesses. The $79 will help to defray some of the free shipping costs, but as with most paid loyalty programs that I’ve studied, customers don’t renew their memberships unless they’re getting a positive return on their investments. And Amazon, as a general merchandiser, can provide customers with enough product choices that they can visualize making enough purchases to get their money back and then some. Specialty retailers may not be able to offer a similar program on their own; although, I keep thinking there might be an opportunity for some third party to aggregate a bunch of retailers into a program in a way that might work. (Maybe that’s a future post.)

Free shipping as a store traffic driver

The previous two examples were pure-play retailers using free shipping as a way to mitigate a major disadvantage they have to physical retailers. So how can multi-channel retailers leverage the advantages they have with their multiple channels? Free shipping to stores is one way. When I was at Borders, we offered unrestricted free shipping to our stores as a cross-channel strategy in order to leverage the selection and experience of Borders.com combined with the convenience of picking up the order in our stores. Originally, we thought it would appeal mostly to urban dwellers who didn’t want packages left on their doorsteps, but it turned out to be a hit all around for people who just didn’t want to pay for shipping. Wal-Mart does something similar with their Site-to-Store program. And Borders just took it a step further with their recently announced “in stock guarantee” for their stores that offers free shipping to home for customers if the Borders store is out-of-stock on the item the customer came in to purchase.

But businesses offering free shipping without purchase hurdles often depend on additional future purchases to make the offering profitable. For example, we ran a lot of analysis at Borders on the free shipping to stores offer. We determined we needed X% of people to buy $X more in-store when they picked up their orders for the offer to make financial sense. With the new offering, it appears Borders is counting on pulling some market share from Amazon with the promise of books available right now in their stores.

There can be little doubt that free shipping is a powerful offer, but we have to be careful how we wield it. Someone recently told me that effectiveness of fire lies in prudence and intention. Used in a positive manner, it can provide great warmth and light but when used in a negative manner it can cause great destruction. Since I like overly dramatic metaphors, I’m going to compare free shipping to fire. Let’s be careful out there.

What do you think? Should we be concerned about free shipping becoming an expectation? How do you use free shipping strategically?