Posts tagged: Zappos

The Prizes and Perils of Free Shipping

Shipping charges. As customers, we HATE paying for them, and we LOVE getting them free. In fact, our feelings about shipping charges are so strong that we highly overvalue free shipping. We’ll spend money we didn’t plan to spend on products we don’t need in order to avoid dumping cash into those awful shipping fees, even when that incremental spending is much more than the shipping charge.

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 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?

Defending the status quo kills companies

“Defending the status quo is what kills companies.” That line comes from the excellent book More Than a Motorcycle: The Leadership Journey at Harley-Davidson written by former Harley CEO  Rich Teerlink and his organizational consultant partner Lee Ozley. The book chronicles Teerlink’s and Ozley’s process to change the culture at Harley-Davidson to ensure the company was ready for the challenges to come. What I found most remarkable, though, was that they didn’t initiate this massive change when the company was troubled — they initiated massive change when the company had just completed a successful financial turnaround and the press was actively singing their praises.

They changed when conventional wisdom would have said to keep doing what they were doing.

Bankruptcy courts are littered with companies who kept doing what they were doing and failed to adapt to changing marketplaces and changing customer needs and expectations.

I spent 20 years in the music industry with Tower Records, so I’ve see one of the best examples in recent years of an entire industry that desperately clung to the past rather than embrace the future. The music industry didn’t suffer because of Napster and illegal downloads; it suffered because it turned its back on its customers in favor of short term profits.

The music industry failed to recognize the opportunity that came with the advent of the Internet and digital music formats. Rather than see their industry from their customers’ perspective, the industry fell pray to the elitism I’ve discussed previously. So a computer company took their business from them. Apple‘s iPod and iTunes took the music retailers’ business and substantially wrestled control away from the music labels.

The retailers could have created digital music stores if they weren’t so worried about protecting their current businesses. And there were other opportunities available. Seth Godin spoke to the industry last year and gave some excellent examples of opportunities to change the business model.

Now other traditional industries like newspapers, video stores and bookstores, among others, are also losing substantial market share to new, technology based upstarts. Others, like travel agencies, are mostly gone.

But some companies are embracing change even during the height of success.
A recent Forbes interview with Xerox’s retiring CEO Anne Mulcahy highlighted her strategy to focus Xerox on “paperless printing” even though the entire organization was basically built on paper-producing technology. Rather than focus on paper, Mulcahy instead said the company’s value was always about the creation, management and dispensing of information, “Democratization of information, however it happened.”

Threats to existing business models aren’t only coming in the form of digitization.
Look at the shoe business. In ten years, went from a germ of an idea to a $1 billion company. Their model? “In March of 2003, we made a decision to be about customer service,” say their CEO, Tony Hsieh, in a recent Fast  Company profile. “We view any expense that enhances the customer experience as a marketing cost because it generates more repeat customers through word of mouth.”

Customer experience as a marketing cost. It’s a whole new way of looking at the shoe business (or retail in general), and it’s a hit worth a cool billion in a short amount of time.

I can’t believe that billion dollars was incremental business to the overall market. That share came out of somebody’s  hide. And that means an existing shoe business could have done it first if the thought process and the courage to act  was there. If the Zappos model works, it can be applied to anything, and it appears that’s exactly what Zappos intends  to do.

And the radical ideas keep coming. Chris Anderson has a controversial new book, Free, that describes a future he believes will be centered largely around business models that give away 95% of their offerings and make money on the remaining 5%. Are Anderson’s ideas open for debate? Sure, but they and other seemingly nutty ideas should be regularly and honestlydiscussed. One of them may well be the next billion dollar idea.

It doesn’t take wholesale change in the marketplace to significantly disrupt a business model.

A drop in business of 10-15% can have massive impact, as many have clearly seen in the current economic downturn. But the economic downturn has not sunk all boats. reported a sales increase of 18% and a net income increase of 24% for their first quarter this year.

As e-commerce continues to be the growth vehicle in retail, and as Amazon continues to dominate e-commerce, I wonder how brick and mortar retail models will adapt. I believe there are many opportunities today to leverage both the growth and value of e-commerce and existing physical real estate.

Certainly, tying the web experience and the store experience together via cross-channel capabilities is a must. In the industry, we talk a lot today about capabilities like order online and pick up in store, and I think those are good.

But how can we take it further?
For example, I know from my experience with in-store kiosks at Borders that a lot more people than I expected still aren’t comfortable shopping online. They want someone to help them use the kiosks, and then they want to pay with cash at the register. Why not use our store POS systems to take cash payments for online orders? What if we took it a step further and took cash payments for other sites’ orders. What if the physical store essentially became an affiliate for a pure play e-commerce site and took the cash along with a commission? What type of opportunities might that open for both the pure play and the brick and mortar store? What other reasons should customers continue to shop physical stores well into the future as technology and delivery systems continue to improve?

What challenges does your business face in the coming years, or what businesses in general do you see most at risk? How could your business model change — maybe radically — to address those challenges? Or, do you think this is all hogwash? Let’s discuss.

Retail: Shaken Not Stirred by Kevin Ertell

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