From the June 2003 issue of Entrepreneur

While free shipping has been an online promotional tool since the Internet's earliest days, the idea really picked up steam last year when Amazon.com began experimenting with it as a full-time service. Initially, the giant Seattle-based online retailer offered free shipping to customers whose purchases totaled $99 or more. The company later lowered the minimum to $49, and then to $25 last fall--its current offering. (There are some exceptions, however, including apparel, video games and accessories, baby products and certain oversized items.)

Amazon.com is not the only company to offer some form of free shipping to customers. BizRate.com, a shopping comparison site that tracks consumer spending across 2,000 Web sites, says there are currently 183 sites with active promotions, ranging from free shipping all the time on every item to free shipping on a variety of items or orders for a limited time.

The main reason to offer free shipping, of course, is to encourage people to fill shopping carts on your site and complete their purchases. Free-shipping promotions were a significant factor, according to Jupiter Research, in boosting online holiday sales to the $13.8 billion mark in 2002-an increase of more than 23 percent over the 2001 holiday period.

However, there are some downsides to free shipping, and a major one is cost. Amazon.com, for example, says it will spend more than $100 million to pay for free shipping this year. "When it comes to free shipping, a lot depends upon average order size in relation to the weight of the products being shipped," says Ken Cassar, a former senior analyst with Jupiter Research. "The ratio of margins per pound is very important. A retailer with a low margin-per-pound ratio doesn't have the latitude to give away shipping, whereas a retailer with a high margin-per-pound ratio does." For instance, it would be difficult for an online retailer to offer free shipping if its average order were $25 but shipping fees were in the $4 to $5 range.

One company that has found success offering free shipping is Shoebuy.com, a Boston-based online footwear and accessories retailer that employs 13 full-time employees and recently enjoyed its fifth straight quarter of profitability, generating about $10 million in sales in 2002. The company has been offering free shipping on all its orders since 2000, when the site officially launched. "We decided we didn't want to even enter into this business if we couldn't sell a product that offered free shipping, because we thought it was part of the whole value proposition," says Scott Savitz, 34-year-old president, CEO and co-founder. "We always knew that just because we were offering a product on the Internet, that alone isn't enough for somebody to make a buy." Savitz says that free shipping especially helps new buyers take a bit more risk in their shopping carts. "Instead of buying two pairs of shoes that they've always bought and they know will fit, they may buy three or four pairs, since they know the merchandise is getting shipped for free." In fact, Savitz says, the average order size for his company is approximately $85, with waived shipping costs in the range of $6 to $7.

But to Savitz, offering free shipping to customers doesn't mean raising prices to deflect the cost. "Internet buyers are a lot more intelligent than people give them credit for," says Savitz. "If all of a sudden you decide you are going to raise prices to accommodate free shipping or you're going to take the free shipping away from them after you've already pulled them in as customers, we think that would be disappointing."

So how is Shoebuy.com able to offer free shipping yet still sell shoes at competitive prices and without compromising its margins? "We work with the manufacturers who send out products to consumers directly," Savitz explains. "Therefore, we don't have salespeople, [and] we don't have excess inventory or warehouse space. Because we are able to limit our infrastructure costs, we are able to have that trickle down to the consumer." Shoebuy.com sells only to consumers who reside in the United States; offering the perk overseas, he says, would be much more costly.

Most likely, larger online retailers and retailers with an infrastructure similar to Shoebuy.com's will probably continue to offer free shipping. However, free shipping-no matter how attractive it is to customers-isn't something all e-tailers should promote, particularly those that sell specialized products. "In many cases, customers will pay a premium to buy a niche product for the simple reason that they can't find the product elsewhere," says Cassar. "As a result, if you are an online retailer selling a niche product, there is really no need to offer free shipping."

But some e-tailers still feel they have to offer free shipping in order to compete-and some have started to charge customers extra or hidden fees to defray the costs. It's a questionable practice industry watchers have noticed since the free-shipping trend started to gain momentum. For example, an e-tailer may instead charge customers a so-called "handling fee," despite promising free shipping with no minimum purchase-and sometimes this fee is not disclosed until checkout. Some e-tailers even charge "restocking fees" for returned products, even for products that have not been used. Customers are smart enough to catch on and may even turn away from your site if they think they're being cheated. So before you offer free shipping, make sure you really can do so. Your business depends on it.


Melissa Campanelli is a marketing and technology writer in Brooklyn, New York.