What's the Impact of the One-Time Buyer?
First of all, the Internet still has very low home penetration despite the fact that the United States has the world's highest Internet-access penetration level. Among U.S. metropolitan areas, only 61 percent of the homes in the top metro area, San Francisco, was connected to the Internet, according to a study released April 13 by Nielsen Media Research and Net Ratings Inc.
Moreover, there were only six metro areas in the entire country that had penetration of more than 50 percent. Since most people do their remote shopping in their leisure time, growth of this channel for shopping is still to come. Internet shopping has just begun to have an impact on people's buying habits, comparable to where cataloging was in the early 1970s. Most commonly cited numbers that put Internet penetration at more than 60 percent include connected offices in the overall total.
What does that have to do with the impact of shipping and handling. The dot-coms, in an attempt to buy business this past holiday season, gave away free shipping and handling. Not surprisingly, it was not the silver bullet that most had hoped for.
In last month's column, I cited a test we conducted at Eastern Mountain Sports a few years ago on the impact of free shipping and handling before the Internet. That test found it takes time for the offer to kick in because not everyone wants to buy the minute they receive a catalog or go to a Web site. If the dot-coms continue to offer free or reduced shipping and handling, they will raise consumers' expectations even higher. As any student of cataloging and direct marketing knows, free or reduced shipping and handling are what people seek as an incentive. If consumers expect it, they will shop where it is available in most instances.
Since I wrote that column, I have had feedback from readers, and almost all have argued against this thesis. True, they have all admitted they never ran a test on free or reduced shipping and handling that covered more than one mailing. Even our experience at Eastern Mountain showed that on a one-time basis, the free or reduced shipping-and-handling cell lost. It was only over an extended time, nine months, that the free or reduced shipping-and-handling cell won.
There was another point in last month's column that everyone who contacted me ignored: Eastern Mountain achieved the higher sales from the free or reduced shipping-and-handling cell because the response rate increased almost 40 percent. Either some customers started ordering three or more times a year, or some customers who bought only once were now buying two or more times. Most likely it was a little of both, and Eastern Mountain benefited from this higher customer contact in another, very critical way to every cataloger, retailer or dot-com.
The most important asset of anyone selling to consumers is its database. The standard way to determine typical buyer value is based on lifetime value, or the amount of purchases combined with how long they continue to buy. If a company can increase the LTV of its customers by keeping them longer or increasing their buying activity, its value and profits will increase dramatically. Fifty percent of most companies' customers order once and never again. What is the impact on a company's value from these "buyers"? In retailing, these would be comparable to store visits by people well outside the trading area. Extrapolating from the Eastern Mountain test and the 40 percent higher response, the contribution to overhead increased 24 percent vs. the control.
Unfortunately, without all the records from that test and the subsequent years, it is impossible to say for sure if this result was due to greater buying from the same buyers or increases in the number of repeat buyers. However, it seems reasonable, based on these results, that the latter did occur: There was an increase in the number of repeat buyers. Extended over time this factor should have an enormous positive impact on a company. Thus, to gauge the impact of charging for shipping and handling accurately, a company must evaluate it over a very long time such as a year or more, not a mailing or two.
Interestingly, the people I have discussed this concept with in the past month have not indicated an intention to test the concept for their company. Rather, they tend to point to the dot-coms' recent misery as justification for doing things the same old way. This may be foolish because it is important to separate the good from the bad when analyzing the actions of the dot-coms. I feel strongly that free or reduced shipping and handling was one of the good ones.