Last week Target declared free shipping on all items on its website. Yesterday, Accenture’s Holiday Survey revealed that free shipping is the main purchasing propellant online. Today Postmaster General Patrick Donahoe introduces a Rudolph the Red-Nosed Reindeer stamp at the National Postal Museum and releases projections for holiday package delivery. That choice of stamp subject is something of a taunt to online retailers, for whom a flying ruminant that runs on hay and delivers packages to the entire world in a single evening must be the ultimate holiday fantasy.
Just as there is no free lunch for humankind, there is no free shipping for retailers. We learned this by talking to a man who makes his living charging people for free shipping—Tom Caporaso, CEO of FreeShipping.com. Because, really consumers, if free shipping truly did exist, why have millions of people over the past 14 years been paying Tom $12.97 a month to get it? Ever thought of that? Well, we did, so we went to Tom to ask him what the deal was.
“Free shipping isn’t free,” Caporaso told us. “Somebody is funding it.”
In the case of FreeShipping.com, members fund it to some degree, of course, but 13 bucks a month doesn’t cover all the monthly shipping costs of avid shoppers. Plus, they get rebated 10% cash back on every purchase they make. No, FreeShipping stays in business by providing value to its members and customers to its retail partners. Here’s how it works:
More than 300 retailers including Walmart, Lowe’s, Best Buy, Macy’s, Sears, and QVC introduce their customers to FreeShipping.com on their websites. People who sign up in turn receive special offers from those retailers when they go to FreeShipping’s deal center to find the best prices. When members complete sales with those retailers, FreeShipping gets a commission.
With free shipping, there’s always an angle, especially since shipping prices are on the rise. “We know that free shipping is the number one promotion online. People will put more into their cart to get free shipping,” Caporaso says. Retailers, therefore, use it to drive up average cart values or, during the holidays, to capture as much of a customer’s gift budget as early in the season as they can. “Last year the threshold for free shipping was [a purchase of] $76. This year it’s up to $82.”
On its face, then, Target’s offer of free shipping on all purchases could only lose the company money, right? Yes, but it could buy the chain new customers. It’s Target’s way of low-balling competitors and gobbling up territory the way Amazon does. “For Target, it’s an investment in customer acquisition and retention,” Caporaso says. “It’s a way to gain scale and market share.”
Like Rudolph, retailers for the most part join in their free shipping games only at year’s end. But consumers like free shipping year-round. “People are joining and using FreeShipping.com at high rates,” Caporaso says. “We believe in the prepaid shipping model as a year-long strategy.”
