Should Retailers Follow Zalando’s Example of Discontinuing Free Shipping?

By Paazl
May 20, 2019

It might be the age of the customer, but some retailers are eliminating free shipping in order to meet profit margins. Recently, Zalando had announced that it would introduce shipping charges for all types of orders. Countries like the UK, Italy, Spain and Ireland have already been affected by this recent policy. In this blog post, we’ll investigate through different sources of data on what happens to brands and retailers when they eliminate free shipping overall.

The reason why these new shipping costs were pushed is because of recent shrinking order size and increasing returns. However, Zalando’s new shipping policy hasn’t affected countries like Germany, Austria and Switzerland, but it is not certain if that will change for the rest of the year.

What happens when you offer free shipping to your customers?

When we looked at CBInsights data based on US research, we saw that free, same-day delivery generally increases order volume.

The study also shows that same day delivery (SDD) increases conversion rates, or in other words, sales revenue. In the graph, green colored conversion rates went up as high as 50% when the $8 shipping fee (purple line) dropped to zero shipping fees.

The Effects of Free, Same-Day Delivery

Offering free SDD delivery also decreases cart abandonment rate. Because consumers are willing to spend more money on free shipping in return, the chances of them leaving their shopping cart are decreased. According to CB Insights, a 3-5 day window might discourage a customer not to buy. Instead, they might turn to Amazon Prime or any other same-day delivery option.

On the contrary, consumers might buy more items to test and pick out the right items just to return them later. DynamicAction’s Retail Index reported that there was an 8 percent increase in returns in Europe.

Zalando’s profit margins Q1 2019 grew despite new shipping costs charged to customers

In the first quarter of 2019, the company continued to capture market share growing Gross Merchandise Volume (GMV) by 23.1% to EUR 1.8 billion. Zalando’s revenues increased by 15.2% to EUR 1.4 billion according to their recent press release. Additionally, Zalando’s growth attributes from their new Partner Program which has brought on board new brands like Calzedonia, Intimissimi and Margarete Steiff.

Irrespective of the new shipping costs charged on customers, Zalando might lose a portion of their long-term, online customer base which could affect the lifetime customer value (LCV). We’ll investigate in the next few months the outcomes further whether it is more beneficial to deliver free shipping or start charging.

Ultimately, retailers must find the balance between pleasing the customer with free delivery and the impact of fulfilling their bottom lines. Looking at the long-term customer value, the biggest question of all is, “Is it worth the risk of losing loyal customers or making a profit immediately by charging them shipping costs?”

What is your opinion?

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