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Cheap Shipping Doesn't Matter

By Anders Bylund - Updated Apr 5, 2017 at 8:55PM

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Go "FREE" or go home.

Tiny Enable Holdings (OTC BB: ENAB), the parent company of would-be eBay (NASDAQ:EBAY) competitor uBid, hopes to take the discount-merchandise market by storm with its reborn RedTag shopping site. The secret sauce? Cheap shipping!

Good luck with that one, dude.

Sure, charging $1.95 per order sounds like a great deal beside direct competitor Overstock.com's (NASDAQ:OSTK) $2.95. Quoth Enable CEO Jeff Hoffman: "We're willing to take less for shipping because we think you'll buy five more items from us -- as opposed to if we got as much as we could from you, shipping this product, you may never buy again." Overstock CEO Patrick Byrne scoffed at the threat, because his frequent $1 and free-shipping specials actually bring the average shipping cost down to less than $2.

Great, Patrick. But both of you are missing the point. If you're not willing to do free shipping, you might as well stick with passing on the full FedEx (NYSE:FDX) or UPS (NYSE:UPS) bill to the consumer.

Walking the talk
In Predictably Irrational, Duke professor Dan Ariely shows how Amazon.com (NASDAQ:AMZN) figured this out, quite by accident. With free shipping in full swing everywhere else, Amazon charged 1 franc for shipping in France. Amazon's French market lagged mysteriously behind the rest of the world in sales growth -- until the company dropped that petty charge of about $0.20 per order. Moving from "really cheap" to "FREE!" made the French join in Amazon's worldwide growth rates.

And there's plenty of evidence for the awesome power of "free" in that book. Here's a free $10 gift certificate, and here's a $20 certificate that would cost you $7. Nearly everyone would choose the free $10 certificate, even if the other option is a 30% better deal. In Dr. Ariely's experiments at local shopping malls, everyone swung that way.

Change the equation ever so slightly, and you can choose between a $10 gift coupon that will cost you $1, or a $20 option that sets you back $8 up front. Suddenly, people get all rational about this choice and pick the $12 net about 64% of the time. Change the purchase prices to $5 and $12, respectively, and 71% will go for the big-ticket item that makes them $8 richer rather than $5. These experiments were repeated to account for the hassle of hauling the wallet out of your pocket, but FREE! gift certificates were still special.

Foolish takeaway
So again, good luck with that "cheap shipping" strategy, RedTag. I think you would have been much better off slapping a massive "FREE SHIPPING!" banner on your front page from day one. Assuming that you actually make a gross profit on each item you sell, however small, you could make a very nice living off the massive sales increases I'd expect. Short-term shipping promotions are all good, but they don't have the same mass-psychology effect that a straightforward "we ship your stuff for free" policy would.

Next time you see some company ascribing great expectations to its latest sales and marketing campaign, check to see whether there's anything "FREE!" about it. Retailers like Overstock could go with free shipping, while service companies such as AT&T (NYSE:T) might give you a free phone in exchange for a fatter contract. These things work. Merely cheap shipping and low-cost phones don't appear to be worth the trouble.

Further Foolishness:

United Parcel Service is a Motley Fool Income Investor recommendation. FedEx, eBay, and Amazon.com are Motley Fool Stock Advisor recommendations. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Anders Bylund holds no position in any of the companies discussed here. You can check out Anders' holdings if you like, and Foolish disclosure would take the better total deal every time. Well, in theory.

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Stocks Mentioned

Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$139.41 (-0.99%) $-1.39
AT&T Inc. Stock Quote
AT&T Inc.
T
$18.00 (-1.91%) $0.35
eBay Inc. Stock Quote
eBay Inc.
EBAY
$47.61 (0.70%) $0.33
United Parcel Service, Inc. Stock Quote
United Parcel Service, Inc.
UPS
$196.09 (-0.34%) $0.67
FedEx Corporation Stock Quote
FedEx Corporation
FDX
$229.02 (-2.50%) $-5.87
Overstock.com, Inc. Stock Quote
Overstock.com, Inc.
OSTK
$31.92 (10.30%) $2.98

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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