Four Strategies Retailers Can Use to Weather Higher Shipping Costs
Recently, FedEx and UPS announced new rate hikes for 2019. These increases in shipping costs, averaging 4.9%, have sparked some anxiety among retailers. They’re another burden on already-thin retail profits, and now threaten one of the most important perks in modern retail: free shipping. (See FedEx's full rate guide here; UPS' here.) In my conversations with some of the world’s largest retailers at recent industry events, I found many are scrambling to find ways to weather the new costs.
There’s no reason to fear disappointing customers by taking away free shipping. There are a number of strategies that can be used to absorb the higher costs and continue delivering a top-notch customer experience -- free shipping still included.
Let’s look at some of them:
1. Reassess Free Shipping Policies
Rather than eliminating their free shipping offers altogether, retailers can simply reassess them. Now that shipping rates have increased, their current strategy may not be the most efficient available. Some alternate strategies to consider include:
• Members-only free shipping and returns: Numerous retailers, like Amazon, Bed, Bath & Beyond, and Walmart, leverage this strategy. The free shipping and returns are offset -- in part or whole -- by a recurring membership fee. The fees vary by retailer, from Bed, Bath & Beyond’s $29 per year, to Amazon’s $119 per year. The retailer essentially assumes all costs of shipping and returns, paid for with membership fees. As shipping rates continue to rise, membership fees can be adjusted to match.
• Free-shipping thresholds: One of the most common strategies involves retailers setting a minimum order amount to earn free shipping. Some retailers go a step further and include return shipping when this threshold is met. Despite its popularity, this practice has a major loophole that consumers can exploit -- more on that later in the article.
• Free shipping, paid returns: Other retailers, such as Victoria’s Secret or VENUS.com, will ship products out for free, but charge the consumer shipping or “restocking” fees on any returns. This approach benefits both the retailer and the consumer -- consumers still get their free shipping, and the prospect of paying for return shipping can dissuade consumers from making returns at all.
• Buy Online, Return in Store (BORIS): This approach is an option at most major retailers. As the name suggests, customers who bought products online can return them at a physical store. The benefits of this approach are twofold for the retailer -- they avoid return shipping altogether, and get the customer through the doors. This presents a great opportunity to upsell or encourage the consumer to exchange their product for something new. Some retailers incentivize this approach by offering BORIS customers additional discounts.
• Third-party returns management: This new and increasingly popular option involves hiring a third-party management company to handle returns. Consumers can return products by presenting the item and its receipt at one of the third-party’s drop-off locations. After processing the return and refunding the customer, a third-party associate will either deliver the product to the retailer’s nearest store, or ship it back to the retailer and charge for shipping. This approach is an especially good fit for e-commerce retailers with no physical stores; however, a number of omnichannel retailers -- including Walgreens, Lowe’s Home Improvement, and The Home Depot -- also make use of this approach.
By consulting their operations and supply chain data and putting it through an advanced data-analytics system, retailers can determine what strategy makes the most financial and logistical sense for their situation.
2. Fine-Tune Sourcing and Fulfillment Activities
When a customer places an online order, the order is traditionally fulfilled by a distribution center (DC). Many retailers are realizing that this isn’t an efficient model. Retailers typically only have a few DCs at most, and shipping from them to consumers can be expensive. With higher shipping costs impacting profits, many retailers are moving to fulfill orders at stores closer to the consumer, versus at a centralized DC.
Of course, this isn’t as simple as giving stores some shipping materials and letting them take it from there. Retailers need to make smart investments in training and technology to prepare sales associates for DC-type tasks. Technology devices are always a good solution, as they simplify complex DC workflows and operations for those unfamiliar with them. At least one major retail-tech vendor is launching a new in-store device that gives store employees all the capabilities they need for slot, pick, drop, pack, and ship activities. When the order comes in for a local recipient, the store employee uses the device to find the product, process it as a fulfillment item, and submit it for packing and shipping. It’s as simple as that, and it offers significant savings over shipping from a centralized DC.
3. Optimize Allocation with Geodemand
The store-fulfillment model mentioned above calls for seamless allocation activities to support it. Many traditional allocation systems can get confused by orders that are placed in one location, but are shipped to another. Typically, they will attribute the demand to the buyer’s location, and allocate more product there accordingly. More advanced analytics systems, like prescriptive analytics, identify that the demand originates not with the buyer, but with the recipient, or whoever will consume the product. This is called geodemand. Without using it to guide allocation, retailers can experience inaccurate forecasts, supply gaps, and other issues that affect store fulfillment. Needless to say, allocating product to the wrong locations causes major losses that are amplified by higher shipping costs.
4. Implement Cost-to-Serve Returns Model
From an e-commerce standpoint, returns can be just as taxing on a retailer as shipping, if not more so. Happy Returns reported that shoppers return 15% to 40% of what they buy online, all of which needs to be covered by a return policy. That's a significant hit on profit margins, especially for retailers who cover shipping both ways.
Many retailers try to stem their losses by setting minimum spend amounts to earn free return shipping, but as referenced above, there is a loophole. Say a customer goes to a retailer’s website to buy a $30 purse, only to realize she needs to spend $100 dollars to earn free shipping. So, she buys a pair of $80 shoes with the intention of returning them later, just to get her purse shipped free. This can cost a retailer significant shipping fees.
Retailers can correct this by categorizing their customers with a cost to serve model. It essentially ranks them based on their profitability, enabling the retailer to provide shipping offers that reflect each customer’s behavior. The purse-buyer would not be a profitable customer on the cost to serve model, and would thus receive a shipping offer to offset her anticipated costs. Examples could include a higher minimum-spend amount, a free-shipping membership so she only has to buy what she needs, etc. The right prescriptive analytics solution will analyze marketing data and extract information on customer spending patterns and behaviors, which can be used to create a cost to serve model.
Shipping price hikes aren’t going away, and based on the precedent set thus far in the retail industry, these recent ones won’t be the last. It is critical for retailers to invest in advanc
There’s no reason to fear disappointing customers by taking away free shipping. There are a number of strategies that can be used to absorb the higher costs and continue delivering a top-notch customer experience -- free shipping still included.
Let’s look at some of them:
1. Reassess Free Shipping Policies
Rather than eliminating their free shipping offers altogether, retailers can simply reassess them. Now that shipping rates have increased, their current strategy may not be the most efficient available. Some alternate strategies to consider include:
• Members-only free shipping and returns: Numerous retailers, like Amazon, Bed, Bath & Beyond, and Walmart, leverage this strategy. The free shipping and returns are offset -- in part or whole -- by a recurring membership fee. The fees vary by retailer, from Bed, Bath & Beyond’s $29 per year, to Amazon’s $119 per year. The retailer essentially assumes all costs of shipping and returns, paid for with membership fees. As shipping rates continue to rise, membership fees can be adjusted to match.
• Free-shipping thresholds: One of the most common strategies involves retailers setting a minimum order amount to earn free shipping. Some retailers go a step further and include return shipping when this threshold is met. Despite its popularity, this practice has a major loophole that consumers can exploit -- more on that later in the article.
• Free shipping, paid returns: Other retailers, such as Victoria’s Secret or VENUS.com, will ship products out for free, but charge the consumer shipping or “restocking” fees on any returns. This approach benefits both the retailer and the consumer -- consumers still get their free shipping, and the prospect of paying for return shipping can dissuade consumers from making returns at all.
• Buy Online, Return in Store (BORIS): This approach is an option at most major retailers. As the name suggests, customers who bought products online can return them at a physical store. The benefits of this approach are twofold for the retailer -- they avoid return shipping altogether, and get the customer through the doors. This presents a great opportunity to upsell or encourage the consumer to exchange their product for something new. Some retailers incentivize this approach by offering BORIS customers additional discounts.
• Third-party returns management: This new and increasingly popular option involves hiring a third-party management company to handle returns. Consumers can return products by presenting the item and its receipt at one of the third-party’s drop-off locations. After processing the return and refunding the customer, a third-party associate will either deliver the product to the retailer’s nearest store, or ship it back to the retailer and charge for shipping. This approach is an especially good fit for e-commerce retailers with no physical stores; however, a number of omnichannel retailers -- including Walgreens, Lowe’s Home Improvement, and The Home Depot -- also make use of this approach.
By consulting their operations and supply chain data and putting it through an advanced data-analytics system, retailers can determine what strategy makes the most financial and logistical sense for their situation.
2. Fine-Tune Sourcing and Fulfillment Activities
When a customer places an online order, the order is traditionally fulfilled by a distribution center (DC). Many retailers are realizing that this isn’t an efficient model. Retailers typically only have a few DCs at most, and shipping from them to consumers can be expensive. With higher shipping costs impacting profits, many retailers are moving to fulfill orders at stores closer to the consumer, versus at a centralized DC.
Of course, this isn’t as simple as giving stores some shipping materials and letting them take it from there. Retailers need to make smart investments in training and technology to prepare sales associates for DC-type tasks. Technology devices are always a good solution, as they simplify complex DC workflows and operations for those unfamiliar with them. At least one major retail-tech vendor is launching a new in-store device that gives store employees all the capabilities they need for slot, pick, drop, pack, and ship activities. When the order comes in for a local recipient, the store employee uses the device to find the product, process it as a fulfillment item, and submit it for packing and shipping. It’s as simple as that, and it offers significant savings over shipping from a centralized DC.
3. Optimize Allocation with Geodemand
The store-fulfillment model mentioned above calls for seamless allocation activities to support it. Many traditional allocation systems can get confused by orders that are placed in one location, but are shipped to another. Typically, they will attribute the demand to the buyer’s location, and allocate more product there accordingly. More advanced analytics systems, like prescriptive analytics, identify that the demand originates not with the buyer, but with the recipient, or whoever will consume the product. This is called geodemand. Without using it to guide allocation, retailers can experience inaccurate forecasts, supply gaps, and other issues that affect store fulfillment. Needless to say, allocating product to the wrong locations causes major losses that are amplified by higher shipping costs.
4. Implement Cost-to-Serve Returns Model
From an e-commerce standpoint, returns can be just as taxing on a retailer as shipping, if not more so. Happy Returns reported that shoppers return 15% to 40% of what they buy online, all of which needs to be covered by a return policy. That's a significant hit on profit margins, especially for retailers who cover shipping both ways.
Many retailers try to stem their losses by setting minimum spend amounts to earn free return shipping, but as referenced above, there is a loophole. Say a customer goes to a retailer’s website to buy a $30 purse, only to realize she needs to spend $100 dollars to earn free shipping. So, she buys a pair of $80 shoes with the intention of returning them later, just to get her purse shipped free. This can cost a retailer significant shipping fees.
Retailers can correct this by categorizing their customers with a cost to serve model. It essentially ranks them based on their profitability, enabling the retailer to provide shipping offers that reflect each customer’s behavior. The purse-buyer would not be a profitable customer on the cost to serve model, and would thus receive a shipping offer to offset her anticipated costs. Examples could include a higher minimum-spend amount, a free-shipping membership so she only has to buy what she needs, etc. The right prescriptive analytics solution will analyze marketing data and extract information on customer spending patterns and behaviors, which can be used to create a cost to serve model.
Shipping price hikes aren’t going away, and based on the precedent set thus far in the retail industry, these recent ones won’t be the last. It is critical for retailers to invest in advanc