The statistics in this fictional case study are not data-driven but illustrative. Betty Buyer is an amalgamation of our shared clients and an alliteration that makes it fun to read.
The Problem
Betty Buyer is shopping on her favorite marketplace looking for furniture under a thousand dollars and is considering a beautiful green velvet couch, retail price $675. Using Arta’s embedded Estimates widget, she finds out the shipping costs are $375. At more than 50% of the value of the object, Betty feels the couch is no longer within budget. Most e-commerce companies she shops at offer free shipping, and although it is a couch and not a book or cosmetics, she cannot believe it costs that much. She closes the marketplace website and starts Googling local furniture retailers that offer free delivery in her hometown.
The marketplace has data from Arta that Betty requested a quote and saw that the rate returned was half the price of the couch itself. They see that the couch remains unsold and assume they have lost the sale. The marketplace understands that the couch is a non-conveyable product and to arrive safely requires blanket wrap trucking or crating. They know a couch takes up a lot of floor space during transportation and requires trained handlers who can maneuver the couch without damage—to the couch or the destination location. And that’s why there’s a cost associated with shipping the couch. Despite all this context the marketplace has, the potential buyer ultimately has grown to expect lower, or even no, shipping costs, and the shipping costs were a deterrent and lost them the sale.
The Choice
The marketplace looks around at competitors and sees ‘Free Shipping’ or ‘Flat Rate Delivery’ and wonders, how can I offer that to my buyers?
Those companies, in most cases, have made the decision to subsidize shipping.
The marketplace considers their options:
- If the marketplace had offered Free Shipping, Betty would have absolutely proceeded with the purchase of the couch. However, this would cost the business $375.
- If the marketplace offers Flat Rate Shipping for $250, and the invoice total is $925, Betty is still within her $1000 budget and is likely to proceed with payment. The cost to the business would be $175.
- If the marketplace adds roughly a 25% margin to their couch price, making it $850, and offers flat rate shipping at $250, Betty would see the couch is under her $1000 budget and would feel the shipping costs are considerably more palatable (at about 30% of the purchase price). This would cost the business nothing.
- But they know this option requires inflating the cost of their goods, which they know is an overall deterrent. When surveyed last year, 25% fewer buyers would purchase furniture from them if the prices were 20% higher.
The marketplace then considers if they recognize a certain percentage of shipping costs as customer acquisition costs, they might see more transactions.
If the marketplace subsidized $135, they would see 25% more buyers. If 100 shoppers had saved the couch in their carts and with the new Flat Rate Shipping, they sold 25 more couches, the cost to the business would be $3,375, but the revenue would be $16,875.
The marketplace decides to subsidize $125. They see a 23% rise in transactions. These buyers are advocates commenting on social media: “Cost-effective shipping for this gorgeous couch!! Can’t beat that.”
The Impact
Betty gets an ad from the marketplace saying they now offer Flat Rate Shipping. She is still dreaming of the velvet couch and wonders if it is now within her budget. At checkout, Betty sees the all-in costs are $925, which is under her thousand-dollar budget. She is thrilled and proceeds to buy the couch.
The marketplace gets notified by Arta of a new booking. They click to the shipment page within their Arta Dashboard and can see the total for Betty’s shipment, which is predictably 18.5% more.
This is an exciting sale for the seller, an up-and-coming furniture designer, and it gets the marketplace one step closer to their sales goals. The $125 cost they incurred to subsidize shipping paid its dividends and more.
Betty loves her couch so much, and decided she needs the matching side table. There’s only one place she’ll consider to shop—Betty heads back to the marketplace with their consistent and fair Flat Rate Shipping.
How could a shipping subsidy impact your conversion?
