Sunday, October 28, 2007

Get it to your doorstep for free

As holiday season is getting closer and closer, and consumers are shifting more and more to buying online, a host of retailers are offering free shipping. A recent report by CNBC interviewing Shop.org president, Scott Silverman talks about how nearly 50% of the US population will make online purchases this holiday season. An interesting part is that free shipping is become very common. A random check on the websites of top retailers (Macy's, Targer, Neiman Marcus, JC Penny's) shows free shipping offers of some kind. In most cases they are conditional upon the total purchase. The shipping option is however restricted to only standard shipping. Any kind of expedited shipping will be charged. Also if the boxes are to be shipped to multiple addresses, only the delivery to one shipping address is for free. In some cases, the option of free shipping is available only if you choose to put the items in minimum possible boxes which is very intuitive since most parcel carriers charge by the box, unless you exceed their 100 wt requirements. So it seems like free shipping is no longer a promotion, its become a cost for doing business. This entails, the retailers to rethink their contracts with standard parcel carriers. Another aspect of free shipping is service level - how soon is the customer going to receive the package. Standard UPS Ground shipping can take anywhere between 5 - 7 business days. So is the customer going to buy something that he needs to gift and choose a free shipping option? One way to support a high service level and still provide free shipping is by doing what is referred to in the small package industry as zone-skipping. The idea is to identify regional parcel hubs and sort your packages by those hubs and line haul (fill a truck) it to the regional hub. Basically, you are avoiding your packages going through multiple sortation points in your parcel carrier's network. At the same time this strategy can help the retailers negotiate better rates as they are effectively doing a lot of the sortation work that the parcel carrier would have to do. Of course with more retailer joining the free shipping bandwagon, the rate negotiation advantage might tilt towards the parcel carriers.

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