Pricing and Ecommerce - Some Thoughts

While shopping online this holiday season I came across the issue of additional charges (shipping, handling and taxes) and took to thinking about how e-commerce merchants can best address them. Although these charges stem from the inevitable costs of doing business, it is interesting to see how different merchants deal with them; after all, store retailers also incur a variety of costs that are reflected in the final price to the customer and that are not itemized in the receipt (do you know the COGS of the shirt you bought at Macys?)

Let’s look at some examples of how some online or multi-channel merchants handle these charges:

• Sierra Trading Post sells some deeply discounted brand name merchandise, in fact a lot of their items are sold at over 50% discount and their shipping costs are well in line with other merchants, but even so, when I am placing an order for an item than costs $30 and pay $6 for shipping, my order price has just gone up by 20%, and the deep discount is no longer so alluring. Like any other merchant, Sierra Trading Post has set its shipping rates so that they become a lesser proportion of the total price with increasing order value.

• Land’s End has always delivered products of great, lasting quality at great prices. Their shipping rates were in line with those of similar merchants; however, after being acquired by Sears (now merged with K-Mart) not only did customers have to pay shipping, but they also had to pay their local sales tax (given that Sears has physical presence in most States.) So we went from paying an extra charge comparable to that shown in the graph above, to having to tack on an extra 6%, 7% or 8% (or whatever the local tax rate happens to be).
• Eddie Bauer takes the Land’s End example a step further and piles a $3 “handling charge” on top of shipping charges and local taxes. Note that in States where the sales tax is computed on the base price plus the shipping charge, the amounts increase significantly.

This list is ranked from lesser to higher charges. Certainly the shipping charge is understood as a “premium” for the convenience of shopping online but what I question is the magnitude of this premium.

Although in line with most merchants, Sierra Trading Post dilutes the value of its deep discounting with shipping charges that add significantly to the price. Land’s End lost its value appeal and seems to be competing only on the quality of its products and the strength of the brand, of course a company can only go so far on those two. And Eddie Bauer’s handling charge on top of shipping and taxes is simply baffling. Were it not for its perennial sales and discounting, I can’t see much room for expansion of the online channel.

Perhaps the best approach is that taken by Amazon: eliminate shipping charges for orders above a given threshold. The cost of shipping is taken against the margin of the goods and not passed to the client. The beauty of the approach is that it sets customers up for bigger order values (if I am close to $25 I may just order another book that will qualify me for free shipping) and prompts customers to think that they are getting a great bargain given that they are avoiding sales tax as well as shipping charges. This is sure to lead to more frequent purchases. And even margins will be kept in line if free shipping implies the cheapest (and slowest) shipping mode possible.

The trick is in pouring over the  financial details of the business and determine the appropriate threshold for free shipping.

Comments

[Darren]

very informative post, but unfortunately I dont know the COGS of macys items.

-Darren