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June 5, 2018

Why FREE shipping sounds like magic to our ears

Alex DePaoli
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This is a guest post by Alexander DePaoli, Visiting Assistant Professor of Marketing, Northeastern University

Have you ever put something in your cart on Amazon and seen that little message saying, “Add $X to your order to qualify for FREE shipping?” How did that affect your behavior? From my own experience, I’ve looked at my Amazon cart, filled with only a single paperback, and thought, “ok, what else do I need?” This soon became, “ok, what else do I want?”

“Free shipping” is one of the more popular (and profitable) promotional tactics for online retailers, with price thresholds varying from $25 on the low end (e.g. Best Buy), to $50 on the higher end (e.g. Wal-Mart and Target), and up to $100 or more for some limited offers or high end brands. We’re so accustomed to these kinds of deals that it was big news when Amazon decided to increase their free shipping threshold from $25 to $35 in 2013. In this post, I will discuss a couple of the behavioral economic underpinnings of when and why free shipping can motivate consumers, and based on these ideas, suggest a way to increase the effectiveness of promotions like it.

Two Types of Consumers

Retailers like Amazon are implicitly sorting their customers into two types: High Spenders who already plan to spend over $35, and Low Spenders who had not planned to spend that much. For High Spenders it’s simple: they’re already planning to spend $35, so they prefer the website that saves money on shipping! People hate paying “extra” but love deals, so having a permanent free shipping program like “Prime” can build customer loyalty. The real action, however, is what’s happening in the heads of the Low Spenders.

When a Low Spender sees the line “FREE shipping on orders over $35″ next to the price of a product, it entices them to spend more. The lure of free shipping starts with the magical word “free.” Dan Ariely, of Predictably Irrational fame, has studied the powerful allure of “free,” and in a 2007 paper found that people don’t treat a zero price like they treat prices in general. When people see something free, two things happen:

  1. They forego the mental cost-benefit analyses usually associated with making a purchase.
  2. They actually perceive the benefits of a free product as higher than they really are. In other words, people overestimate the positive qualities of a free product, and this is true even when the freebie is the shipping.

While High Spenders see free shipping as more of a valuable convenience, to Low Spenders that all-caps promise of FREE provides a compelling incentive to get their cart up to the target price. In other words, Low Spenders do not view free shipping as a perk, but rather as a goal to be attained.

If we start thinking about the free shipping threshold as a goal, the next step would be to identify ways to increase the likelihood the goal will be achieved.

Goal Velocity

There are two main concerns about free shipping as a goal.

  1. If customers come to your website to buy only one cheap thing, then shelling out the extra money to get to a free shipping threshold may seem too costly or too “psychologically distant” in their minds.
  2. If customers’ carts are already very close to the threshold, they may resist buying anything that puts them too far over (i.e. they impose a price ceiling on themselves).

If the path to free shipping can be presented in a way that minimizes these two concerns, it will be more successful.

One novel solution comes from the idea of “goal velocity.” This is based on a recent stream of research by Szu-Chi Huang and Ying Zhang, who identify differences in how people are motivated when they are far away versus near to a goal:

  • When people are far away from achieving a goal, their main concern is whether they can make it all the way. Thus, when the goal is far away, people are more motivated to reach it if they believe they are already making a lot of progress.
  • When people get close to achieving a goal and become confident that they can reach it, their concern shifts toward getting there as quickly and smoothly as possible. Because their focus is now on completing the goal as soon as possible, people will actually be more motivated (and will try harder) to reach that goal if they feel like it is further away.

To illustrate this, Huang and Zhang (2011) offer a compelling example relevant to the free shipping discussion. They partnered with a coffee shop to offer a new kind of loyalty card to customers. The offer was to buy 8 cups of coffee and get 1 free, but the punch cards all called for 24 points before they could be redeemed. For half of the cards given out, these points were split up as they would be on a normal loyalty card: each purchase was 3 points. For the other half of the cards, the first 4 purchases were worth 5 points, and the last 4 purchases were worth only 1 point (the authors refer to this as “varying the velocity” of progression towards the goal). At the end of the study, only about 24% of customers who received one of the more traditional cards redeemed it for a cup of coffee, while 40% of the “variable velocity” cards were redeemed!

Using this idea for free shipping requires helping customers to visualize their progress towards the $35 mark (or $50 or $100) in a way that feels like their dollars go further in the beginning and slower at the end (in economic terms, they need to perceive decreasing marginal progress).

A Holiday Example

In honor of the holiday shopping season, here’s an idea of how this might be done. Suppose that your website has identified a Low Spender customer, and you want to encourage them to buy enough to reach the free shipping threshold. Give them a little gauge that shows their progress towards the goal, and design it to exaggerate their progress at the beginning and downplay it at the end. One approach is to use a triangle gauge that “fills” from the base: because of the shape, it will appear to fill more quickly at the bottom and more slowly at the top. In other words, the first 5 dollars will fill in a much larger area of the triangle than the final 5 dollars, so customers will visually see their progress as faster (or more impactful) in the beginning, and slower towards the end. Since it’s the holiday season, you might choose to make your triangle look like a Christmas tree that fills with color from the bottom and reaches “FREE shipping” at the top. Below is a rough prototype of what something like this might look like.

The actual use of a Christmas tree is not important (it’s just a festive camouflage). The important detail is that moving from 0% to 10% or from 25% to 50% fills in more of the triangle and looks more impactful than moving from 50% to 75% or from 75% to 100%. By leveraging the psychology of goal velocity in this way, you can help motivate your Low Spenders to reach that free shipping price.

Takeaways

  1. Be mindful of how your promotions will naturally split your customers into different types.
  2. People (and their brains) love the word FREE even more than you might expect. The more you can claim something is a freebie, the more motivated your customers will be to get it.
  3. If you want your customers to reach a price quota or threshold for you, make them feel like they are closer than they really are (or are getting there faster) in the beginning, but don’t be afraid to make them work for it a little at the end.

So if you’re thinking about offering free shipping, you just might get your customers paying more than either of you would have expected if you put FREE in the front of their minds and play with their perceptions of goal velocity.

This is a second post from the 'Psychology behind promotions' series. You can read the previous post here.

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promotional psychology
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customer loyalty
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marketing
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