Retail Marketing Strategy Should Rely More on Personalization, Less on Free Shipping

With the holiday season upon us, and with the specter of economic downturn no longer looming but now in full unfurling, the hue and cry for free shipping to draw customers has never been greater. Almost everyone insists that drastic price cuts and coupon-like free shipping are necessary evils to keep your customers from the competition. But I would urge smaller retailers to resist giving up margin and making deal-seekers of their entire housefile. Instead they should get more personal.

I recently read “Flaunt your free delivery” by Helen Leggatt in BizReport and came away with the notion that ecommerce and retail in general love to race to the bottom. While I can’t argue with Leggatt’s basic premise - if you are going to offer free shipping as a carrot then you should advertise it well - I can argue with the fact that free shipping should not be something that smaller retailers cozy up to. As a desperation move, sure. As a strategy, no way. Let’s go over this from a business standpoint.

Learn from the airlines
What do airlines have to do with retail and free shipping? Well, two things actually. On the one hand, the airline industry is akin to the retail industry in that it has done a poor job keeping price competition at bay. While it’s hard to fault an industry as a whole for this, it does give us a good idea of where a steep ramp on discounting and free shipping will lead the retail industry: into a situation where there are only a few dominant players and with niche retailers becoming ghosts of the past.

Learn from the airlines: Part II
However, that’s not to say that the retail industry shouldn’t mimic the airline industry in one respect: price discrimination. The airline industry learned long ago how to sell the same seats to different customers for different prices. After all, some customers will pay more for certain goods than will other customers. It just depends on how much a customer wants a specific item. The retail industry, now more than ever, should be finding ways to find the items that each customer wants more than others. And then charge them a premium for their desire. At Istobe, we tend to believe that our email application is a way that smaller retailers can reach out to customers who will pay more for their products.

The Problem of Scale
I’ll close with another problem that small retailers will have if free shipping is allowed to proliferate. That is: they don’t enjoy the scale of larger retailers. Leggatt notes that Amazon has recently dropped its minimum order needed to get free shipping by two thirds. Similarly, Linda Bustos’ article on flaunting free shipping, from which Leggatt gets some of her talking points, notes that Zappos really pushes their free shipping. So what do those two have in common? Right. They’re large and can take advantage of economies of scale that smaller companies cannot. I’ll betcha right now that Jeff Bezos is out there licking his lips. This economic downturn is about to strengthen his position in the market, as smaller vendors begin to fall by the wayside. And Bezos and crew are going to make sure to help speed this momentum, offering a ridiculous two-thirds cut in the minimum required for free shipping. If you’re a small retailer, and you play Amazon’s game - which it seems that Leggatt and Bustos are implying - then you’re toast. If anything, it’s time for smaller retailers to double-down on customer service and differentiate on product lines. And, of course, they should use new types of customer analytics so that they know more about their customers than any retail behemoth.

Tags: Economic Downturn, Free Shipping, Personalized Marketing, price discrimination

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This entry was posted on Monday, October 20th, 2008 at 9:24 pm and is filed under Amazon, Customer Analytics, Discounts and Offers, Economic Downturn, Preserving Margins. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.