The Evil Domino Effect of Raising Shipping Prices

Have you heard of the ‘domino effect’? According to Wikipedia, “A domino effect or chain reaction is the cumulative effect produced when one event sets off a chain of similar events. The term is best known as a mechanical effect, and is used as an analogy to a falling row of dominoes. It typically refers to a linked sequence of events where the time between successive events is relatively small.”

This article examines the domino effect of small changes in your ecommerce strategy — specifically raising your shipping costs — and how these can impact your overall sales number.

The fundamental ecommerce equation

Ecommerce is fundamentally just a sales channel. Here at Export Technologies, we follow the basic ecommerce equation:

This formula provides a context for any ecommerce tactics that are used to increase sales.

The same equation holds true for a retail shop as for an online store. The only things that will show up in the sales figure are actions that increase one of the three elements of this equation.

Do shipping costs affect only conversion rates?

Not long ago, if you increased or decreased shipping costs it would mainly impact your Conversion Rate — shoppers would land on your website, discover your shipping prices and potentially move elsewhere. However this is no longer the case.

Today your business is connected to many parts of the digital world, including comparison shopping channels such as Google Shopping, Bing Shopping and many other marketplaces (Amazon, eBay, Affiliate Channels and more).

These ‘comparative’ traffic sources will increase or decrease the ranking of the products that you sell depending on the competitiveness of your prices.

A further potential consequence of increasing your shipping costs is that you could have fewer people to whom you can remarket and thus fewer people will come back to your website.

How can increases in shipping costs affect the ecommerce formula?

When you increase your shipping costs, the three variables in the ecommerce formula can be affected as follows:

• Traffic: When you increase shipping costs your products become less competitive in Google Shopping, Bing Shopping, comparison engines and Affiliate Marketing. These channels will pump less traffic to your site or will give preference to other sellers who have more competitive prices. In addition, one of the consequences of generating less traffic is that you will have fewer people to whom you can remarket, so you can expect less traffic from Social Media, Email Marketing and PPC Advertising.
  Example: A small increase of £1 in shipping costs can move some of your products off the first page of comparison engines. The cheaper your products, the greater are the chances that they will lose their position because, marginally, the impact of a £1 rise will be bigger.
• Conversion Rate: The impact of shipping tends to be more severe for sites with smaller Average Order Values as it affects the Conversion Rate.
  Example: If the shipping cost rises from £4 to £5 on a website with an Average Order Value of about £15, it will be more difficult to convert visitors as the shipping cost accounts for 25% of the total purchase price.
• Average Order Value: Some people will sacrifice a product or two that they have placed in their basket, or will even drop their basket if, when they go to the basket page, the total purchase price (including shipping costs) differs too much from the initial price that they saw when shopping.

What should you do when you need to increase your shipping costs?

Try to work the maths — sacrificing margins if possible for a while — in such a way that you are the last one of your competitors to implement shipping increments and the first one to apply shipping discounts (when shipping costs go down).

When an increase in shipping pricing is needed, keep your eye on trends in other countries; you can possibly compensate for the decrease in traffic by attracting new traffic from other countries.

Free shipping thresholds are an important means of increasing your Average Order Value — make sure that you create a reachable ‘free shipping threshold’. Do this for your top countries and advertise the free shipping as much as you can on your site.

Case Study

Fig.1 Client X Sales, Jan-May 2017

Client X (Sports & Recreation market) experienced a constant growth in sales of 40% in January, February and March.

At the end of March, Client X increased their shipping costs by £1. As a result, sales declined from the previous 40% growth rate to a state of non-growth (see Month 4 (April) in Fig. 1 above).

If we compare the data year-to-year, we can see that Client X was still better off than they were in the same period of the previous year — but they were no longer enjoying the growth trend that they had experienced in the months before the increase in shipping costs.

As a result of increasing shipping costs by £1 at the end of March, Client X’s Traffic, Conversion Rate and Average Order Value suffered a decrease, thus negatively impacting their sales. We’ll look at each of these variables in turn.

1. Traffic

After raising shipping costs by £1, Client X experienced a decline in traffic coming from PPC and Display Advertising (see Fig. 2 below). As a consequence, fewer cookies were distributed for remarketing strategies that would occur on social media and PPC.

Fig.2 Client X Site Traffic Following Change in Shipping Costs

2. Conversion Rate

Client X’s Conversion Rate decreased by about 12% following the change in shipping costs (see Fig. 3 below). The number of transactions fell by 28% and revenue decreased by about 29%.

Fig.3 Client X Conversion Rate Following Change in Shipping Costs

3. Average Order Value

The top countries in terms of sessions and revenue were negatively affected by the change in shipping costs (see Fig. 4 below). The lower amount of traffic combined with the lower Average Order Value heavily impacted the company’s revenue.

Fig.4 Client X Average Order Value Following Change in Shipping Costs

Conclusion

As soon as the issue was discovered, Client X reviewed their shipping costs and implemented achievable thresholds. As a result, sales increased from the state of non-growth back to the 40% growth trend that the company experienced previously (see Month 5 (May) in Fig. 1 above).

This case study clearly shows that all parts of your ecommerce business can impact sales but, more than that, it demonstrates that, today, shipping costs can affect your overall strategy.

The important thing to note is that, when you inevitably have to increase shipping costs, you need to keep a close eye on any subsequent variation in statistics, especially: Traffic coming from comparison engines, Conversion Rate and Average Order Value.