Essays on the Effectiveness of Conditional Free Shipping Policies on Customers’ Purchase Behaviors and Retailers’ Profitability

Abstract

With the proliferation of e-commerce, designing a free shipping policy that can balance the need to recover shipping costs and retain customers is a big quandary for retailers. This dissertation investigates the effectiveness of several widely adopted free shipping policies to provide significant managerial implications for retailers.

My first essay mainly focuses on Membership Free Shipping (MFS), a trending free shipping policy requiring customers to pay an upfront membership fee in exchange for unlimited free shipping. It takes a comprehensive analysis of the benefits and costs of MFS on how enrollment in MFS affects customers’ purchase decisions from multiple dimensions, including how much they buy and what they buy. The results show that MFS enrollment surprisingly does not lift consumers’ average spending over the membership period. It might be because the unlimited free shipping benefit encourages order-splitting behavior that members purchase with an increased frequency but a reduced-order size. In addition to the purchasing behaviors, I further analyze whether enrolled customers are profitable by accounting for sales and membership fees and the costs from the free shipping benefits.

My second essay compares the effectiveness of several commonly adopted free shipping policies, including contingent free shipping with different thresholds and MFS. To suggest the optimal shipping option for online retailers, I construct a joint model of customers’ online shopping trips, spending, and membership conversion decisions and conduct several policy simulations to quantify the impact of different shipping policies on the retailer’s profitability.