Discounted Price or Free Shipping: Which Sells More?

Last updated: Ecommerce 6 min read
The cart abandonment rates are in and bad news: they’re terrible. The average cart abandonment rate for 2016, including and excluding Black Friday/Cyber Monday, averages to more than 75%. More than three-quarters of your potential customers start a cart and abandon it before completing the sale. Perhaps this isn’t the worst news or incredibly surprising: the rates have been rising through the high 60s to low 70s for years, with some sources reporting outlying spikes of 80% at certain points. While these statistics don’t directly apply to every ecommerce store, it does mean that on average ecommerce stores could be doing three or four times as much business as they are doing already. Unless your abandonment rate is much higher than the average (say 85-90%) it isn’t really an indicator of your site’s funnel and conversion strategy. The real question is: what converts your potential customers into real, paying customers – what’s driving your customers past abandoning their cart and getting them to make a purchase? Regardless of whether you sell fashion accessories, kerosene, software downloads, or quotes on lumber; beyond your general marketing, the look and experience of your website, and your ecommerce platform, price discounts or free shipping drive your ability to compete in the marketplace. There’s been a lot of talk about the benefits and merits of discounted price versus free shipping. Many sources will try to tell you that the hard and fast rule between the two is that free shipping will always sell more product. While in a certain sense that can be true, this would be the marketing equivalent of saying that everyone looks great in a fez – while it might be true for some people, even many, it’s certainly not true for everyone.

Dollar Discount Vs Percentage Discount: Should You Discount Either?

Before we jump into whether free shipping really is a better incentive than discounts, what do we mean by discounted price? While there are several ways to discount the list price for an item on your website, the two most popular discount incentives tend to be a dollar discount and a percentage discount. This is the difference between offering a $20 item with either a $2 discount or a 10% discount – these end up being the same discount, though one is a dollar amount and the other a percentage. The difference in sales between a dollar discount and a percentage discount create polarizing opinions. Many say that a dollar discount is the worst incentive out there because the face value is limiting, i.e., the customer believes that because the deal will never exceed the face value of $2 that it will never be the better deal. Other sources have shown that given the choice between a dollar discount or a percentage: for example, $50 off versus 15% off, customers will choose the $50 because they perceive it to be a better deal. For purchases under $400, the customers choosing the $50 off over the 15% are making a smart choice; however, sources have shown that customers will choose the $50 off over the 15% even when the 15% is actually cheaper. This is the sometimes-paradoxical perceived value at work – $50 off just seems like a better deal to the consumer. So what’s the takeaway on dollar discounts versus percentage off? It depends on the perceived value of the item for the customer, a metric of performance that is becoming more and more prominent in the ecommerce marketplace.

The Perceived Value Problem

Perceived value is defined as the worth of a product in the mind of the customer – and it is a worth that may or may not be grounded in reality. It has nothing do with labor, the cost of materials, or distribution, but is made up of several factors, such as what the customer thinks it should be worth and how much it will cost them, monetarily or otherwise. The equation goes like this: Total Customer Perceived Value = Customer Perceived Benefits – Customer Perceived Sacrifices. We should take Customer Perceived Benefits here to refer to quantifiable and unquantifiable benefits, such as utility, service value, and social value. Take the example of YETI Mugs: the Customer Perceived Benefits would be a good quality travel mug that helps save money by taking drinks instead of buying them, doesn’t create waste with coffee cups or water bottles, and makes them look cool because YETI is a popular brand. The Customer Perceived Sacrifices are similarly quantifiable/unquantifiable. Again, with the example of the YETI: the mugs cost a lot for just a travel mug when a cheaper one might do just as well, if you lose the YETI you’re out a large chunk of change, and if you buy one, does that make you look like a follower? Ideally, the Benefits outweigh the Sacrifices, and become a positive Total Customer Perceived Value and ultimately a purchase. In a 2015 study done on Chinese ecommerce fashion brands, the most successful lines and companies are the ones that have shifted the functional goals of their products from meeting “functional needs” to meeting “psychological needs.” Essentially, these brands have been able to capitalize not only on the perceived utility and worth of their garments, but they have been able to increase the perceived social value while lessening the perceived sacrifice.

Remember to Hit Your Target Demographic

We’ve seen that whatever kind of discount is offered succeeds based on the perceived value of the discount, but how does discounted price measure up against free shipping? The answer here is frustrating: it depends. Demographics, location, and even time of year can have massive effects on whether or not a customer makes a purchase. There is no “one-size-fits-all” or even “most” when it comes to marketing most products, and the studies show that that includes incentives. A demographic breakdown of the statistics show interesting data: people aged 46 and older prefer free shipping while people under 35 prefer percentage discounts. In fact, offering free shipping is more likely to convert Baby Boomers and women, as both groups have listed shipping costs as their number one pet peeve when online shopping. By contrast, eMarketer studies have shown that men are a third more likely to pay for expedited, overnight, or same day shipping. In fact, Millennials are almost twice as likely to pay for expedited shipping than Gen Xers and more than 6 times as likely than Baby Boomers.

Location, Location, Location – and Target Market

What areas do you normally sell to and could you refine or reposition your product? Certain areas and states have a higher growth in ecommerce spending (depending on the product, of course). The states that tend to spend more on ecommerce have more graduate degrees, higher rents, and even higher debt – in other words, the more affluent an area, the more likely they are to spend more and save less, especially around the holidays. Lower income areas with fewer degrees and less student loan debt don’t tend to see as much ecommerce growth. Location can further modify the customer portrait: a college graduate Baby Boomer woman living in Seattle is going to be more likely to wait the 3 week delivery time for your product shipping freight from New York.

Tis the Season for Discount Price Conversions

Time of Year has been shown to influence conversion rates as well. While free shipping might influence more people the rest of the year, during the Black Friday/Cyber Monday/Christmas shopping season, lower prices and great deals had a higher conversion rate in both 2015 and 2016 than free shipping. Volume is a likely culprit when it comes to seasonal shopping – customers know that they’ll be looking for several items and tend to batch their purchases together.

Life in the Amazon Marketplace is an intriguing example of this in the opposite direction. Due to the large number of different products Amazon sells, their customers are more likely to purchase several items, but at the same time, the Prime Membership includes “free” 2-day shipping for millions of items. In addition, Amazon will often offer their own special deals on particular items, making them the most effective one-stop ecommerce shop there is in the marketplace. This means now that for every two dollars that are spent online in the United States, $1 is spent with Amazon. Amazon is truly starting to cast a long shadow onto many small ecommerce markets, potentially freezing out many retailers and manufacturers, and forcing them to sell as a third party through Amazon. So how is David supposed to beat Goliath when Goliath has both discounted price and free shipping? Know your targets and use the right incentive.

Abandon All Hope, Ye Who Purchase Here

Be specific about who your target is, know their age, sex, and location, and then be direct – with a 75% abandonment rate, there are many sales to recapture. Email marketing has been shown to be a huge proponent of online lead and purchase generation, but both email and SMS text have been shown to convert cart abandoners to cart purchasers. In fact, the statistics from Barilliance showed an 20% conversion rate on Black Friday/Cyber Monday cart abandonment emails for desktop users, meaning that they recovered 20% of the sales that they had potentially lost. SalesCycle uses SMS remarketing tactics 30% success rate. The total message is this: be vigilant. Know your target and market specifically to their quirks. If they abandon their cart, send them a reminder – they probably just forgot that they wanted free shipping or a discounted price.
Running your ecommerce business doesn’t need to give you heartburn. We can help. Contact our ecommerce marketing strategists in Raleigh, NC at 919-341-8901 or schedule a complimentary consultation and website review.

Tags: EcommerceStrategy & Consulting

Leslie Vegter

Marketing Director

Leslie Vegter is a Marketing Manager at TheeDigital. She implements digital marketing strategies that help clients meet their online goals. Chat with Leslie about your digital marketing campaign and goals by calling 919-341-8901.

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