Even before COVID-19 pandemic lockdowns had us all at home, ordering things online to be delivered to our doorsteps, e-commerce sales were booming in the United States. E-commerce raked in $453 billion in retail sales back in 2017, and a recent U.S. Census Bureau News Report shows $211.5 billion estimated U.S. retail e-commerce sales for the second quarter of 2020 alone, an increase of 31.8% from the previous quarter.
But in the midst of the pandemic, delivery carriers have had to add surcharges to their fees to manage the overwhelming surge of packages during lockdowns. And the effects of this massive uptick in parcel distribution have even caused retailers and logistics providers to change their business models, moving toward more warehouses close to population centers and away from a smaller number of regional ones that spread more inventory across the country.
This shift to online retailers, accelerated during the pandemic, raises significant questions about how customers behave and react to price changes. In our most recent issue, authors Travis Tokar of Texas Christian University, along with Brent D. Williams and Brian S. Fugate of the University of Arkansas, look at how online shopper behavior shifts in response to shipping price increases, in their paper “I Heart Logistics – Just Don’t Ask Me to Pay For It: Online Shopper Behavior in Response to a Delivery Carrier Upgrade and Subsequent Shipping Charge Increase.”
Online retailers heavily depend on the performances of their chosen delivery carriers because they have a significant impact on customer satisfaction and retention. Better services cost more, and thus online retailers are put in the position of either having to absorb the costs via a profit reduction or pass the costs along to customers in the form of increased shipping costs.
It’s well known that customers have particular opinions about which carriers provide higher quality service, and that they certainly prefer premium delivery carriers - but they often don’t want to pay for it. In fact, 58% of abandoned online shopping carts are left to sit without purchase because shipping costs increased the total beyond what customers expected, with many shoppers reporting they sought out the product from another online retailer.
Increasing shipping costs to switch from a low- to high-service carrier is not well received by shoppers, and while they’re unlikely to complain about the switch, their purchase intentions end up low, elevating the risk for the retailer that their customers will go to their competition. Additionally, giving shoppers their choice of carrier is better received, but more often than not, shoppers continue choosing the original, cheaper carrier – meaning retailers still face the operational issues from poor carrier performance.
So, what is the e-commerce industry to do?
Overall, for retailers, the best strategy is to bundle product and shipping costs, then make a carrier change and increase the overall price. Additionally, even though customers perceive some delivery services as better than others, disclosing those involved can have unexpected impacts, and therefore retailers achieve the most favorable results when carriers remain unnamed.Policymakers should also take note. In recent years, the Department of Treasury has called to overhaul the United States Postal Service after its losses of $65 billion over 11 fiscal years, mostly due to a drop in First Class and Marketing mail services given the rise of text messages and email. Some have proposed increasing the commercial package delivery rates to offset these losses, but if policy forces USPS to raise its prices, retailers might switch to another carrier, costing USPS business and worsening their financial situation. Instead, policymakers should avoid raising delivery rates and focus on improving USPS efficiency across all its operations.