The Unintended Consequences of Free Shipping
I just read about an online shopper who ordered 10 pairs of pants from the Gap and then returned 7. Called a high frequency returner, that same consumer told a WSJ reporter that for Christmas, she buys coats and shoes in different sizes and colors for her 4 children. They can choose what they prefer and the rest get….returned.
Reminds me of the tragedy of the commons.
When something is free, we tend to overuse and abuse the resource. The result is a negative externality that could affect uninterested third parties. Too much high frequency returning and we all will be charged more.
Social norms also come to mind. Behavioral economists have concluded that people are more likely to do what they believe their neighbors do. I suspect that returning goods has become more of a widespread and acceptable social norm.
Finally, free shipping has almost no “friction.” It represents taking an easy present default that we can cope with in the future. Order all of the possibilities and then decide later.
With an increasing volume of returns that one discounter, Rue La La said cost it $5 million last year, retailers have the incentive to change consumer behavior. Rue La La is experimenting with a buyer reminder email. When a customer orders several sizes, he might get an email saying, ” “Are you sure you want to order the small? The last five times you ordered both sizes, you only kept the medium.” Other sellers are sending coupons for items that get returned less frequently.
When a frequent returner participates in the tragedy of the commons, he does not directly suffer the cost of his behavior. Add to that the power of social norms and selecting the effortless default and I suspect that the unintended consequence of free shipping will get worse. But then again, Amazon seemed happy to spend $2.8 billion on free shipping last year.
A final note: Trying to protect their independent booksellers, during October, the lower house of the French parliament passed a law banning Amazon’s free shipping.
Sources and resources: Reading about the impact of free online shipping, I especially enjoyed a WSJ article (gated) on the high frequency returner, a Wired Dan Ariely interview about free shipping and an NPR report on the French attempt to stop Amazon from shipping books for free.