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Christmas Gift Guide
Tech Industry

E-tailers may be stuck with shipping costs

E-commerce companies spent big bucks on expensive advertising campaigns, discounting goods and offering free shipping, and now they may find they are locked into such practices.

E-commerce companies spent big bucks on expensive advertising campaigns, selling goods at rock-bottom prices and offering free shipping to acquire new customers

Now they may find they are locked into such practices.

Online customers have grown accustomed to special discounts and free services offered by e-commerce sites. One of their favorite perks is free shipping, according to a recent survey released by Internet study group Forrester Research.

As the holidays end and the new year approaches, analysts predict e-tailers will concentrate less on acquiring new customers and more on the bottom line. Many companies had hoped to cut costs by charging for delivery. But Forrester found 82 percent of online consumers said that shipping costs "factored into their purchase decision."

Forrester predicts that companies that ask customers to pay for delivery could lose business.

"Free delivery is a customer acquisition ploy," the report stated. "Longer term customers will head back to [brick-and-mortar] stores if shipping charges return."

The report comes at a time when Web sites such as eToys, Toysrus.com and Macys.com struggled to ship goods on time this holiday season. The news caused many e-tailers' stock prices to fall.

More than a dozen companies this holiday season--including Circuit City, ZanyBrainy.com and Blue Nile--offered free shipping. Some companies found that picking up the tab for delivery created other problems, such as eroding the efficiency of distribution systems, said Argus Research analyst Alan Mak.

Customers will order products indiscriminately, for example. They will order one or two products one day and the next day place a new order for something else. That is more costly to the company than if the customer ordered everything he or she needed at one time.

Companies that offer flat-rate shipping, such as Amazon.com, offer customers an incentive to order more goods at one time. A flat fee allows a customer to buy several items at a specified rate, which does not change whether the customer buys one item or buys 20.

"This also works to increase the average amount of sales," Mak said

But Forrester found that several companies have been successful at eliminating some of the burden that comes from paying delivery costs.

The Internet arms of some brick-and-mortar companies can offer customers the option of picking up their purchases at a local store. Circuit City allows shoppers to select up to three different locations to pick up their online merchandise.

HomeRuns.com and Ashford.com offer free shipping for orders that reach a certain dollar amount. The companies hope this will motivate customers to buy more.

Mak said that e-tailers will have to move slowly when weaning customers off of receiving free shipping. He suggested that companies begin by offering reduced-rate shipping.

Another way to avoid alienating customers, of course, is to offer free delivery year-round. Outpost.com pays shipping costs and even pays for overnight delivery.

Convenience good provider Kozmo.com offers free same-day delivery. Chief executive Joseph Park said the company will never charge for delivery. Kozmo, which sells videos, CDs and books, expanded its offerings to include items such as laundry detergent, shampoo and diapers. Expanding offerings is part of the way Park hopes to absorb the delivery costs.

"As we increase our offerings, the higher each of our sales will go," Park said.

This tact could be successful in attracting a share of the 11 million households that will begin shopping online in 2000, Forrester predicts. Many of the new Internet shoppers will be less affluent than earlier online consumers. Finding the lowest price will be their primary concern, according to Forrester's report.

Forrester recommends e-commerce companies offer discounts in delivery charges selectively. They should offer free shipping to customers who buy a certain amount of merchandise or to their best customers.

"Retailers typically get about a 20 percent discount from shipping companies, such as UPS and FedEx," the report said. "Companies should pass on the savings to loyal, profitable customers in the form of reduced charges or totally free shipping."

The report said shoppers who buy infrequently should be charged standard shipping prices. In addition, the report said companies should transfer the costs of delivery charges into the costs of their merchandise and then offer "free delivery."

"That way customers get the perception that they are getting a deal," the report said.

But offering customers cut-rate deals and free services is not the only factor in attracting customers, Mak said. Customers want to shop at sites that are easy to navigate, feature responsive customer service and provide quality products.

"If price were the only factor, then Amazon wouldn't be as big as it is," Mak said. "They don't always have the lowest prices, but shoppers continue to go there because they enjoy shopping there."