Show Me the Money: The Economic Impact of Membership-Based Free Shipping Programs on E-Tailers

This analysis examines the economic impact of membership-based free-shipping (MFS) programs once introduced as AN augmentation to wide accepted contingent free-shipping (CFS) policies. underneath CFS, clients waive the shipping surcharge if the order exceeds a precise threshold, whereas under MFS, consumers pay an direct fee and luxuriate in the free-shipping perk throughout the membership period. we have a tendency to develop a conventionalised model that considers consumer heterogeneousness in 2 dimensions: (1) disutility from effort an auxiliary product—a product that customers wouldn’t otherwise purchase—to qualify for CFS; and (2) looking frequency over a given period. Our analysis suggests that the introduction of MFS permits the e-tailer to phase the market further, that may lead to the next product price. once the disutility from effort AN auxiliary product is moderate, the e-tailer ought to charge a high membership fee to focus on solely frequent shoppers who forgo CFS. However, the e-tailer should lower the fee to lure additionally (1) frequent shoppers who would otherwise take CFS, when the disutility is high; or (2) occasional shoppers who would otherwise forgo CFS, when the disutility is low. all told cases, though the collected fee revenue will ne’er atone for the price arising from giving the free-shipping perk, the loss can be recouped as a fascinating outcome of a additional divided market. Our analysis generates insights into the best style of e-tailers’ shipping policies, shedding lightweight on the sensible challenges that confront e-tailers.

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