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

Zhen Fang (), Yi-Chun (Chad) Ho (), Xue (Jane) Tan () and Yong Tan ()
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Zhen Fang: Michael G. Foster School of Business, University of Washington, Seattle, Washington 98195
Yi-Chun (Chad) Ho: School of Business, George Washington University, Washington, District of Columbia 20052
Xue (Jane) Tan: Kelley School of Business, Indiana University, Bloomington, Indiana 47405
Yong Tan: Michael G. Foster School of Business, University of Washington, Seattle, Washington 98195

Information Systems Research, 2021, vol. 32, issue 4, 1115-1127

Abstract: This research examines the economic impact of membership-based free-shipping (MFS) programs when introduced as an augmentation to widely accepted contingent free-shipping (CFS) policies. Under CFS, consumers waive the shipping surcharge if the order exceeds a certain threshold, whereas under MFS, consumers pay an upfront fee and enjoy the free-shipping perk throughout the membership period. We develop a stylized model that considers consumer heterogeneity in two dimensions: (1) disutility from acquiring an auxiliary product— a product that consumers would not otherwise purchase—to qualify for CFS; and (2) shopping frequency over a given period. Our analysis suggests that the introduction of MFS allows the e-tailer to segment the market further, which could lead to a higher product price. When the disutility from acquiring an auxiliary product is moderate, the e-tailer should charge a high membership fee to target only frequent shoppers who forgo CFS. However, the e-tailer should lower the fee to lure also (1) frequent shoppers who would otherwise take CFS, when the disutility is high; or (2) infrequent shoppers who would otherwise forgo CFS, when the disutility is low. In all cases, although the collected fee revenue can never compensate for the cost arising from offering the free-shipping perk, the loss can be recouped as a desirable outcome of a more segmented market. Our research generates insights into the optimal design of e-tailers’ shipping policies, shedding light on the practical challenges that confront e-tailers.

Keywords: free shipping; contingent free shipping; segmentation; price discrimination; electronic commerce (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (5)

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