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Online Retailers, Shipping Fees, and the Bottom Line

The base prices for the good and bad retailers were 0.31 percent higher and 2.07 percent lower, respectively, than the average of all retailers in the study. But the average shipping prices for good retailers were lower across three options (ranging from standard ground delivery to overnight). For the slowest delivery options, the good retailers’ fee was 24 percent lower than the average of all retailers, whereas the less reliable retailers charged 11 percent more than the average.

One reason for the disparity could be that Internet retailers with a lower likelihood of delivering products on time are less established and have a smaller advertising budget, so they have to offer a lower base price to initially attract consumers. But they are not able to subsidize shipping, so they charge higher delivery prices.

“This may also represent an attempt by the lower on-time probability Internet retailers to exploit the possibility of profiting from charging higher shipping prices that will not be refunded if the product is eventually returned,” the authors write.

But in examining the pricing of various shipping options — for example, three- to five-day ground service versus overnight service — they found that some Internet retailers manage their options as a bundle to boost their bottom line. Reliably prompt retailers charge less for shipping overall, but they also offer a smaller time gap between shipping options, giving them a way to charge more at times.

For instance, the authors note, some Internet retailers choose to increase the delivery time for the slow option without reducing the corresponding shipping price, in effect making the fast mode more appealing to customers. These companies can then raise their charges for the fast mode and make more money from shipping, even though they are not getting their products to the customer any faster via the speedy option than before.

“Internet retailers, dependent on their on-time probability, can strategically pace their different menu of shipping time[s] and charges to maximize profits,” the authors conclude.

Bottom Line:
Many Internet retailers deliberately manipulate base product prices and shipping charges to attract customers and benefit their bottom line. Some subsidize their free shipping services by charging higher prices for the product itself; others, with a track record of delivering purchases to customers on time, increase profits both by charging more for products and by adjusting their menu of shipping options and fees.

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