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

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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)

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.

Suggested Citation

  • Zhen Fang & Yi-Chun (Chad) Ho & Xue (Jane) Tan & Yong Tan, 2021. "Show Me the Money: The Economic Impact of Membership-Based Free Shipping Programs on E-Tailers," Information Systems Research, INFORMS, vol. 32(4), pages 1115-1127, December.
    • Handle: RePEc:inm:orisre:v:32:y:2021:i:4:p:1115-1127
    DOI: 10.1287/isre.2021.1001
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    References listed on IDEAS

    as
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    Cited by:

    1. Geng Sun & Huseyin Cavusoglu & Srinivasan Raghunathan, 2024. "Strategic Implications of Online Retail Platforms’ Membership-Based Free Shipping Programs," Information Systems Research, INFORMS, vol. 35(2), pages 673-685, June.
    2. Hu, Li & Zhang, Mengwei & Wen, Xin, 2023. "Optimal distribution strategy of coupons on e-commerce platforms: Sufficient or scarce?," International Journal of Production Economics, Elsevier, vol. 266(C).
    3. Xu, Lina & Meng, Zhiqing, 2024. "The role of membership fees in online retail market competition," Research in International Business and Finance, Elsevier, vol. 67(PA).

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