a canadian startup

Free Shipping and Drawbacks to the Web 2.0 Pricing Strategy of Lowering Entry Costs

We’ve had an overwhelmingly positive response to our movement to free shipping. I like one blogger who wrote:

“Well.ca goes Free Shipping. Holy S[**]t.”

Thank you blogosphere, for all the positive feedback!

This post, however, is about the negative feedback.

I believe that our launch of free shipping leads to some lessons to learn for all Web 2.0 companies — not just e-commerce companies like ours.

One of the key elements of Web 2.0 pricing strategies is about lowering entry costs. Much of the new Web software out there is free to use, and you only pay when you want advanced features.

The idea behind free shipping and the Web 2.0 freemium pricing model are related: both are attempts at giving something for free to lower entry barriers, appeal to a larger audience, and generate word-of-mouth marketing.

Here are some notes on some possibly unintended drawbacks to doing this…

Surprising Pricing Strategies Make People Wonder

The first of two negative reactions we received was through a post on RedFlagDeals.com. One of the readers of RedFlagDeals.com (as well as a commenter on my blog) assumed that since we were making shipping free, there must be some other hidden cost — our pricing must have gone up to make up the difference. This is a valid assumption — I would assume the same thing. The truth is, in fact, that Well.ca has been consistently lowering our prices in the last while — but how would people know that?

This is a problem any time you lower prices — people will distrust the inherent value of what you are selling as they see prices go up and down. This is a problem with the airline industry — since prices vary so much, I have no idea how much a flight is really worth. (Joel Spolsky speaks about this in a post here — search for the word “airline”)

Two suggestions to avoid this problem that I can think of are 1) be consistent about prices and 2) create more transparency on how you make money. I think Well.ca could do a better job of showing where we make our money and how our prices compare to the competitors. Instead of leaving people guessing, we could show how much we normally make on an order and how much of that goes to paying for the free shipping.

If you have questions in the meantime — feel free to give me a call or send me an email.

In general in a startup, if you try to be secretive, people will assume the worst.

Lowering Entry Barriers Implicitly Punishes the Best Customers

The only other negative feedback I received was from a customer who wanted to tell me about how she wasn’t pleased with our new offer. She orders from us every month and she explained that she always ordered more than $99 worth of products (at which point we always used to give free shipping). By giving free shipping to everyone, she was no longer being rewarded for being a good, repeat customer.

This is always a problem that has annoyed me about freemium pricing models. The 1% of users that have to pay for your service have to pay an extra amount to cover the other 99% of users who don’t. Freemium models punish customers that were willing to pay in the first place. Our situation at Well.ca is not the same, but it’s related: in our case, those customers that order the largest amount receive the least net percentage benefit from free shipping.

Here at Well.ca, we’re looking at ways to give free gifts or perhaps free upgrades to express post to our best customers. We’re good at that already, but let’s see what we can do better

I thought you’d be interested in these two examples because you might not think of them when launching a new pricing strategy.