Contingent Free Shipping: Drivers of Bubble Purchases

44 Pages Posted: 1 Mar 2021

See all articles by Sahar Hemmati

Sahar Hemmati

University of Maryland - Robert H. Smith School of Business

Wedad J. Elmaghraby

University of Maryland - Robert H. Smith School of Business

Ashish Kabra

University of Maryland - Robert H. Smith School of Business

Nitish Jain

London Business School

Date Written: February 27, 2021

Abstract

Retailers often offer free shipping contingent on an order satisfying a pre-specified threshold amount (Contingent Free Shipping, CFS). As a response, customers may pad up below-threshold orders to avoid paying shipping charges. From a retailer’s standpoint, such order-padding behavior can economize logistics costs provided that customers do not engage in padding behavior that yields bubble purchases---padded orders with above-par return propensity. Bubble purchases can financially strain a retailer via increased returns handling cost. In this study, we empirically examine how the customers’ engagement in bubble purchases relates to: (i) CFS policy’s threshold and shipping fee levers; and (ii) a contextual lever---ease of product return---that is elemental to customers’ return consideration. To do so, we collaborate with a large online retailer who switched over time between multiple CFS policies. Our empirical strategy builds on the induced quasi-natural experiments by these switches, and variation in customers’ experience in processing returns.

We find that, in response to our retailer’s CFS policies, customers pad 12.4\% to 28.4\% of below-threshold orders. Both policy levers considerably affect their order-padding and bubble-purchase propensity. Interestingly, the share of bubble purchases in padded orders is strongly moderated by the customers’ ease-of-return experience. In markets with a customer-friendly return process, this share varies from 8.4\% to 14.7\% and is altogether eliminated in markets with modest inconveniences in the return process. Our findings suggest managers should carefully select CFS policy terms in accordance with (and not in isolation from) their returns policy features to drive its efficacy.

Keywords: Online Retail Operations, Contingent Free Shipping, Product Returns Policy, Shipping Threshold, Shipping Fee, Empirical OM, Causal Inference, Natural Experiment

Suggested Citation

Hemmati, Sahar and Elmaghraby, Wedad J. and Kabra, Ashish and Jain, Nitish, Contingent Free Shipping: Drivers of Bubble Purchases (February 27, 2021). Available at SSRN: https://ssrn.com/abstract=3794442 or http://dx.doi.org/10.2139/ssrn.3794442

Sahar Hemmati

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742-1815
United States

Wedad J. Elmaghraby

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742-1815
United States

Ashish Kabra

University of Maryland - Robert H. Smith School of Business ( email )

7621 Mowatt Ln
Apt 1116
College Park, MD 20740
United States
6158779203 (Phone)

Nitish Jain (Contact Author)

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

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