Contingent Free Shipping: Drivers of Bubble Purchases

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