Internet Shoppers Perceptions of the Fairness of Threshold Free Shipping Policies Wen-Hsien Huang, Department of Marketing, National Chung Hsing University. Taiwan. E-mail: whh@nchu.edu.tw George C. Shen, Department of Marketing and Tourism Management, National Chiayi University. Taiwan. E-mail: georgeccshen@gmail.com Abstract Many e-tailers offer free delivery for orders that reach a minimum purchase quantity that is, the threshold free shipping (TFS) policy. This paper examines how characteristics of a TFS policy and the individual differences may influence consumers fairness perceptions, and consequently, their intentions to pay for delivery when a threshold is out of reach. The results demonstrate that perceived threshold is positively related to inferred motive, shipping fees as profit generator, and willingness to pay. However, there is a negative relationship between perceived threshold and TFS policy fairness. In addition, sensitivity to shipping charge is positively related to inferred motive and negatively related to willingness to pay. The data also show that delivery time and satisfaction with price contribute to fairness perceptions. Unfortunately, the positive relationship between delivery time and shipping fees as profit generator is not supported. Finally, perceptions of fairness have a positive influence on willingness to pay. Key Words: Perceived threshold, sensitivity to shipping charge, fairness perceptions JEL Classification: M 31, L 81, L 91 1
1. Introduction Proceedings of the International Conference on Marketing, Tourism & Hospitality Many e-retailers, large and small, provide threshold free shipping (TFS) policies to attract and retain consumers. Under which the e-retailers bear the cost of shipping for orders equal to or larger than a certain dollar amount or a specific number of items, but charges a fixed fee otherwise (Huang & Cheng, 2016; Koukova, Srivastava, & Steul-Fischer, 2012). For example, Amazon.com ships all orders of $35 or more for free; orders that fall below that threshold are shipped for a $5.99 flat delivery fee (i.e., a dollar-based TFS). On the other hand, NerdyShirts.com ships for a flat $6.99 rate on all subsequent orders; purchase over 4 items and earn free shipping (i.e., a piece-based TFS). In the cases, 35 dollars and 4 items are the threshold values or cutoff levels for free delivery. By setting a free shipping threshold that is above the current average order value, e- tailers are able to encourage their consumers to shop more with each purchase (Huang & Cheng, 2016). In a 2014 ComScore survey, 58 percent of respondents reported that they have added items to the shopping cart in order to qualify for free shipping. Lewis et al. (2006), using a database from an online retailer, demonstrated that free shipping on large baskets is very effective in generating additional sales. Nevertheless, there is evidence showing that TFS policy has only little impact on order incidence (Lewis et al., 2006). That is, consumers may abandon their purchase to avoid shipping fees when there is a minimum purchase requirement for free delivery. When a TFS is offered, consumers who initially intend to buy one item only may decide: (1) not buy to avoid the shipping fee; (2) buy more items to avoid paying the shipping fee; or (3) to buy only one item and pay the shipping fee. While TFS has become the most prevalent shipping policy in e-tailing, factors that may determine a consumer s (un)willingness to pay for shipping under this policy is still unknown. Our research thus aims to build a model to explain how characteristics of a TFS policy and the individual differences may influence consumers perceptions of the policy fairness, and consequently, their intentions to pay for delivery when a threshold is out of reach. It is believed that this focus will not only assist e- tailers to build a better communication strategy for practicing a free large promotion, but will also make a broader contribution to the transportation literature, through adding insight into the psychology that govern how internet shoppers evaluation and respond to a TFS policy. 2. Literature Review Fairness refers to consumers assessments of whether a seller s policy, price or service is reasonable or justifiable (Adams, 1965). The principle of dual entitlement proposes that sellers and buyers are entitled to a reference profit and price, respectively (Kahneman, Knetsch, & Thaler, 1986). Possible reference points may include the past prices, competitor 2
prices, and vendor costs (Bolton, Warlop, & Alba, 2003). That is, consumers may compare prices they paid previously with current prices, with the prices charged by competitors, or with the perceived cost of a good or service to the sellers. Unfairness perceptions arise if prices compare unfavorably with the reference point. Campbell (1999), expanding on the principle of dual entitlement, suggested that consumers inferred motive for the seller s action partly contribute to their judgment of fairness. Inferred motive refer to the perceived reason for employing tactics such as TFS promotions. When consumers believe that a seller s motive is to take advantage of or exploit them, they view the price as unfair. Prior research has confirmed that perceptions of unfairness in turn will diminish consumers willingness to engage in business with a firm (Campbell, 1999). In the context of a TFS policy, we define TFS policy fairness as consumers perceived fairness of the process used to determine the threshold value for free delivery as specified by the promotion tactics. TFS policies (either a dollar- or piece-based) are a way for e-tailers to differentiate among consumers on the basis of purchase quantity (Huang & Cheng, 2016). It acts in the same way as the quantity discount since consumers who place larger orders receive better value (Lewis, 2006). With a view towards increasing the amount purchased, some e- tailers choose to set a higher threshold for free shipping, meaning that more must be bought to receive the free delivery. This high minimum purchase requirement should activate consumers negative inferences of firm motive. As a result, it will adversely impact TFS fairness perception and willingness to pay for shipping. Figure 1 shows an overview of the conceptual model. Figure 1: Conceptual Framework Inferred motive Delivery time Perceived threshold value H1 H5 H3 H9 H10 Fairness of TFS policy H2 H4 H12 H7 Sensitivity to shipping charge H8 Shipping fees as profit generator H6 H11 Satisfaction with price Willingness to pay for shipping 3
3. Methodology Proceedings of the International Conference on Marketing, Tourism & Hospitality An online survey was used to collect data. Only those who had previously purchased at an online retailer with TFS policy were invited to participate in the survey. As an incentive for participation, potential subjects were told that once they completed all the questions, their e- mails would be entered in a random drawing for twenty prizes of NT$300 (about US$10). At the beginning of our survey, participants were asked to recall a recent internet shopping experience at a specific online store who offered TFS policy such as Free shipping on orders over NT$799 (a dollar-based TFS) or Buy 4 items get free shipping (a piecebased TFS). Next, the following questions were asked: Which online store you shopped from? What s the threshold value (i.e., minimum purchase requirement) for free shipping? Did you receive a free delivery? What s the shipping fee if a threshold is not meet? What kind of produces are you purchased? and What s the total cost you ultimately pay? Participants were provided ample space to write down their responses. This approach helps the participants to remember what actually happened and to relieve their experiences (Huang, 2008). The second part of the questionnaire included a set of closed-ended questions. Scales to measure each of the variables in the model were adopted or developed based on previous literature. Perceived threshold was measured using a two-item scale developed from the study by Huang and Yang (2015). Sensitivity to shipping charge and satisfaction with price were measured by adapting and modifying the scale used by Xia and Monroe (2004) and Schindler et al. (2005). Perceptions of shipping fees as profit generator were adapted from the scale used by Koukova et al. (2012). Delivery time was measured with three items, adapted from Mentzer et al. (2001). Fairness of the TFS policy were adapted and modified from the scales used by Xia, Kukar-Kinney, and Monroe (2010). Inferred motive and willingness to pay for shipping were measured using the scales originated by Kukar-Kinney et al. (2007). All items were measured using seven-point Likert scales, ranging from strongly disagree (1) to strongly agree (7). At the end of the survey, participants were asked to complete some demographic information such as gender, age, education, dollar amount spent monthly on internet shopping, actions taken to quality for free shipping, etc. A total of 377 samples were collected. However, 12 respondents were dropped for lack of TFS shopping experience, leaving 365 cases for statistical analyses. There were 331 females and 34 males, ranging in age from 16 to 55 years, with an average age of 25.3 years (SD = 4.79). Of these participants, 31% reported spending NT$1001-2000 and 26% spending NT$2001-3000 on internet shopping monthly (US$1 = NT$30). Seventy-four percent of the sample reported having completed at least a bachelor s degree level qualification. Actions participants have ever taken in order to qualify for free shipping are: purchase an alternative 4
product that was priced above the retailer s free shipping threshold (22.4%), add more items to a cart to qualify for free shipping (20.7%), choose ship-to-store (15.4%), delay making the purchase to wait for a free shipping offer (14.2%), join a loyalty program to qualify for free shipping (6.8%), and so on. In relation to the recalled shopping experience, 317 participants were in a dollar-based TFS and 48 were in a piece-based TFS. The average threshold value for the dollar-based TFS was NT$756 and 2.68 pieces for the piece-based TFS. The total cost participants paid was NT$1116 and a majority of the participants (315) received free delivery. Slightly more than 58% of the participants purchased apparels. The rest included cosmetics (11%), books and magazines (10.4%), household goods (6.3%), and others. 4. Results A confirmatory factory analysis, using LISREL 8.80 with maximum-likelihood estimation (Jöreskog and Sörbom 1998), was performed on all eight constructs. The overall model fit indices exhibited that the measurement model offered a good fit to the data (χ 2 = 462.28, df = 224, p =.00; χ 2 /df = 2.06, Goodness-of-Fit Index [GFI] =.90, root mean square error of approximation [RMSEA] =.054, Normed Fit Index [NFI] =.94, Comparative Fit Index [CFI] =.97). Composite reliabilities (see Table 1) were high and exceeded the minimally acceptable level of.70 (Fornell & Larcker, 1981), ranged from.77 (sensitivity to shipping charge) to.96 (willingness to pay for shipping). Convergent validity was assessed by observing the magnitude of the factor loading of each manifest indicator on its proposed latent construct (Anderson & Gerbing, 1988). Factor loadings of.60 are generally considered the minimal level at which convergent validity could be suggested (Bagozzi & Yi, 1988); this level was achieved. Evidence of discriminant validity is provided by comparing the squared correlation of two constructs against their individual average variance extracted. When the squared correlation between any pair of constructs is lower than the corresponding average variance extracted of each construct in the pair, discriminant validity is established (Fornell & Larcker, 1981). The data in Table 1 demonstrate the discriminant validity of our constructs. Overall, these measurement results are satisfactory and suggest that it is appropriate to proceed with the evaluation of the structural model. The correlations and descriptive statistics of the constructs used in this study are reported in Table 1. The structural model was utilized to analyze the hypothetical relationships between the constructs. There was a reasonable model fit (χ 2 = 486.77, df = 234, p =.00; χ 2 /df = 2.08, GFI =.90, RMSEA =.054, NFI =.94, CFI =.97). Perceived threshold is positively related to inferred motive (γ =.33, t = 5.49), perceptions of shipping fees as profit generator (γ =.39, t = 6.30), willingness to pay for shipping (γ =.14, t = 2.04), and negatively related to TFS 5
fairness perceptions (γ = -.40, t = -6.99), indicating support for H1, H2, H4, and H3. In addition, the results lend support to both H5 and H6. H5 stated that inferred motive has a positive impact on shipping fees as profit generator (β =.21, t = 3.25) and H6 stated that shipping fees as profit generator has a negative impact on TFS fairness perception (β = -.11, t = -2.12). Moreover, there is support for H7 as well as H8. H7 suggested that there is a positive relationship between sensitivity to shipping charge and inferred motive (γ =.29, t = 4.66), while H8 suggested that there is a negative relationship between sensitivity to shipping charge and willingness to pay for shipping (γ = -.50, t = -8.64). H9 is not supported, which posited that delivery time is negatively related to shipping fees as profit generator (γ = -.07, t = -1.33). However, the positive relationship between delivery time and fairness of TFS is confirmed (γ =.12, t = 2.67), supporting H10. It was hypothesized that satisfaction with price would have a positive influence on TFS fairness (H11) and the results verify this (γ =.34, t = 6.66). Finally, H12 is also supported, which argued that TFS fairness has a positive impact on willingness to pay for shipping (β =.14, t = 2.13). Table 1: Descriptive Statistics, Correlations, and Discriminant Validity Variables 1 2 3 4 5 6 7 8 1. Threshold value.45 2. Sensitivity to shipping.18 charge (.03) 3. Inferred motive.37 (.14) 4. Shipping fees as profit.41 generator (.17) 5. Delivery time -.08 6. Satisfaction with price -.31 (.10) 7. Fairness of TFS policy -.55 (.30) 8. Willingness to pay -.05.83 0.29 (.08) 0.14 (.02).09.11.01 -.43 (.18).60 0.31 (.10) -.15 (.02) -.12 -.22 (.05) -.14 (.02).65 -.10 -.23 (.05) -.37 (.14) -.09.63.28 (..08).25 (.06).10.81.50 (.25) -.03.79.04 Mean 3.66 5.57 4.97 3.57 4.90 5.17 5.12 3.89 Standard deviation 1.39.89 1.14 1.24 1.24 1.01 1.01 1.64 Composite reliability.91.77.82.85.84.93.92.96 Note: Diagonal elements are the average variance extracted for each of the eight constructs. The squared correlations between constructs are in parentheses. 5. Conclusions and Recommendations The findings demonstrate how characteristics of a threshold three shipping (TFS) policy and the individual differences may influence consumers perceptions of fairness, and eventually, their willingness to pay for shipping when a threshold is not meet. Specifically, perceived threshold is positively related to inferred motive, shipping fees as profit generator, and willingness to pay for shipping. However, there is a negative relationship between perceived threshold and TFS policy fairness. In addition, sensitivity to shipping charge is.90 6
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