To Charge or Not to Charge: Making Decisions on Deliveries
Over the last thirty years, most florists have evolved in how they handle delivery charges.
The old mindset believed that delivery was part of what makes the flower buying process so attractive to the customer. Ketchup, salt, vinegar: these condiments make French fries much tastier, and restaurants don’t charge for them. Likewise, for decades flower delivery was free because it added so much value to our core product.
Over the years, we went from that to subsidizing delivery (charging a fee, albeit one less than it cost to provide the service), to charging enough to break even, to turning a profit. And now we’re told that delivery should be very profitable. The argument goes likes this: delivery is a valuable service, one that is expensive to provide, and customers don’t mind it. Rather, they appreciate the value of the service and will cheerfully pay for it.
But the truth is that many people hate delivery charges. Amazon Prime exists (and is so wildly popular) primarily for this very reason. Amazon recognized that many customers abandoned the checkout process because they did not want to pay a small delivery charge. These customers hated delivery fees so much that they would rather pay a $79 membership fee upfront than a much smaller delivery fee on each purchase. There are many Prime members who spend far more on the membership than they save on delivery fees. And they do so happily because they’re not confronted by those hated delivery charges.
One size does not fit all. Sure, some customers highly value delivery service and will pay accordingly for it, but others despise delivery charges and will do anything to avoid them. Pretending everyone falls into the former category is very dangerous. It enables deceptive order gatherers to lure these delivery charge haters with false promises of free delivery and then under fill the arrangement (to make the numbers work), which leaves customers disenchanted with our industry.
So what is the right approach?
Informing The Customer
Some florists believe it as simple as an explanation. Delivery is a valuable service and providing it is expensive. Just point that out to the customer and everything will be fine, right?
Consider air travel. Between 1995 (well after deregulation had any impact) and 2016, the inflation adjusted cost of flying fell substantially, even after factoring in all of the additional charges (checked bags, headphones, snacks, etc.) introduced over the last decade. In many cases, airfares are cheaper now than they were twenty years ago.
So everyone must love the airlines, right? Of course not! We resent every single one of those fees, even though the total cost is still lower than it used to be, and we hate the airlines for charging them.
Here’s what happens: When something is free, or heavily subsidized, it becomes an entitlement, and some people will always resent when they have to start paying for it. And as long as there are free delivery options out there, whether it’s from order gatherers or the local pizzeria, there will be people who don’t value delivery.
Telling the customer they’re wrong won’t help. Customers are like spouses. They feel what they feel and they know what they know. Telling them they’re wrong rarely changes their mind, and it’s almost always bad for the relationship.
The answer is to use a variable pricing strategy. Customers who don’t mind paying higher fees will have the opportunity to do just that. Those who hate delivery charges won’t have to see them. And in between, there will be options for everyone else.
Causation, Correlation or Coincidence?
Those who have been in the business a while likely remember when they did away with free delivery. They might also recall this roughly coincides with what many believe to be the end of the golden era, as flower sales started to drop.
Can some of that decline be traced back to higher delivery fees? There were certainly other factors: rebates, which ultimately enabled order gatherers; the rise of the call centre; the Internet and online shopping.
But it’s not hard to see some correlation between increased delivery prices and stagnant or declining sales. Maybe, by taking away some of the value of our product and alienating customers who hate delivery charges, we helped things along.
RAISING DELIVERY PRICES
So far, we’ve focussed on the customers who resist delivery fees. Now let’s take a look at the ones at the other end of the spectrum. We want to give these customers the option to pay more.
The easiest way to do this is by offering premium delivery options (timed delivery, same day delivery, express delivery, etc.). If the customer wants one of these options, he or she has to pay a premium.
Another option: delivery confirmation. Charging for these can seem strange to florists, who have typically been brought up in a cost-plus mindset. Delivery confirmations cost you nothing to provide, so why would you charge for them?
Consider the more contemporary (and profitable) “value-based” approach to pricing. Delivery confirmations might not add to your costs, but they do add to the value of your service—and you should charge accordingly. What a customer is willing to pay has nothing to do with your costs and everything to do with the way they perceive the value they are receiving.
Some florists think “but by including free delivery confirmations with all orders, we add value for everyone and people are less likely to complain about the delivery charge.”
Maybe, but there is another way customers can look at that. If they don’t like delivery charges, and/or don’t care about a confirmation, they feel like they’re paying for something they don’t want. This hurts even more.
Wearing Down Resistance To Delivery Charges
Now back to the delivery charge haters. How do we keep them happy?
You could do the opposite of what is described above and offer less expensive delivery options. People who are serious about saving money will be willing to jump over a hurdle (like placing an order a day or two in advance) to do just that.
Another option is bundling. Fast food restaurants love bundling complementary products into “combos” because it is so effective. Study after study shows that, when bundles are available, people buy extra products even when there is no real savings.
The magic of the combo is that it lets customers assign value the way they like. The person who wouldn’t buy fries separately has no trouble stomaching them as part of the bundle because they aren’t confronted with the fries’ individual price; they really want the burger and soda, and the fries just come with them.
It’s the same idea with a bundle that includes delivery. It doesn’t confront customers with a charge they don’t like. Instead, they see just one price that includes everything they need to make a loved one happy.
It’s easy to introduce bundles early in the sale. Casually say, “Would you be interested in one of our weekly specials that includes delivery?” The people who like bundles will ask for details; the people who prefer to shop line-by-line won’t. Another big advantage is that it lowers your “ordering cost,” as your sales person can process the single item very efficiently.
You can also go one step further and offer “value” and “premium” bundles. These could include nicer arrangements, a greeting card instead of the standard enclosure card, a coupon for another local business, or delivery confirmation. Note: describing these bundles with words like “value,” “premium,” and “exclusive” gets customers to self-stream according to their true nature. The loving son looking for a special gift will naturally gravitate to the more expensive (and more profitable) premium bundle. Meanwhile the person focussed on price, the one most likely to be tempted by a “free delivery” order gatherer, will go straight to the value bundle.
It’s important that you don’t mislead the customer. Don’t say that delivery is free: say it’s included. Bundle savings are generally far less than customers assume: almost always less than 5%, usually closer to 2%. In fact, studies have shown that bundles are so magical that they sell even when they cost more than the sum of their component parts. But that is a very dangerous game to play: anyone who does the math will get upset. Play it safe and keep the price of the bundle lower than the total of included items. That’s why inserting items that are not sold separately (like coupons and gift cards) is a good idea — it adds and obfuscates value.
But don’t be a slave to your cost-plus formula. You don’t have to charge the same markup on every component. Use higher markups for things that differentiate premium products. The markups on the components exclusive to a loaded Toyota Camry far exceed those on the base units. This is one of the most important pricing adjustments you can make.
The High-Low Model
Another way pricing can be used to overcome resistance to delivery fees is with a “high-low” model where the customer pays an up-front fee (the “high” part) to secure future discounts or savings (the “low” part).
One of the best-known examples is Costco, where an upfront annual membership fee secures access to low prices. More relevant is Amazon Prime, which was introduced specifically for people who don’t like paying for delivery. Prime Members pay an annual membership fee to get free shipping.
The upfront fee, in addition to generating revenue, increases loyalty as well as purchase size and frequency. Committed to making the most of their investment, the customer will spend more.
How would this look in the flower business? Let’s say you have a customer who typically spends $75 on an order (this includes $15 for delivery) and shops four times a year. This comes to a total annual revenue of $300 from this customer.
A high-low package could offer free delivery on any order over $75, if the customer pays an annual fee of $99. Customers who like this kind of deal typically overestimate how much they will take advantage of it. (Health clubs make most of their money from people who would be much better off purchasing day passes.) There is a good chance that the customer won’t actually purchase flowers any more frequently.
In that case, you have still increased revenue by at least 33% – four orders of $75 (flowers only) plus the $99 membership fee. Even if it really costs you $15 to make the delivery, you were able to clear $39 on the membership fee ($99 minus four $15 delivery fees). Your profit is higher, and you were able to fill four larger orders.
If the customer orders twice as frequently with this plan, you almost double revenue with sales of $549 (six orders of $75 + $99 membership fee). You are still $9 ahead on your delivery fees ($99 minus six $15 delivery fees), meaning both margin and profit are still up.
If the customer orders more frequently than that, you will start to lose revenue on delivery, but it is likely a good tradeoff. If the customer orders eight times a year, you would increase total revenue by more than 130%, generating sales of $699 (eight orders of $75 each + $99 membership fee) while losing only $21 in delivery revenue. You have more than doubled sales by providing an effective discount of just under 3%.
Points of Consideration:
This kind of offer should be targeted only to customers with spending patterns, or predicted spending patterns, that will benefit your store.
Florists are typically very kind and generous people, and that can be a problem. If for example a store starts offering free local delivery in exchange for a $99 annual membership fee the temptation is to contact the customers this most benefits: “Mrs. Smith orders flowers every other week – I can’t wait to tell her about this. She’ll save a fortune!” Helping your customers save money is not your goal. Any money your customers save is money you lose. This offer should be aimed at people who send flowers relatively infrequently.
You also need to be careful that you don’t open up any loopholes that could cost you a fortune. For example, you don’t want a customer who purchases a package for free delivery then sends his girlfriend a single rose every day for a month. Order minimums work well with this model.
Avoid the temptation to offer long-term or “lifetime” deals. Abuse of lifetime memberships in the health club industry led to the introduction of legislation that can apply to such deals and cause more trouble than they’re worth.
The high-low model is very powerful. It plays on the same psychology that makes people spend more on an all you can-eat-buffet or an all-inclusive resort than they would if they paid based on consumption. They’re willing to pay a little extra to not have to think about every drink they order. At the same time, the high-low model won’t appeal to everyone. Don’t expect massive participation for an offer like this.