Online Retailing  and the  Shipping Function

Omar Adil		and Natasha Chagpar

? Returns and Exchanges for Pure Plays:
   &

When purchasing from an online retailer with a bricks and mortar presence, a consumer has peace of mind in knowing that he/she can return or exchange purchased products at any of the retailer’s physical locations.

It follows that many online consumers are reluctant to buy from pure play retailers because they are worried about how they will return or exchange an ordered item to a retailer who has no physical stores to visit.  Interestingly, American pure play companies such as Dell have found a rather sound solution to their lack of a bricks and mortar presence by outsourcing returns to courier companies such as Purolator.

Purolator, for example, has hundreds of outlets setup across Canada and returns to Dell can be made at any one of these Purolator locations.  Now, through courier companies like Purolator, pure play customers do have physical locations to visit for returns.  However, for obvious reasons consumers cannot exchange their products at these Purolator outlets, for they do not hold pure play retailer inventories.

Outsourcing to a company like Purolator also offers pure play customers many other value added services.  For example, if it is inconvenient for a customer to visit a Purolator retail store, Purolator will pick up the product for return from the customer’s house/office and have it shipped to Dell.  All the customer has to do is fill out a bill of lading, which can be done online from Purolator’s website.  The bill of lading looks like:
 
 

If the customer has any questions about shipping a Dell product back to Dell (for example if they need assistance in completing the bill of lading), the Dell customer can contact Purolator’s call center via a toll-free number and get any assistance they need.

In addition, the customer may not know how exactly to package the Dell product so that it can withstand the delivery process, or “withstand a 5’ drop”, and thus Dell will even courier to the customer’s house/office an empty box that meets shipping specifications.  Then, all the customer does is put the Dell product in the box, and either drop the box to a Purolator retail store or call Purolator’s toll free number and have Purolator pick it up from their house/office.

ARTICLE:

Drop-shipping – A Great Way Of Making Money Online

Nowshade Kabir | Contributing Writer | 2004-11-08

Using the Internet to sell products and services to ever increasing number of net users is a good way to start your own business. If you are not taking advantage of this great opportunity you are just missing the boat! Consider this: e-commerce, contrary to popular believe, is thriving and increasing at a double-digit growth rate. According to Jupiter Research, Online sales during this holiday season in United States are expected to reach $21.6 billion, a 19 percent increase over the same period last year. Jupiter also predicts in the report that 86 million U.S. residents will make holiday purchases online this year compared to 73 million last year, which is an 18 percent increase.

No doubt that this is the right time to get into online business. Building a website for selling products or services is no longer that difficult. You can make your own website by using available sophisticated but easy-to-learn-and-use programs like Macromedia Dreamweaver, Microsoft Frontpage, Adobe Go live, etc. There also exist various online web store builders similar to Rusbiz.com, which allow you to create powerful web stores using simple editors and numerous templates. You can also setup a store with E-bay and sell products through it. Finally, you can hire professional web designers to develop your website. So, the important question is not how to get online, but what to sell on the Internet?

In one of my articles - What to sell on the Internet? (http://ezine.rusbiz.com/archivenews.html?nl_oid=19) - I wrote about selling information products. Although this is an interesting concept, you might think that this is not your cup of tea; and you still prefer to work with some tangible products. In ideal scenario, probably, you want to sell a product of your choice but don't want to carry your own stock and don't want to handle the shipping. Is there a way of doing this? Yes, there is! It's called "Drop-shipping".

What is drop-shipping?

When a manufacturer, wholesaler, distributor or importer, after receiving an order from their retailers, individually pack and deliver the product to the customer of the retailer with retailers address as shipper, this selling technique is called drop-shipping.

 Complete Story:

http://www.webpronews.com/ebusiness/smallbusiness/wpn-2-20041108DropshippingaGreatWayofMakingMoneyOnline.html

Summary/Important Facts:

This article is important to understand the future of shipping and online retailers.  It describes a new forum of shipping known as “drop-shipping” and explains its benefits.
? Shipping Cost Burdens:

In the online retailing industry, there are industry standards detailing whom (for example: retailer or consumer) burdens shipping costs under different circumstances.  Since Dell adheres to industry standards, it serves as a good example and will be used to illustrate shipping cost burdens under differing circumstances.

a. Online Retailer Makes the Mistake:

If Dell has made a mistake and a consumer receives a defective or incorrect product, he/she must contact Dell.  After this, the customer will contact Purolator who will return the product to Dell and, concurrent to all this, Dell will ship out the right product to the consumer.

Dell will pick up the tab for both (a) the shipping costs for the returned product and (b) the shipping costs for the new product, leaving the consumer with no financial distress with this process.  Purolator can bill Dell directly because Dell has an account setup with Purolator.  Setting up an account with Purolator is as easy as calling their toll free number and any business, big or small, can setup an account free of charge.  Once an account is setup, an online retailer can offer customers the convenience of free shipping if they chose to.

b. Consumer Makes the Mistake:

If, however, a customer chooses to return a Dell product within 30 days for reasons other than a mistake of Dell, then Dell will refund the cost of the equipment minus shipping and handling charges.  In other words:

    Customer       =    Cost of     -      Cost to Dell of Originally      -    Cost to Consumer of
Reimbursement                   Product        Shipping Product to Consumer     Returning Product to Dell

c. Warranty Repair:

For products being returned to Dell for repair under warranty, consumers must pay the shipping charges required to ship products back to Dell.  However, Dell will return these products to consumers free of charge, once repaired.  Dell’s warranty policy is provided in the link below:

http://support.dell.com/support/edocs/systems/pe6400/en/ug/warranty.htm
 

Advantages of the Present Shipping Cost Burden Structure:

If Dell’s return policy was that upon return, a customer would be reimbursed for all costs including the cost of the product and all shipping costs, Dell would become vulnerable to consumer return policy abuse.  A consumer may, for example, purchase and use a product and just before Dell’s 30 day return period expires, he/she may return the product for full reimbursement.

On the other hand, Dell’s present return policy of full reimbursement minus shipping and handling costs deters people from “scamming” Dell and protects Dell from the ill effects of such scams.  Their return policy helps to attract only genuinely interested consumers to make purchases.  Therefore, Dell’s present return policy, (which is also the industry standard return policy in online retailing), will help filter out “scammers” and will channel more serious consumers to Dell.  Below is a screen shot of Dell’s return policy:
 
 
 

Disadvantages of the Present Shipping Cost Burden Structure:

The cost of shipping varies depending on the weight/size of the package and the location to where the item is being returned (for example the particular province or state).  This return cost adds to the consumers overall cost of purchasing the product and may reduce their likelihood to buy from that online retailer.  Therefore, online retailers should consider paying the return shipping costs thereby not deterring customers from purchasing the product online in the first place.

 An online retailer who is willing to burden the shipping costs when consumers are returning products illustrates to customers that the E-tailer is willing to stand by and has faith in its products.

? Potential Business Opportunity?

An online retailer with a bricks and mortar presence such as Best Buy offers any Best Buy consumer the convenience of (i) returning products via mail/courier, or (ii) returning or exchanging products to physical Best Buy locations.

By definition, pure plays such as Dell lack physical locations.  However, pure plays such as Dell still offer consumers the convenience of (a) returning products via mail/courier, or (b) returning products to physical locations via Purolator outlets.

The first disadvantage for a pure play is that whether the consumer chooses option (a) or (b), he or she burdens shipping charges whereas a consumer of an online retailer with a bricks and mortar presence faces zero shipping costs under option (ii).  Of course, to avoid such shipping costs in the case of returns, a retailer with a bricks and mortar presence becomes more favourable.

The second disadvantage for a pure play is that courier companies do not maintain an inventory of their products, hence, exchanges cannot be made.  As a result, consumers must bear the inconvenience and cost of returning a product to an online retailer, and then having to go back online and purchase what they otherwise would have exchanged for.

There is, however, “silver lining” in what seems like a cloudy sky for pure plays.  Pure plays such as Dell save huge amounts of money from not incurring the costs associate with having retail outlets.  By passing these savings on to customers via lower prices, pure plays become more competitive.

The remedy to the two above-mentioned disadvantages of pure plays is not in the costly creation of a new business entity, but rather in the amending of current return policies.  Presently, pure play return policies tend to be unforgiving which leads to less customer trial and reduced competitiveness.  To overcome this weakness, pure plays such as Dell may consider passing on a fraction of the associated savings from not having brick and mortar stores in the form of paying for all courier services costs to encourage trail and give consumers more flexibility.
 

? Consumer Psychology and Pure Plays:

Although most pure play retailers offer sound return policies, consumers often experience great psychological distress buying from a pure play.  This is often the case because as humans, we like to employ all five senses in the purchasing process, particularly the sense of touch.  When buying online the lack of being able to actually see and touch the product is a substantial drawback.  Therefore, people cannot fully decide if they like a product until the have seen and touched it.  This is where online retailers run a large disadvantage, in that people can only experience their products after being purchased.  If a consumer is dissatisfies with a product purchased from a brick and mortar store, they can easily return it to the physical store for a refund or exchange and there is clear accountability.  When it comes to pure plays, there is no physical store the consumer can walk into for a refund or exchange and the consumer has not seen the product before buying it, therefore many consumers have a fear of being “tricked” and getting stuck with a product that they don’t want.

For online retailers to be successful they need to have an accommodating return policy that helps people get over their fears of buying online.  Online retailers need more flexible return policies than traditional retailers because with traditional retailers, customers have the benefit of “what you see is what you get”, and this is not so with E-tailers.  In markets like Canada buying online is still emerging and E-tailers need to be sensitive of consumers’ fears and restrictions.  Although Dell chooses to use their return policy to weed out non-serious consumers, smaller pure play retailers cannot have the same strategy as that my cause them to not have any business at all.
 

Therefore, the ability for consumers to easily return and exchange the products they buy online is a critical aspect of online retailing.  The procedures for returning items differs with the type of online retailer, but nevertheless the costs involved in this process should be absorbed by the retailer to keep customers satisfied, reduce their costs and make them more willing to make online purchases in the first place.  An effective and efficient return and exchange policy and procedures are another way to convince consumers to shop with an online retailer.  The best way to get people to shop online is to help them make worry free purchases and this comes with effective return policies and once again helps to reduce post-purchase cognitive dissonance, by eliminating the feeling that the consumer is stuck with the product if they do not like it anymore.
 
 

Cross  Border  Shipping

As stated is the “E-Commerce Statistics” unit  www.witiger.com/ecommerce/ecommercestatistics.htm, Canadians go online more then Americans, but Americans are buying more products online (9% of Canadian households have made a purchase over the Internet versus 23% of Americans).  Since such a large proportion of the Canadian population is online, there is a lucrative opportunity in trying to sell more to Canadians.  One reason Canadians do not buy online as much as Americans is that the largest number of sites from which to buy are U.S. based, which is a disincentive to Canadian shoppers who have to consider the exchange rate disadvantage and additional shipping costs and hassles.  In addition, many U.S. E-tailers don’t ship to Canada, or the shipping costs are high and often involve a slow shipping process. Therefore, an opportunity existed in which American E-tailers could try and further penetrate the Canadian market and a company known as Borderfree acted on this opportunity in 1999.

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Cross  Border  Shipping companies involved

www.borderfree.com/index.jsp Borderfree is just one example of a company that saw an opportunity to improve cross border online transactions (specifically American / Canadian E-Commerce relations) and saw a problem with the integration of American websites with the Canadian market and distribution issues of products between American E-tailers and the Canadian people.  Borderfree is a web service company that provides technological solutions to assist with transactions across national borders.  Their technological solutions include landed cost calculations, order management, data management and fraud and returns management.  In addition, they collect international shipments through a hub facility and prepare them for shipment and customs clearance before shipping them internationally.  They have partnerships with major shipping companies and obtain favorable shipping rates.  Borderfree is owned by Canada Post and a group of institutional and venture capital investors.  Omar and Natasha

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Cross  Border  Shipping companies involved Story of Borderfree

Borderfree recognized that there are high costs to internationalizing a website, but also that there are high costs in companies doing business with international customers.  Setting up a website is becoming increasingly easier and with this ease comes easier access to international markets.  What E-commerce merchants forgot was that it may be easy to set up a website and sell products, but it is not easy to distribute products beyond borders.  Within the distribution of products beyond borders comes: duties, taxes, timing, restrictions and the need to develop partnerships with local logistic service providers.  Borderfree also noticed that Canada and other countries lacked the volume that the US has in online purchasing mostly because American E-tailers do not ship internationally as this is beyond their means.  Interestingly, many consumers were reluctant to buy from foreign E-tailers as they didn’t know the landed cost of how much they were actually going to pay for a product by the time it was at their door.  Borderfree works to help online companies enter foreign markets.  They not only provide technology that helps to calculate the shipping costs and manage inventory, but help American companies ship to Canada with via Canada Post for favourable shipping rates.  Although challenging, shipping to foreign markets is possible and once a proper process is in place, it can be very profitable.  Omar and Natasha

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Conclusion to the Unit

For an online retailer to be successful, it has to have the complete package (for example optimal performance on all 4 P’s).  Thus far, the P that seems to have been overlooked by many online retailers is the last P in the marketing mix - Place.  To have the complete package, an online retailer has to have an efficient shipping process that gets products to consumers on time and in their intended form.  In addition, this process has to be reversible, in that if a consumer needs to return or exchange a product, this can be done easily without many penalties.  For online retailers, success on the fourth P is often the factor that converts website visitors into website customers.  Omar Adil and Natasha Chagpar

 
 
 
 
 

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