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‘Free’ delivery plans profit both retailers and customers

Free-delivery subscription (FDS) plans come surprising close to being a free lunch. They can offer financial benefits to everyone involved: retailers such as Target and Amazon and their customers, who intend to buy many products and take advantage of free shipping.

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In March, Target became the latest mega-retailer to offer “free” delivery — for a price. For $99 a year, subscribers to Target Circle 360 can place unlimited orders without having to worry about shipping costs. Target competes with similar plans offered by Walmart and Amazon.

Of course, someone ultimately must pay those delivery costs. Or do they?

According to new research from Texas McCombs, free-delivery subscription (FDS) plans come surprising close to being a free lunch. They can offer financial benefits to everyone involved: retailers such as Target and Amazon and their customers, who intend to buy many products and take advantage of free shipping.

The paper was co-authored by Anant Balakrishnan, professor of information, risk, and operations management. With Shankar Sundaresan of Rutgers University and McCombs graduate Chinmoy Mohapatra — now at Amazon — he explored whether FDS services are a good business move, compared with the traditional practice of having customers pay extra for shipping.

“We saw some articles in the business press that the actual cost of delivering goods was more than twice the amount they recover from subscription fees,” Balakrishnan says. “It begs the question: How can this be sustainable?”

For example, he says, if a company spends $8 per order on shipping costs and charges $80 for its subscription, its operations costs exceed the fee after 10 orders. What’s more, customers who subscribe to FDS place smaller orders more frequently, instead of grouping items together to save on shipping. That further increases the company’s total delivery costs.

It’s hard to get cost and revenue information from mega-retailers, who prefer to keep logistics data secret, Balakrishnan says. Instead, he used computer modeling, analyzing 3,125 different combinations of delivery operations and customer types.

On average, he found, compared with traditional paid delivery,

  • A universal FDS plan, where all customers pay the same subscription fee for unlimited free deliveries, generated 33.7% more overall profit.
  • A tiered plan, offering extra perks for higher fees, generated an additional 1.9% in profit over the universal plan.

The reason, he says, is that other factors increase profits enough to make up for what the retailer loses on shipping.

More purchases. 

“People who are subscribing to these plans buy more on average every year,” Balakrishnan says. Since they no longer pay separate shipping for each purchase, their cost per unit is lower, prompting them to purchase more. Companies benefit because they earn a profit margin on each purchase.

Locking in customers. 

Even heavy shoppers aren’t likely to sign up for every FDS service available. They’re likely to do more shopping with whatever retailer they’re subscribed to.

“Once you lock in a customer to a subscription, they may shift their purchases from other places, as long as the price is comparable,” Balakrishnan says.

Adding value.

In addition to free shipping, retailers can add other perks, such as access to online entertainment, exclusive sales, or different return options. If the package is attractive enough, customers might be willing to pay more than they would spend for shipping alone. Amazon Prime has steadily increased its price from $79 to its current $139 a year.

But FDS plans don’t work for all retailers and all customers. Some customers may not shop enough to make the plan worthwhile. Others may shop so often that it would hurt a smaller retailer to offer them unlimited free shipping, even with a fee.

Giving customers flexible options works best, Balakrishnan says. For example, a retailer can offer a subscription fee that includes free shipping but limits it to a specific number of orders.

The biggest takeaway, Balakrishnan says, is that a mix of FDS and pay-for-delivery (PFD) options can increase business for retailers while saving money for frequent shoppers. In homage to a well-known ad campaign for American Express, he considered titling his paper, “Membership Has its Benefits.”

Now that he’s shown how combining FDS and PFD can work for retailers, he says, the next step might be to look at how they can compete within these frameworks. Other avenues to explore include getting and analyzing empirical data from companies, and studying the economics of alternative business models for last-mile delivery operations.

“I see Amazon trucks almost every day making deliveries to multiple households,” Balakrishnan says. “If many of my neighbors are Prime subscribers, and they keep ordering often, the delivery costs get amortized over multiple deliveries. So, delivery costs for Amazon may be lower. I think this is very important for us to study later.”

Subscription Pricing for Free Delivery Servicesis published in Production and Operations Management.

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Reminder to marketing people: Missing information can misinform

You don’t need bad actors for people to get the wrong idea. Incomplete information can be enough.

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To get people to pay attention, you have to make it engaging. But what makes content engaging often comes at the cost of detail – shaping what people learn and what they think they’ve learned. The result: People can come away with the wrong idea, even when what they read isn’t factually wrong.

That tension sits at the core of research from Marta Serra-Garcia, a behavioral economist at the University of California San Diego’s Rady School of Management. The study, published in the American Economic Review, examines how incentives in the online attention economy shape the way scientific information is communicated – and what readers ultimately take away from it.

A trade-off in the attention economy

You don’t need bad actors for people to get the wrong idea. Incomplete information can be enough.

Crucially, the research finds that attention-grabbing summaries are not more likely to be factually inaccurate. Instead, they tend to include less information – especially key details about how studies were conducted.

“This is not a simple story that clickbait is bad,” said Serra-Garcia, associate professor of economics and strategy and Phyllis and Daniel Epstein Chancellor’s Endowed Faculty Fellow at UC San Diego’s Rady School. “You need to get people’s attention in order for them to learn something, and it’s good to encourage curiosity. Yet there’s a trade-off: Material designed to engage can also unintentionally contribute to the kinds of misunderstandings that can fuel misinformation.”

The finding comes from a large, multi-stage experimental study in which freelance writers produced nearly 600 summaries of actual scientific research, and more than 3,700 participants were then tested on what they learned from them.

Why “in mice” matters

In one study used in the experiment, a compound in broccoli reduced cancer cell growth – in mice. Leave out those last two words, and the finding can sound far more directly relevant to human health than it actually is.

“Why can’t we say ‘in mice’?” Serra-Garcia said. “It’s not very hard to add. It’s two words. But once you say ‘in mice,’ maybe fewer people will click.”

Study results were consistent. Summaries written to attract attention were shorter, easier to read and more engaging – but included less detailed information, especially about sample sizes and methods.

Given the option to seek out more information, most readers did not. That mirrors real-world behavior: Studies of social media use suggest most content is shared without users ever clicking through to read more.

Among those who relied on summaries alone in Serra-Garcia’s study, knowledge dropped by about 6-7 percentage points. Readers were also more likely to draw incorrect conclusions – such as assuming findings applied to humans or reflected firm medical guidance.

Inside the experiments

To isolate these effects, Serra-Garcia conducted a multi-stage experimental study. In the first stage, 149 freelance writers produced nearly 600 summaries of the same set of studies – covering topics such as cancer, sleep, vaccines and climate – under different instructions: to inform readers accurately, or to attract attention by encouraging clicks or shares. 

In the second stage, more than 3,700 participants read those summaries under different conditions, including whether they could click through for more information.

The results held across experiments: Attention-driven summaries increased engagement and prompted some readers to learn more – but left many others with less complete understanding.

AI and the attention economy

The same pattern emerged when a human wasn’t doing the writing. In additional tests, when a large language model was prompted to attract attention, it also produced less detailed summaries – suggesting the effect is driven less by who creates the content than by the objective it’s optimized for.

For Serra-Garcia, the findings point to an ongoing challenge for researchers, journalists and institutions alike.

“How do you make science engaging and important to readers,” she said, “without missing the essentials that convey the full picture?” 

The research was funded in part by National Science Foundation grant no. 2343858. 

Read the full study: “The Attention – Information Trade-off.” 

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Office owners or managers, take note: Increased risk of bullying in open-plan offices

In traditional open-plan offices it is easier to notice colleagues’ shortcomings and become irritated by them. If someone gets frustrated and takes it upon themselves to “do something about” a colleague’s behaviour, and there are no clear guidelines for handling such situations, there is a risk that it may escalate into bullying. Those who are subjected to bullying lack access to a private space for retreat. 

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Open-plan offices entail a clearly increased risk of workplace bullying compared with employees having their own office or sharing with just a few colleagues. This is shown in research from Linköping University, Sweden. 

“Increased bullying is a tangible negative consequence of how you choose to organise the workplace. It’s important to highlight this, as it hasn’t previously been examined,” says Michael Rosander, professor at the Division of Psychology at Linköping University.

Open-plan offices, where many employees share the same space, have become increasingly common. Employers often justify this development as a way to use premises more efficiently and to encourage creative interactions between employees. However, research has shown that open-plan offices do not promote health, job satisfaction or productivity.  

Until now, it has been unclear whether open-plan offices also affect the risk of bullying and employees’ motivation to look for another job. Through surveys of more than 3,300 randomly selected individuals in employment in Sweden, Michael Rosander has now provided an answer. The results are published in the journal Occupational Health Science. 

Thirty per cent of those with some form of office-based work reported that they worked in a traditional open-plan office with no access to private space. Thirteen per cent worked in so-called activity-based offices, where employees spend part of their time in an open-plan environment but also have access to designated rooms for tasks requiring peace and quiet. The remainder had their own office or shared one with only a few colleagues.

For traditional open-plan offices, the survey responses showed a clearly increased risk of bullying compared with those who had their own office or shared an office with only a few colleagues. The difference remained regardless of factors such as personality traits and the extent of remote working. This suggests that the problems are indeed caused by the work environment in the office.  

The researchers’ explanation is that in traditional open-plan offices it is easier to notice colleagues’ shortcomings and become irritated by them. If someone gets frustrated and takes it upon themselves to “do something about” a colleague’s behaviour, and there are no clear guidelines for handling such situations, there is a risk that it may escalate into bullying. Those who are subjected to bullying lack access to a private space for retreat. 

Activity-based open-plan offices, by contrast, showed no increased risk of bullying, likely due to the availability of private spaces. However, in both types of open-plan office, employees were more likely to consider changing jobs. One possible explanation is that activity-based offices also involve more distractions, according to Michael Rosander.

For employers who have introduced, or are planning to introduce, open-plan offices, there are some lessons to be learned. One is to be prepared to deal with irritation and conflicts before they escalate. Another is the importance of providing rooms where employees can work undisturbed. Placing individuals with similar needs and tasks near one another may also reduce the risk of disruption.

“Traditional open-plan offices are in themselves negative for the individual, for productivity, and make people more likely to leave their job. Social interaction also suffers. So it’s worth considering how to handle it,” says Michael Rosander.

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Long-serving CEOs may weaken innovation, study finds

Companies led by long-serving chief executives may become less innovative over time unless challenged by strong independent boards.

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A new study from the University of East London has found that companies led by long-serving chief executives may become less innovative over time unless challenged by strong independent boards.

The research examined 215 FTSE 350 companies over an 11-year period between 2010 and 2021. It explored how CEO tenure and independent directors influence a company’s “R&D knowledge stock”, which is the research, expertise and technological capability built through investment in innovation.

The study published in the journal Corporate Governance found that CEOs who remain in office for many years often become more cautious and less willing to back risky research and development projects. These companies were more likely to reduce investment in innovation and long-term technological growth.

Firms with higher numbers of independent directors were more likely to continue building innovation capacity with experienced CEOs and independent directors forming an effective partnership, to combine deep company knowledge with outside challenge.

However, both experienced CEOs and independent directors become more cautious and less willing to back risky research and development projects when the company fails to meet performance aspirations, suggesting that independent directors do not have stable risk preferences.

The findings suggest that innovation is shaped not only by technology and finance, but also by leadership culture and corporate governance structures.

Author Dr Igbekele Sunday Osinubi, of the Royal Docks School of Business and Law, said: “Long-serving CEOs can bring valuable experience and stability, but there is also a risk that leaders become too cautious or too attached to existing ways of thinking. Our findings show that independent directors play an important role in encouraging companies to continue investing in innovation, especially during difficult periods when firms may otherwise retreat from long-term research and development.”

He added: “This matters beyond individual companies. Innovation drives productivity, competitiveness and economic growth. The study highlights how governance structures can influence whether firms continue building the knowledge and technologies that shape future industries.”

The paper argues that regulators and policymakers should consider governance reforms and incentives that encourage long-term innovation strategies, particularly in firms led by long-serving executives. The findings may also influence how boards think about CEO succession planning, oversight and the balance between short-term financial pressures and long-term investment.

Osinubi’s research, “Long CEO tenure, independent directors and R&D knowledge stock: the moderating effect of performance shortfalls”, was published in the Corporate Governance: The International Journal of Business in Society

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