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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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In-aisle store displays might crowd shoppers and reduce overall sales

Retailers might seek strategies to boost product exposure without also increasing crowding – especially for cart shoppers who may experience greater crowding effects – and that excessive use of in-aisle fixtures will likely dampen sales at the aggregate level rather than increasing it. 

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In a study involving a real-world grocery store, in-aisle displays meant to boost product visibility were in fact associated with reduced sales and purchase-related behaviors, with results amplified for shopping cart users.

Mathias Streicher of Austria’s Department of Management and Marketing presents these findings in the open-access journal PLOS One.

Retailers often place extra product displays directly in aisles in an effort to boost visibility and enhance sales. However, in-aisle displays could increase spatial crowding, which occurs when people feel restricted in their freedom of movement and has been linked with purchase-avoidance tendencies. To help clarify if in-aisle displays result in more purchases, Streicher conducted several experiments with a partnering grocery store.

First, they tracked weekly sales for an aisle containing household, baby and pet staples over a six-week period during which five product-display stands were placed mid-aisle. The stands were then removed for six weeks. Comparison of sales data showed that in fact, sales increased after removal of the in-aisle displays, with the average weekly percentage of total store revenue from that aisle rising from 4.33 to 4.83 percent.

A second in-store experiment in the same aisle showed that people using shopping carts also stopped and physically handled products—behavior previously linked with sales—about 7.05 times more often when in-aisle displays were absent than when they were present. Non-cart shoppers also touched products more often when displays were removed, but the effect was smaller (3.81 times).

Finally, in an online experiment, 200 participants imagined using a shopping cart or basket while viewing photographs of the same aisle from the in-store experiments, with or without in-aisle displays. They tended to rate the aisle with displays as more crowded and reported lower levels of perceived control for aisles with displays than those without, with effects amplified for imagined cart versus basket use.

Together, these findings suggest retailers might seek strategies to boost product exposure without also increasing crowding – especially for cart shoppers who may experience greater crowding effects – and that excessive use of in-aisle fixtures will likely dampen sales at the aggregate level rather than increasing it. 

Further research could address some of this study’s limitations, such as by considering the effects of human crowding, promotional offers on products, and seasonal influences on shopping behaviors.

Streicher adds: “The research shows that adding merchandise into store aisles can actually reduce overall sales by making the environment feel crowded and harder to navigate. Importantly, this negative effect is even stronger for shoppers using carts, as they experience greater spatial constraints and reduced control while shopping.”

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Structure of online reviews shapes their helpfulness

Reviews that grow increasingly positive are most helpful to readers, while those that turn negative are least helpful. For average-rated products, progressively negative trajectories enhance helpfulness, whereas reviews that start negative and grow positive are least effective.

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A study of nearly 200,000 Amazon reviews shows that the usefulness of online product reviews depends not only on what is said, but on how the information is structured.

The researchers, from the Universities of Cambridge and Queensland, studied Amazon reviews for products ranging from clothing to food to electronics. They found that how the information is organised matters as much as what is said, and that different review structures are more or less helpful, depending on how highly the reviewer has rated the product.

Their results, published in the journal Scientific Reports, could help companies and third-party review platforms design their review pages to prompt the sort of reviews that will be most helpful to potential customers.

For example, a reviewer assessing a laptop might praise its performance and design while criticising its battery life, so how should such information be structured to be most useful to the reader? Should the review begin with criticism and end on a positive note, or start positively before turning to drawbacks?

“Any target of evaluation typically has both positive and negative aspects, which makes crafting evaluative messages challenging,” said co-author Dr Yeun Joon Kim from Cambridge Judge Business School. “The key question is how to structure these elements within a single message. For example, one might present criticism upfront and then move to praise, or instead integrate negative points within an otherwise positive evaluation. Yet research has paid little attention to this structural dimension.

“We wanted to understand whether certain structures are consistently more effective, or whether their effectiveness depends on the performance of the target being evaluated.”

The study was based on 195,675 reviews of 5,487 distinct products, and assessed performance and related factors, and a helpfulness score as measured by reader votes.

The researchers identified nine possible structures of online reviews ranging from Type A reviews that start positive and become more positive as they go along, to Type I reviews that start negatively and become even more negative – with lots of variance in between.

For highly-rated products, reviews that grow increasingly positive are most helpful to readers, while those that turn negative are least helpful. For average-rated products, progressively negative trajectories enhance helpfulness, whereas reviews that start negative and grow positive are least effective. For low-rated products, reviews are judged most helpful when they open constructively before introducing criticism.

“The results are nuanced but very clear,” said co-author Dr Luna Luan from the University of Queensland, who carried out the research while earning her PhD at Cambridge Judge Business School. “Looking at the overall sentiment of reviews does not fully translate into message effectiveness. It is the broader structure of sentiment – how positivity and negativity evolve throughout the review – that shapes how readers interpret online reviews.”

“Our findings have practical implications for how platforms and companies can design review pages in order to elicit the sort of reviews that will be most helpful to readers based on how highly products are rated,” said Kim. “For example, instead of simply asking ‘Write your review here’, the online review form could instead include micro-prompts that guide how reviewers structure feedback in a way recipients find most helpful.”

The researchers found the most commonly used review styles are not necessarily the most helpful to readers. In particular, for average- and low-rated products, the structures that reviewers tend to adopt often differ from those that readers find most useful.

This mismatch likely reflects different underlying motivations. Reviewers are not always writing to maximise usefulness for others, but may instead be expressing their own experiences, frustrations or emotions – especially when evaluating products of moderate or poor quality. As a result, review writing often serves both as information sharing and as a form of self-expression. This helps explain why widely used review styles do not always align with what readers perceive as most informative or helpful.

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Reversible words can lower consumer disbelief in ads

A simple word choice in marketing messages can significantly impact how confident consumers feel about believing – or not believing – a claim.

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It’s estimated that consumers experience hundreds if not thousands of marketing messages daily. While the exact number can depend, how much someone believes the message can be more important for marketing success than the number of messages they see. 

A new study reveals that a simple word choice in marketing messages can significantly impact how confident consumers feel about believing – or not believing – a claim. Researchers found that when words differ in their “reversability,” or how easily people can think of their opposites, it can trigger different mental processes when consumers evaluate marketing language. 

Imagine the messaging options for a new sunscreen designed specifically for those who like a strong scented product. The first product description reads, “The scent is prominent,” while the second notes, “The scent is intense.” The word “prominent” is uni-polar, meaning people tend to negate it by adding “not” to the original statement.

“Intense,” though, is a bi-polar word, meaning readers can easily come up with its opposite meaning and negate the statement by replacing it with its antonym. In this example, “The scent is mild,” instead of, “The scent is intense.” 

“When people encounter easily reversible words, like ‘intense’, in messages processed as negations (mild), they experience lower confidence in their judgements compared to words that are hard to reverse, like ‘prominent,’” explained Giulia Maimone, a postdoctoral scholar in marketing at the University of Florida Warrington College of Business. 

Across two experiments of more than 1,000 participants, the research demonstrated that this effect occurs because negations of bi-polar, or reversible, words engage a more elaborate cognitive process requiring additional mental effort, resulting in lower confidence of the statement’s truthfulness. 

Based on their findings, the researchers suggest that marketers take this advice when crafting language: for new products, use affirmative statements with easily reversible words, like ‘The scent is intense’ in the sunscreen example, which most consumers will judge as true with high confidence. Importantly, this language would also minimize the confidence of consumers who will be skeptical about the message, as they will process it via a more complex cognitive process that reduces confidence in those consumers’ disbelief. 

“This simple lexical choice could help companies maximize confidence in their desired messaging and minimize confidence among the doubters,” Maimone explained. 

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