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The effect of shipping fee structure on consumers’ online evaluations and

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Article  in  Journal of the Academy of Marketing Science · November 2011

DOI: 10.1007/s11747-011-0281-2

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J. of the Acad. Mark. Sci. (2012) 40:759–770
DOI 10.1007/s11747-011-0281-2

ORIGINAL EMPIRICAL RESEARCH

The effect of shipping fee structure on consumers’ online

evaluations and choice
Nevena T. Koukova & Joydeep Srivastava &
Martina Steul-Fischer

Received: 22 February 2011 / Accepted: 4 August 2011 / Published online: 21 August 2011
# Academy of Marketing Science 2011

Abstract This research examines how consumers respond
to different shipping fee structures. Focusing on two of the
most common shipping fee structures, flat rate shipping and
threshold-based free shipping, we first demonstrate that
offer evaluations are less (more) favorable with threshold-
based free shipping when order value is below (above) the
free shipping threshold compared to flat rate shipping.
However, when an alternative more important referent is
present, the effect of shipping fee structure is attenuated.
Second, we show that although perceptions of shipping fees
as a profit generator are higher (lower) under threshold-
based free shipping relative to flat rate shipping for order
values below (above) the free shipping threshold, providing
a justification for the shipping fee by explicitly linking it to
Listed alphabetically, the three authors contributed equally to the
article. This research was partially funded by the Alison and Norman
Axelrod’74 endowed summer research fellowship awarded to the first
author by Lehigh University and by the summer research grant
awarded to the second author by the Robert H. Smith School’s Center
for Excellence in Service and the Research Committee.
N. T. Koukova (*)
College of Business and Economics, Lehigh University,
Bethlehem, PA 18015, USA
e-mail: nkoukova@lehigh.edu
J. Srivastava
Robert H. Smith School of Business, University of Maryland,
College Park, MD 20742, USA
e-mail: srivasta@rhsmith.umd.edu
M. Steul-Fischer
Institute of Marketing, School of Business and Economics,
University of Erlangen-Nuremberg,
90403 Nuremberg, Germany
e-mail: martina.steul-fischer@wiso.uni-erlangen.de
delivery costs encourages consumers to view the shipping
fee as a cost of doing business rather than as a profit
generator, thus raising offer evaluations.
Keywords Shipping fee . Flat rate shipping . Threshold-
based free shipping . Free shipping . Progressive rate
shipping . Online shopping
Direct-to-consumer business models, where the physical good
is spatially separated from the consumer (Lewis 2006),
necessitate firms’ incurring order assembly and delivery costs
(Rosen and Howard 2000). Firms typically recover these costs
by passing them on to consumers in the form of shipping fees
(Barsh et al. 2000). The growth in e-commerce (online
spending in the U.S. reached $142.5 billion in 2010, an
increase of about 10.5% over 2009) has accentuated the
importance of shipping fees. Designing a shipping policy is
one of the biggest quandaries firms face as it requires
balancing the need to recover delivery costs and the need to
attract and retain consumers. Despite the topic’s importance,
only a handful of studies have examined shipping fees (Lewis
2006; Lewis et al. 2006; Schindler et al. 2005). Further, the
existing studies restrict their examination to comparing
promotional offers of free shipping to threshold-based free
shipping (Lewis 2006; Lewis et al. 2006).
This paper attempts to contribute to the sparse literature
by examining the effects of two common shipping fee
structures—flat rate and threshold-based free shipping.
With flat rate shipping, retailers charge a fixed fee
regardless of order value. With threshold-based free
shipping, retailers waive the shipping fee for orders above
a specific amount, but charge a fixed fee otherwise.
Estimates suggest that 49% of online retailers use flat rate
760
and 43% use threshold-based free shipping (ComCult
Research 2003). The experimentation occurring online and
the variety of fees indicate that retailers are grappling with
the effect of shipping fees on consumer demand. For
example, Amazon decreased its free shipping threshold
from $99 to $25, while Ann Taylor Loft changed its policy
from threshold-based free shipping to flat rate to progres-
sive rate shipping. Thus, from a substantive as well as a
practical perspective, there is a need to explore how
consumers respond to different shipping fee structures.
The primary purpose of this research is to experimentally
examine how consumers evaluate and respond to flat rate
and threshold-based free shipping. We focus on these two
shipping fee structures because these are the most prevalent
in the marketplace and most other structures are derived
from them (e.g., flat rate shipping fee that increases
stepwise based on order value). Importantly, we examine
factors that may moderate the effect of shipping fee
structure on consumer evaluations and thus provide a better
understanding of the conditions under which different
shipping fee structures affect consumer response.
Since the shipping fee depends on order value for
threshold-based free shipping, we first examine whether
the effect of flat rate and threshold-based free shipping on
online offer evaluations depends on order value. The results
reveal that offer evaluations are less (more) favorable with
threshold-based free shipping when order value is below
(above) the threshold compared to flat rate shipping. The
theoretical argument is that, for threshold-based free
shipping, the possibility of free shipping is the natural
referent against which any shipping fee is evaluated. While
for order values below the threshold the shipping fee is
likely to be coded as a loss relative to the referent and lead
to lower evaluations, for order values above the threshold
the shipping fee is likely to be coded as a gain and result in
higher evaluations. However, if another referent that is
more important than the shipping fee is present, such as
product price discount, the effect of the shipping fee is
attenuated regardless of order value. Given that the price of
the focal product (and related discount) is more important
than shipping fees (Hamilton and Srivastava 2008), such an
alternative referent is likely to overshadow the effect of
shipping or draw attention away from the shipping fee,
particularly from the natural referent of free shipping
associated with threshold-based free shipping. The presence
of an alternative important referent thus moderates the
interaction effect of shipping fee structure and order value
on consumer evaluations of online offers.
Second, we propose that the shipping fee structure itself
may prompt consumers to think of retailer profit motives
for employing this structure (Schindler et al. 2005). We
examine consumers’ inferences about the extent to which
shipping fees are used to generate profits and whether
J. of the Acad. Mark. Sci. (2012) 40:759–770
providing a justification for the shipping fee alters the effect
of shipping fee structure on inferences and evaluations. Our
results suggest that for order values below (above) the
threshold for free shipping, consumers are more (less)
likely to infer that shipping fees are used to increase profits
when the retailer employs threshold-based free shipping
than flat rate shipping. However, retailers may be able
to channel such inferences in a way to improve offer
evaluations by justifying the shipping fee structure employed.
Specifically, we show that linking the shipping fee to the
actual cost of delivery alters consumers’ inferred motive
regarding shipping fees and improves evaluations. The
provision of justification for the shipping fee thus moderates
the interaction effect of shipping fee structure and order value
on consumer evaluations.
This research contributes to the literature by systemati-
cally examining the effect of two common shipping fee
structures on consumers’ inferences and evaluations, and
testing boundary conditions for the effects. Specifically,
adding to previous research (e.g., Lewis 2006; Lewis et al.
2006), this paper investigates the effect of flat rate shipping
and compares it with threshold-based free shipping. We
demonstrate that a specific shipping charge may differ-
entially affect offer evaluations depending on whether it
is framed as a flat rate or a threshold-based shipping fee.
We offer a theoretical explanation for the observed effect
and provide recommendations to retailers on how to
frame the shipping fee in order to increase consumers’
evaluations. Further, given that data constraints prevented
an examination of moderators in previous research (e.g.,
Lewis 2006), the use of experimental methodology allows
us to identify boundary conditions thus adding to our
understanding of the effects of shipping fee structure. In
particular, we demonstrate that the presence of an
alternative important referent and the provision of justifi-
cation for the shipping fee can systematically alter
(moderate) the interaction effect of shipping fee structure
and order value on offer evaluations.
The next section provides the conceptual background
and develops specific predictions for the effects of shipping
fees and potential moderators. We then report three experi-
ments that test the hypotheses and explore boundary
conditions. The paper concludes by discussing the theoret-
ical and managerial implications of the findings including
directions for future research.
Conceptual background
The explicit separation of shipping fee from the price of a
product is an example of partitioned pricing where the total
price is divided into two or more mandatory components
such as a base price and a surcharge (e.g., Chakravarti et al.
J. of the Acad. Mark. Sci. (2012) 40:759–770
2002; Cheema 2008; Hamilton and Srivastava 2008;
Hamilton et al. 2010; Morwitz et al. 1998; Xia and Monroe
2004). However, partitioning the total price into product
price and shipping fee has only been used as a context in
which to study the effect of price partitioning rather than
the differential effects of various shipping fee structures on
consumer response. Specifically, while previous studies
have compared partitioned (i.e., shipping charge listed
separately) and non-partitioned (shipping included in the
total price) offers, our focus is on the effect of different
shipping fee structures such as flat rate and threshold-based
free shipping.
More relevant to the current investigation, in an analysis
of online book purchase data, Smith and Brynjolfsson
(2001) find that consumers are almost twice as sensitive to
changes in the shipping fee than to changes in the price of
the book. Hamilton and Srivastava (2008) also argue that
consumers are more sensitive to the price of partitioned
components that are less important and provide relatively
low consumption benefits (e.g., shipping) than to the price
of components that are more important and provide
relatively high consumption benefits (e.g., the product).
Lewis et al.’s (2006) analysis reveals that promotional free
shipping increases order incidence but reduces order values,
whereas threshold-based free shipping encourages larger
orders but has little impact on order incidence. Although
free shipping raises order incidence, the increased revenues
are not enough to offset the cost of shipping.
In sum, a shipping fee is an important component that is
likely to influence consumers’ online purchasing behavior
and decision making. While previous research has explored
the effects of promotional free shipping and threshold-
based free shipping (Lewis et al. 2006), this paper is the
first to examine the effect of flat rate shipping and compare
it to the effect of threshold-based free shipping on
consumer evaluations and inferences. Further, we study
the role of order value on the effect of shipping fee structure
on consumers’ inferences and evaluations, as well as the
moderating role of an alternative important referent and
shipping fee justification on the interaction effect of
shipping fee structure and order value on consumer
evaluations.
Order value as a moderator of the effect of shipping fee
structure on offer evaluations
Proponents of both flat rate and threshold-based free
shipping structures speculate on identical reasons for their
success. Both are believed to be “clean” and “simple” for
consumers and can be easily communicated such that it is
clear to shoppers how much they are paying for shipping.
Both shipping fee structures are believed to increase order
value. While flat rate shipping presumably increases order
761
value because “it does not cost any more,” threshold-based
free shipping encourages people to increase order value and
reach the free shipping threshold to avoid the shipping fee
(Lewis et al. 2006). Order value thus assumes particular
significance for threshold-based free shipping. We argue
that a critical difference in evaluating offers with flat rate
and threshold-based free shipping lies in the referent used
to evaluate the shipping fee.
The notion that evaluations are reference dependent and
based on a comparison with a standard or a referent is well
acknowledged (Kahneman and Tversky 1979). Evaluations
depend on both the absolute and relative value compared to
some referent. For example, when a potential buyer
assesses the value of a house, she is likely to anchor on
some reference (e.g., comparable houses in the area, last
house sold, average house) and make a judgment by
comparing the current house with the referent (Hsee and
Leclerc 1998). However, if the buyer is shown two houses,
she is less likely to think about the referent used in the
earlier evaluation and is more likely to make a judgment by
comparing the two houses. The reason for the shift in
reference from the single house to the two houses is that
people rely more on vivid, easily available information than
on pallid background information that requires more
effortful processing to access (Hsee and Leclerc 1998). In
general, the preference reversals between separate and joint
evaluations can be explained by the “evaluability” hypoth-
esis—attributes that are hard to evaluate independently
loom larger in joint evaluations, while attributes that are
easy to evaluate independently loom larger in separate
evaluations (Hsee et al. 1999).
We conceptualize a similar “shift in reference” mecha-
nism underlying the effects of shipping fee structures on
consumer evaluations. First, consider an online offer with
flat rate shipping. In evaluating the fee, consumers are
likely to use referents such as the shipping fee last paid, the
fee charged by an online retailer used frequently, or some
abstract distributional information such as “average fee”
based on prior experience or knowledge. Now consider an
online offer with threshold-based free shipping. For such
offers consumers are likely to use the potential free
shipping as the natural referent. Flat rate and threshold-
based free shipping are thus likely to differ in the frame of
reference that consumers use in their evaluations. Specifi-
cally, while flat rate shipping is likely to invoke a memory-
based referent based on prior knowledge or experience, in
the case of threshold-based free shipping the referent shifts
to stimulus-based free shipping. In other words, flat rate
shipping is typically less evaluable as it is relatively
difficult to assess given the lack of a precise referent. In
contrast, threshold-based free shipping is more evaluable as
it is relatively easy to assess, given the more vivid and
precise referent of free shipping (Hsee et al. 1999). Unlike
762
Hsee et al. (1999), the evaluability of shipping fees is
inherent to the shipping fee structure and does not depend
on joint versus separate evaluation (which is not considered
in the current research). Our focus is on how consumers
evaluate a product offer with a specific shipping fee
structure (separate evaluation), and we do not consider
situations in which two offers with different shipping fee
structures are evaluated simultaneously (joint evaluation).
The implication is that because threshold-based free
shipping provides a precise referent against which to
evaluate the shipping fee, order value assumes differential
significance. When the order value is below the threshold,
the shipping fee is likely to be coded as a loss or penalty
relative to the possibility of free shipping. For equivalent
total prices, consumer evaluations are likely to be less
favorable relative to an offer with flat rate shipping.
Conversely, when the order value is above the threshold,
the lack of shipping fee is likely to be coded as a gain or a
bonus and offer evaluations are likely to be more favorable
relative to an offer with flat rate shipping. The differential
effect of the two shipping fee structures on offer evaluations
for order values below or above the threshold is likely to be
driven, in part, by perceptions of shipping policy fairness.
Previous research highlights the importance of perceived
price fairness in influencing consumers’ reactions to prices
(e.g., Campbell 1999; Kahneman et al. 1986). Moreover,
fairness perceptions mediate the effect of price discounts or
price premiums relative to other consumers on purchase
satisfaction (e.g., Darke and Dahl 2003). Thus, when the
order value is below the threshold for threshold-based free
shipping, the loss associated with incurring the shipping fee
(compared to the referent of free shipping) will be
perceived as less fair than a flat rate that every consumer
must pay, leading to less positive offer evaluations. On the
other hand, for offers above the threshold, the gain
associated with free shipping will be perceived as fairer
than flat rate shipping, leading to more positive offer
evaluations.
Alternative important referent as a moderator of the effect
of shipping fee structure and order value on offer
evaluations
Our conceptualization of the effects of shipping fee
structure is based on different referents being used in the
evaluations. It follows that providing an alternative referent
that is more important than the shipping charge may draw
consumer attention away from the referents used in
evaluating the shipping fee. The price of the focal product
has been shown to be more important than the shipping fee
(e.g., Hamilton and Srivastava 2008). Further, in general,
consumers are bargain driven such that the subjective
importance of a bargain is often greater than what would
J. of the Acad. Mark. Sci. (2012) 40:759–770
be expected based on the economic value of the bargain
(Darke and Dahl 2003). As such, an online offer that
emphasizes a discount off the regular product price is likely
to draw consumers’ attention away from the shipping fee,
thereby attenuating the effect of shipping fee structure on
consumer evaluations. Specifically, consumers are likely to
shift their focus to the more important alternative referent
when evaluating the online offer (Kahneman and Miller
1986). We thus predict that regardless of order value,
consumer evaluations of online offers will not differ across
flat rate and threshold-based free shipping when an
alternative important referent such as a price discount is
provided. Study 1a examines the effect of shipping fee
structure, order value, and the presence of another impor-
tant referent on offer evaluations.
H1a: Compared to an online offer with flat rate shipping,
a threshold-based free shipping offer will be evalu-
ated less (more) positively when the order value is
below (above) the threshold for free shipping in the
absence of an alternative important referent.
H1b: When an alternative important referent is present,
consumer evaluations will not differ across flat rate
and threshold-based free shipping structures, regard-
less of order value.
In examining how threshold-based free shipping may
affect offer evaluations, it is important to consider the level
of the free shipping threshold itself. It is possible that the
referent of free shipping may loom larger for threshold-
based free shipping when the order value is just below
(versus well below) the free shipping threshold. Just
missing out on reaching the threshold and incurring a
“loss” may have a more pronounced effect on consumer
evaluations when the threshold is easy to reach rather than
difficult to reach (e.g., Kahneman and Miller 1986). For
example, Lassar et al. (1997) found that just missing out on
a warranty created a less favorable reaction relative to
having the problem within the warranty period or long after
its expiration. Study 1b examines the robustness of the
results across different free shipping thresholds for an order
value below the threshold and rules out the level of
closeness of the threshold as an alternative explanation for
the lower evaluations when threshold-based free shipping is
employed (relative to flat rate shipping).
Inferences of profit motive and the moderating role
of shipping fee justification on the effect of shipping fee
structure and order value on offer evaluations
Given that consumers are skeptical of shipping charges and
may view them as a way for firms to make additional
profits (Schindler et al. 2005), we examine whether
consumer perceptions of the extent to which a shipping
J. of the Acad. Mark. Sci. (2012) 40:759–770
fee is used to generate profits rather than as a means to
recover delivery costs is affected by whether the shipping
fee structure is flat rate or threshold-based free shipping.
According to attribution theory, consumers will seek to
meaningfully explain firms’ shipping fee structure in terms
of underlying reasons such as profits and/or cost (Fiske and
Taylor 1991). Attribution research indicates that the
inclination to search for causal explanations for others’
behavior is particularly high following an unexpected and/
or negative outcome (Folkes 1984; Kelley 1967). For
example, the underlying motives of some sellers for a price
increase may be perceived as positive or benevolent,
whereas other sellers’ motives may be perceived to be
negative, driven by the extent to which the seller is taking
advantage of or exploiting consumers (Campbell 1999).
Campbell (1999) demonstrates that a seller’s inferred
motive is an important causal construct that underlies
perceptions of price (un)fairness. As such, we argue that
the extent to which consumers infer a profit generating
motive for a retailer’s shipping fee is likely to affect how
the retailer’s online offer is evaluated.
Attribution theory highlights locus (whether the cause
resides within or outside of the actor) and controllability
(whether the cause is subject to volitional alteration or
not) as two central characteristics of causality (Weiner
2000). They both trigger judgments about responsibility
for the obtained outcome, affecting consumers’ evalua-
tions and satisfaction (e.g., Tsiros et al. 2004). Given the
salience of free shipping for a threshold-based free
shipping structure, consumers paying a shipping fee for
order values below the threshold are likely to seek an
explanation for why the retailer charges a fee for orders
below the threshold. They may believe that since profits
are relatively low on small order values, retailers com-
pensate by charging a shipping fee. Alternatively, they
may believe that retailers attempt to make a profit on
shipping fees from consumers with low order values in
order to subsidize the high order value consumers.
Consumers facing a reasonable flat rate fee will be less
likely to search for a causal explanation for the fee
because all consumers pay the same shipping fee,
regardless of order value. Supporting this notion, Haws
and Bearden (2006) demonstrate that differences between
consumers result in the greatest perception of unfairness
and the lowest overall satisfaction (relative to seller, time,
and price setter differences). Thus, for order values below
the free shipping threshold, consumers facing threshold-
based free shipping will be more likely to infer a profit
motive for the shipping charge (e.g., retailer is trying to
make money on shipping) relative to consumers presented
with flat rate shipping that every consumer is paying. In
contrast, consumers with order values above the threshold
are less likely to seek an explanation and less likely to
763
regard the shipping fee as a way for retailers to generate
profits. Thus, consumer perceptions of shipping fees as a
profit generator are likely to be higher (lower) when the
order value is below (above) the threshold for threshold-
based free shipping relative to flat rate shipping.
Further, we examine whether providing a (cost) justifi-
cation for the shipping fee moderates the effect of shipping
fee structure and order value on perceptions of shipping
fees as a profit generator and offer evaluations. While
people believe that retailers are entitled to a certain level of
profit on the price of the product (Kahneman et al. 1986),
the same entitlement does not hold for shipping fees.
However, people recognize that retailers incur delivery
costs and are entitled to recover the “cost of doing
business” (Schindler et al. 2005). The implication is that
consumer inferences of shipping fees as a profit generator
and evaluations of online offers may be more favorable
when retailers link the shipping fee structure to their actual
shipping cost. When a justification for a negative outcome
is provided, the outcome is perceived as fairer than when
the same outcome arises with no justification offered (Bies
and Shapiro 1988).
We suggest that when a credible statement with a
rationale for the shipping fee structure (that links the
shipping fee to the actual cost of shipping) is provided,
the effect of shipping fee structure on consumer perceptions
of shipping fees as a profit generator and offer evaluations
is likely to be attenuated. For example, a retailer may
include a statement on its website claiming that the
shipping fees correspond to what the shipping company is
actually charging. Thus, for order values below the
threshold, consumers provided with such a justification
will no longer view the shipping fee as a penalty but as a
cost of doing business. As such, regardless of order value,
consumer perceptions of shipping fees as a profit generator
and evaluations of the online offers are not likely to differ
across the flat rate and threshold-based free shipping
structures when the rationale for shipping fees is clearly
communicated. Study 2 examines the moderating role of
justification for shipping fee structure on consumer percep-
tions of shipping fees as a profit generator and evaluations
of online offers.
H2a: Compared to an online offer with flat rate shipping,
a threshold-based free shipping offer will lead to
higher (lower) perceptions of shipping fees as a
profit generator when the order value is below
(above) the threshold for free shipping.
H2b: When a justification for the shipping fee is present,
perceptions of shipping fees as a profit generator
and offer evaluations will not differ across flat rate
and threshold-based free shipping structures, regard-
less of order value.
764
Study 1a: order value and an alternative important
referent
Study 1a tests H1, which predicts that compared with flat
rate shipping, an online offer with threshold-based free
shipping will be evaluated less (more) favorably when the
order value is below (above) the free shipping threshold.
However, the effect will be attenuated in the presence of an
important alternative referent. The rationale is that consum-
ers will focus on the important referent, drawing attention
away from the shipping fee and specifically the natural
referent of free shipping associated with threshold-based
free shipping, regardless of order value.
Method
One hundred and seventy-nine undergraduate students
(47% female, age ranging from 18 to 26 years, mean age
=20.1 years) from a U.S. university participated in the
study for extra credit. Participants were assigned at random
to one of eight conditions of a 2 (shipping fee structure: flat
rate and threshold-based free shipping) x 2 (order value:
$34.99 and $44.99) x 2 (alternative referent: none and $2
price discount) between-subjects design. Participants imag-
ined that they were buying a new flash drive. They were
told that they came across an online store that had suitable
flash drives and the model they liked was described in
detail. The online store either charged a flat rate shipping
fee of $6 for all order values, or shipped free for order
values above $40 and $6 otherwise. The flash drive was
priced either below or above the threshold of $40 for free
shipping at $34.99 and $44.99, respectively. When the
alternative referent was present, it was stated that $34.99
($44.99) was a discounted price, and the regular price was
$36.99 ($46.99). Another condition was added where the
flash drive was priced at $50.99 with a referent of $52.99 as
the regular price and threshold-based free shipping. The
total price was the same as the high order value with flat
rate shipping condition (44.99+6.00=$50.99).
Offer evaluations were measured by averaging responses
to three seven-point items (α=.93; “The online store’s offer
is” 1 = Unattractive/Undesirable/Unreasonable; 7 = Attrac-
Table 1 Study 1a: means (standard deviations) of dependent measures
Shipping fee structure Threshold-based free shipping
Order value (Total price) $34.99 ($40.99) $44.99 ($44.99)
No alternative referent
Offer evaluations 4.02 (1.00) 4.72 (1.61)
Alternative referent
Offer evaluations 4.75 (1.24) 4.73 (1.28)
J. of the Acad. Mark. Sci. (2012) 40:759–770
tive/Desirable/Reasonable). Perceptions of quality (α=.83;
“The flash drive is:” 1 = Low quality/Worse than others/Not
appealing; 7 = High quality/Better than others/Appealing)
and price perceptions (r=.63; “The price that the online
store is asking for the flash drive is” 1 = Low/Unaccept-
able; 7 = High/Acceptable) were also measured.
Results and discussion
Offer evaluations A 2x2x2 ANOVA (the ninth condition
was excluded) revealed a significant two-way interaction
between shipping structure and order value (F(1, 152)=
7.45, p<.01) and the predicted three-way interaction (F(1,
152)=6.74, p<.01). The results in Table 1 show that the
evaluations differed across the two alternative referent
conditions.
In the absence of the alternative referent, the results
support H1a. For order values below the free shipping
threshold, the online offer was evaluated less favorably in
the threshold-based free shipping than in the flat rate
condition (M’s=4.02 and 4.95; F(1, 170)=4.87, p<.05).
However, for order values above the threshold, the online
offer was evaluated more favorably in the threshold-based
free shipping than in the flat rate condition (M’s=4.72 and
3.37; F(1, 170)=9.35, p<.01). The total price was also
lower in the threshold condition.
Conversely, in the presence of an important referent in
the form of a $2 price discount, there were no significant
differences across the threshold-based free shipping and the
flat rate conditions when the order value was below the free
shipping threshold (M’s=4.75 and 4.46; F(1, 170)=0.44, p
>.51) or when the order value was above the free shipping
threshold (M’s=4.73 and 4.39; F(1, 170)=0.62, p>.43).
These results support H1b. Further, holding total price
constant at $50.99, there was no significant difference
between the ninth condition where the flash drive was
priced at $50.99 with threshold-based free shipping and the
high order value with flat rate shipping condition (M’s=
4.74 and 4.39; F(1, 170)=.62, p>.43). These results cannot
be attributed to perceived quality and price as these
measures did not vary significantly with any of the factors
(all p’s>.13).
Flat rate shipping
$50.99 ($50.99) $34.99 ($40.99) $44.99 ($50.99)
4.95 (1.35) 3.37 (1.37)
4.74 (1.54) 4.46 (1.34) 4.39 (1.58)
J. of the Acad. Mark. Sci. (2012) 40:759–770
Discussion Study 1a supports H1 by demonstrating that
order value moderates the effect of shipping fee structure on
consumer evaluations. Online offers were evaluated less
(more) favorably with threshold-based free shipping com-
pared to flat rate shipping when the order value was below
(above) the threshold for free shipping. The findings are
consistent with the argument that the referent used to
evaluate the fee under threshold-based free shipping
structure is free shipping. A follow-up study with 50
participants from an online paid panel provides further
support for this premise. Using a scenario similar to that
used in the main study, except for an offer, participants were
randomly assigned to either flat rate or threshold-based free
shipping conditions. Participants were asked to respond to
the following questions: “In evaluating the retailer’s
shipping fee policy, you compared the current shipping
fee to the shipping fees you have typically paid in the past”
and “In evaluating the retailer’s shipping fee policy, you
compared the current shipping fee to free shipping” (1 =
Strongly disagree; 7 = Strongly agree). The results show
that participants in the threshold-based free shipping
condition disagreed more with the first statement (M’s=
4.12 and 5.34; F(1, 48)=3.45, p<.05) but agreed more with
the second statement (M’s=5.69 and 3.45; F(1, 48)=8.65, p
<.01). The main study findings, along with this follow-up
data, suggest that the referent of free shipping is naturally
adopted for threshold-based free shipping while the referent
for flat rate shipping is relatively imprecise based on prior
experience or knowledge. Accordingly, for online offers
with threshold-based free shipping and order values below
the threshold, the shipping fee is coded as a loss relative to
the free shipping referent and evaluations are lower
compared to offers with flat rate shipping. In contrast, for
order values above the threshold, the avoidance of shipping
fee is coded as a gain and evaluations are more favorable
compared to equivalent offers with flat rate shipping.
Study 1a also provides strong support for H1b. The
results show that the effect of shipping fee structure and
order value on offer evaluations is attenuated when an
alternative important referent is present. This is consistent
with the rationale that the presence of an important referent
overshadows the effect of shipping fee (or draws attention
away from shipping fee), thus attenuating the effects.
To confirm the mediating role of shipping policy fairness
on the effect of shipping fee structure and order value on
offer evaluations, we conducted a study in a different
product category (coffeemaker) with 157 participants
similar to the no alternative referent conditions of Study
1a. We replicated the results of study 1a regarding offer
evaluations, and confirmed that the effect was mediated by
shipping policy fairness perceptions (α=.92; 1 = Unaccept-
able/Not fair/Not justified; 7 = Acceptable/Fair/Justified;
Sobel z=2.21, p<.05).
765
To demonstrate the robustness and generalizability of
findings in the presence of an important referent, we
conducted another study with 171 participants similar to
Study 1a except that the alternative referent was in the form
of a 20% price discount. This study also measured affect as
participants were asked to indicate their feelings such as
happiness and delight about the price of a coffeemaker. The
results rule out affect as an alternative explanation for the
findings and corroborate the findings of Study 1a.
Despite the replications and robustness checks, a
potential limitation of Study 1a is that the referent of free
shipping may have loomed large in threshold-based free
shipping, particularly in the low order value condition,
because the order value was just below the threshold for
free shipping ($34.99 compared with the threshold of $40).
Study 1b tests the robustness of the results across different
free shipping thresholds for an order value below the
threshold.
Study 1b: robustness to different thresholds
Study 1b assesses the robustness of the findings in Study 1a
to different thresholds of free shipping. Although our
conceptualization based on reference dependence does not
predict variations in evaluations due to the near miss effect,
it is plausible that an offer may be evaluated less favorably
when the order value is just below versus well below the
free shipping threshold.
Method
One hundred and thirty-seven participants (60% female,
age ranging from 18 to 70 years, mean age=31.30 years)
from a paid online consumer panel in the U.S. participated
in the study. Participants were randomly assigned to one of
three conditions: flat rate, $25 threshold for free shipping,
and $75 threshold for free shipping. Participants imagined
that they were devoted coffee drinkers and were looking to
buy a new coffeemaker as theirs had broken down.
Depending on the condition, the online store charged either
a flat rate shipping fee of $5.95 regardless of order value,
free shipping for orders above $25 and $5.95 otherwise, or
free shipping for orders above $75 and $5.95 otherwise.
The order value (coffeemaker price) was held constant at
$19.99. A pretest ensured that the difference between order
value and threshold was regarded as much larger in the $75
versus the $25 threshold-based free shipping conditions.
Similar to Study 1a, evaluations were measured by
averaging responses to three seven-point items (α=.91;
“The online offer is” 1 = Unattractive/Undesirable/Unrea-
sonable; 7 = Attractive/Desirable/Reasonable). Participants
766
were also asked if they believed that the retailer was trying
to get consumers to spend more on a specific visit (1 =
Disagree; 7 = Agree).
Results and discussion
An ANOVA with offer evaluations was significant (F(1,
135)=5.04, p<.01). Specifically, planned contrasts revealed
that the online offer was evaluated less favorably in the $25
threshold free shipping than in the flat rate condition (M’s=
4.42 and 5.38; F(1, 135)=7.87, p<.01). Further, the online
offer was evaluated less favorably in the $75 threshold free
shipping than in the flat rate condition (M’s=4.41 and 5.38;
F(1, 135)=7.21, p<.01). There was no difference across the
two threshold conditions (p>.97). These findings support
H1a.
Another ANOVA with perceptions of the extent to
which the retailer was trying to get consumers to spend
more revealed a significant effect (F(1, 133)=11.14, p
<.001). Planned contrasts showed that participants in the
$25 threshold free shipping condition agreed more that
the retailer was trying to get people to spend more per
visit than those in the flat rate condition (M’s= 5.58 and
4.46; F(1, 133)= 10.89, p< .01). Participants in the $75
threshold free shipping condition were also more likely to
agree that the retailer was trying to get people to spend
more per visit than those in the flat rate condition (M’s=
6.10 and 4.46; F(1, 133) =20.82, p< .001). There was no
difference across the $25 and $75 threshold free shipping
conditions (p> .14).
Next, we tested whether the perceptions of the extent
to which the retailer was trying to get consumers to
spend more mediated the effect of shipping fee structure
on offer evaluations. The first two steps of the mediation
analyses (Baron and Kenny 1986) were reported above.
In addition, we ran a model that included perceptions of
the extent to which the retailer was trying to get
consumers to spend as another (continuous) factor. The
effect of perceptions was significant (F(1, 132)=3.87,
p<.05), and the interaction between shipping structure and
order value became insignificant (F(2, 132)=2.48, p=.09).
A Sobel test confirmed that perceptions marginally
mediated the effect of shipping structure on offer evalu-
ation (Sobel z=1.91, p<.06).
Study 1b shows that our conceptualization of free
shipping being used as a referent for threshold-based free
shipping is robust across different thresholds. It also rules
out the level of closeness to the threshold as an alternative
explanation for the lower evaluations when threshold-based
free shipping is employed (relative to flat rate shipping).
Finally, Study 1b attests to the generalizability of the
findings since the participants were part of an online
consumer panel.
J. of the Acad. Mark. Sci. (2012) 40:759–770
Study 2: inferred motive and justification for shipping
fees
Study 2 tests H2, which predicts that consumers are more
(less) likely to infer that retailers use shipping fees to
generate profit under threshold-based free shipping relative
to flat rate shipping when the order value is below (above)
the free shipping threshold. However, these differences will
be attenuated when a justification for shipping fee structure
is provided.
Method
One hundred and forty-one undergraduate students (60%
female, age ranging from 18 to 23 years, mean age=
19.9 years) from a U.S. university participated in the study
for extra credit. Participants were randomly assigned to one
of eight conditions of a 2 (shipping fee structure: flat rate
and threshold-based free shipping) x 2 (order value: $34.99
and $44.99 or $50.94) x 2 (justification: absent and present)
between-subjects design. Participants were asked to imag-
ine that they were devoted coffee drinkers and had to buy a
new coffeemaker.
In the flat rate shipping condition the retailer charged a
flat rate shipping fee of $5.95 for all order values while in
the threshold-based free shipping structure the retailer
offered free shipping for order values above $40 and
$5.95 otherwise. In the low order value condition the
coffeemaker was priced at $34.99 while in the high order
value condition it was priced at either $44.99 or $50.94. To
ensure that the two offers were financially equivalent in the
high order value condition, $44.99 was used in the flat rate
condition for a total of $50.94 (including flat rate shipping
fee of $5.95) and $50.94 was used in the threshold-based
free shipping condition. When a justification for shipping
fees was present, participants read the following: “Our
shipping charge is based on what the shipping company
charges us to deliver our products to your doorstep. We do
not make a profit on shipping charges. In fact, we absorb
the cost of shipping for bigger orders, allowing us to
[charge a flat fee no matter what your order size is]/[offer
free shipping].” This statement was not provided when
justification was absent.
Perceptions of shipping fees as profit generator were
measured by averaging responses to two seven-point items
(r=.54). Specifically, participants were asked “How likely
is that the online store is making a profit on the shipping
fees?” and “How likely is that the shipping fee corresponds
to the true shipping cost of the online retailer?” (1 = Very
unlikely; 7 = Very likely). Evaluations of the online offer
were measured as in Study 1a. Participants were also asked
“How acceptable is the price of the coffeemaker?” (1 =
Unacceptable; 7 = Acceptable).
J. of the Acad. Mark. Sci. (2012) 40:759–770
Results and discussion
Perceptions of shipping fees as profit generator A 2x2x2
ANOVA on perceptions of shipping fees as a profit
generator revealed a significant effect of justification (F(1,
133)=6.51, p<.05) and a significant two-way interaction
between shipping fee structure and order value (F(1, 133)=
5.55, p<.05), which were qualified by the predicted three-
way interaction (F(1, 133)=7.02, p<.05).
In the justification absent condition, for order values
below the free shipping threshold, perceptions that the
retailer was making a profit on shipping fees were higher in
the threshold-based free shipping condition than in the flat
rate condition (M’s=4.92 and 3.65; F(1, 133)=7.55, p
<.01). The pattern reversed for order values above the free
shipping threshold (M’s=3.43 and 4.47; F(1, 133)=4.60, p
<.05). These findings support H2a.
In the justification present condition, there was no
significant difference across the threshold-based free ship-
ping and the flat rate conditions when the order value was
below the threshold for free shipping (M’s=3.22 and 3.81;
F(1, 133)=1.64, p>.20) as well as when the order value
was above the threshold for free shipping (M’s=3.32 and
3.76; F(1, 133)=1.02, p>.31). These findings support H2b.
Offer evaluations A 2×2×2 ANOVA on offer evaluations
revealed a significant three-way interaction (F(1,133)=
6.73, p<.05). No other effects were significant (all p’s
>.19). Table 2 shows that the pattern of results clearly
differs across the two justification conditions.
In the justification absent condition, the results replicate
those of Study 1a. For order values below the free shipping
threshold, the online offer was evaluated less favorably in
the threshold-based free shipping condition than in the flat
rate shipping condition (M’s=4.57 and 5.14; F(1, 133)=
2.82, p<.10). The reverse was true for financially equiva-
lent offers with order values above the free shipping
threshold (M’s=5.10 and 4.35; F(1, 133)=4.42, p<.05).
However, in the presence of a justification for shipping
structure, there was no significant difference across the
Table 2 Study 2: means (standard deviations) of dependent measures
Shipping fee structure Threshold-based free shipping
Order value (total price) $34.99 ($40.94)
Justification - Absent
Perceptions of shipping fees as generating profits 4.92 (1.53)
Offer evaluations 4.57 (0.97)
Justification - Present
Perceptions of shipping fees as generating profits 3.22 (1.46)
Offer evaluations 5.15 (0.92)
767
threshold-based free shipping and the flat rate conditions
when the order value was below the threshold for free
shipping (M’s=5.15 and 4.91; F(1, 133)=0.53, p>.46) or
above the threshold for free shipping (M’s=4.89 and 5.09;
F(1, 133)=0.36, p>.54). These findings are consistent with
H2b.
Discussion Study 2 demonstrates that perceptions of the
extent to which retailers make profit off shipping fees
systematically vary in the threshold-based free shipping
structure depending on whether order value is above or
below the free shipping threshold. Compared to flat rate
shipping, the belief that the retailer is making profit on
shipping fees is higher under threshold-based free shipping
structure when the order value is below the free shipping
threshold. The result is in the opposite direction for order
values above the free shipping threshold. However, provid-
ing a justification for the shipping structure such that there
is a clear link between the shipping fee and the actual cost
of delivery attenuates the effect. Consistent with our
argument, justification about the shipping fees encourages
consumers to view shipping fees as the cost of doing
business rather than as a way for the firm to make
additional profits. Importantly, justification for shipping
fees results in more favorable offer evaluations under
threshold-based free shipping when order value is below
the free shipping threshold relative to when no justification
is provided.
General discussion
Motivated by the experimentation occurring online with
regards to shipping fees, coupled with the relatively limited
research on the effects of shipping fee structure, the main
purpose of this paper is to examine the effect of shipping
fee structure on consumer response. This paper focuses on
two common shipping fee structures—flat rate and
threshold-based free shipping. In contrast to the prior
Flat rate shipping
$50.94 ($50.94) $34.99 ($40.94) $44.99 ($50.94)
3.43 (1.46) 3.65 (1.22) 4.47 (1.66)
5.10 (1.17) 5.14 (0.99) 4.35 (0.86)
3.32 (1.43) 3.81 (1.09) 3.76 (1.07)
4.89 (1.12) 4.91 (0.86) 5.09 (1.02)
768
empirical research (Lewis 2006; Lewis et al. 2006), the
experimental methodology allows us to compare the two
focal shipping fee structures. Importantly, we also examine
factors such as order value, an alternative important
referent, and justification for the shipping fee structure that
moderate the effect of shipping fee structure on consumer
response, thus providing a better understanding of the
conditions in which shipping fee structures affect consumer
evaluations.
Based on the premise that evaluations are reference
dependent (Kahneman and Tversky 1979), we argue that
consumers use different referents to evaluate flat rate and
threshold-based free shipping. Specifically, while the referent
used to evaluate flat rate shipping is likely to be based on
prior experience and/or knowledge and thus somewhat
imprecise, the referent used to evaluate threshold-based free
shipping is the possibility of free shipping, which is more
precise. While a memory-based referent requires more effort
to access in the case of flat rate shipping, the stimulus-based
referent of free shipping in the case of threshold-based free
shipping is vivid and easily accessible. Accordingly, for
threshold-based free shipping, order values below the
threshold are coded as a loss, whereas order values above
the threshold are coded as a bonus relative to the natural
referent of free shipping.
Consistent with our conceptualization, Study 1a shows
that relative to flat rate shipping, evaluations are less (more)
favorable when an online offer has threshold-based free
shipping for order values below (above) the threshold.
However, when an important alternative referent is provid-
ed, there are no differences in consumer evaluations across
the two shipping fee structures. The important referent is
likely to shift attention away from the shipping fee and the
associated referents, thus attenuating the effect of shipping
fee structure on consumer evaluations. Study 1b confirms
that the results are robust regardless of whether the order
value is just below versus well below the threshold for free
shipping.
Study 2 demonstrates that perceptions of shipping fees
as a way for retailers to generate additional profits are
higher (lower) in the threshold-based free shipping condi-
tion than in the flat rate condition for order values below
(above) the threshold for free shipping. Given that
consumer perceptions of shipping fees as a profit generator
differ across the two shipping fee structures based on order
value, providing a credible justification for the shipping fee
that links the fee to the actual cost of delivery should
attenuate the effects. Consistent with our conceptualization,
Study 2 demonstrates that perceptions of shipping fees as a
profit generator as well as consumer evaluations do not
differ across the flat rate and threshold-based free shipping
structures for all order values when a justification is
provided. The justification for the shipping fee encourages
J. of the Acad. Mark. Sci. (2012) 40:759–770
consumers to view the shipping fee as the cost of doing
business rather than to assume that the retailer is using the
shipping fee to make additional profits.
The limitations of this research bear comment. Despite
attempts to make the task as realistic as possible, and the
use of different populations including paid online panels,
the studies reported here are laboratory experiments. While
lab experiments allow us to examine different shipping fee
structures and test moderator variables in a controlled
setting, thereby clarifying the theoretical underpinnings of
our findings, some aspects of online shopping such as
shopping cart abandonment are not captured. Across our
studies, we do examine offer evaluations, and it is arguable
that low offer evaluations may lead to cart abandonment.
Further, it is conceivable that most carts are abandoned by
“explorers” rather than “shoppers.” The findings reported
here are specific to the shipping fee and threshold values
used in the studies. Although the values were selected
based on actual online retailers and were varied across
studies, it is important for future research to replicate the
findings with other values, products, and settings.
Notwithstanding the limitations, the findings have
important theoretical and managerial implications. First,
the results indicate that consumers use different referents to
evaluate shipping fee structures. While the referent for flat
rate shipping is somewhat imprecise, the free shipping
referent for threshold-based free shipping is stimulus-based
and vivid. It is possible that threshold-based free shipping
may lead to higher order values as consumers strive to
reach the free shipping threshold (Lewis et al. 2006).
However, there may be unintended consequences. If
consumers are shopping for a specific product (as examined
in this paper) and do not wish to increase basket value just
to exceed the free shipping threshold, they are likely to
perceive the shipping policy as unfair and may not
complete the purchase, leading to low evaluations and cart
abandonment. Further, the salience of the free shipping
referent may get consumers to fixate on order values that
just exceed the free shipping threshold, hindering order
values that are much higher than the free shipping
threshold. The implication is that while the free shipping
referent in threshold-based free shipping may have a
positive effect in terms of orders that exceed the threshold,
there may be a negative effect in that consumers may be
content just to exceed the threshold. The idea that the free
shipping referent may fixate consumers to just exceed the
threshold and thus distract from higher order values is
offered as an area for future research.
Second, our findings suggest that providing important
alternative referents such as a price promotion or reduction
draws attention away from the referents used in evaluating
shipping fee structures. This strategy is likely to be more
effective for online retailers with unknown or low reputa-
J. of the Acad. Mark. Sci. (2012) 40:759–770
tion because consumers pay more attention to surcharges
from such retailers (Cheema 2008). Drawing attention away
from shipping fees may encourage consumers to scale up
their order values and complete the purchase process (and
thus less cart abandonment).
Third, retailers should carefully consider the specifics of
using a threshold-based free shipping structure. Relative to
flat rate shipping, consumer attributions are less favorable
with threshold-based free shipping when the order value is
below the threshold and shipping is not free. Thus, although
consumers may be motivated to increase their order value
to pass the threshold for free shipping, it may result in
negative attributions and affect future purchase decisions
negatively. It may be more beneficial for retailers to charge
flat rate shipping fees as it leads to more positive inferences
and offer evaluations. This recommendation is based on our
studies and is subject to change as more evidence regarding
order value and incidence rate amasses in the literature.
Importantly, retailers can alleviate consumer perceptions of
shipping fees as an additional way for retailers to make
profits by providing a justification for the shipping structure
that they use. A credible justification is likely to have a
positive impact on image, sales, and profitability.
Although these findings are consistent with reference
dependent evaluations, they suggest that consumers may
believe that since retailers make relatively little profit on
small orders, they compensate by charging a shipping fee.
Alternatively, consumers may believe that retailers attempt
to make money on the shipping fee from consumers with
small orders. Future research may further explore the
specific inferences and attributions consumers make as a
result of the shipping fee structure employed, and outline
other boundary conditions (moderators) for the inferred
motives. For example, the shipping policy of competitors
may be used as a reference and guide the attributions the
consumers make about the focal retailer. In addition, it
will be interesting to empirically examine the effect of
various shipping fee structures on order incidence,
shopping basket (order) value, and profitability. Finally,
future research may also investigate how consumers
respond to very high shipping fees, sometimes as high
as 50% of the price of the product for some TV offers.
Arguably these retailers are offering their products at
lower prices than competitors and are compensating the
lower product margin with higher shipping and handling
charges. Although they may offer the lowest product
price and entice consumers, the perceived unfairness of
the shipping policy may have a negative effect on retailer
satisfaction and product purchase likelihood.
In sum, it is imperative that online retailers employ a
shipping fee structure that strikes a balance between the
need to attract and retain customers and the need to
recoup delivery costs. In implementing any shipping fee
769
structure, retailers have to decide on specific fees and
values based on their average delivery costs and average
order value.
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