Shipping’s Bottom Line

Jennifer Brown, an assistant professor of management and strategy at the Kellogg School of Management, and colleagues Tanjim Hossain, an assistant professor at the University of Toronto, and John Morgan, a professor at the University of California, Berkeley, conducted field experiments and analyzed historic data from online auctions to answer whether shipping fees influence auction revenue.

They discovered that sellers with low shipping fees can increase revenue by disclosing those charges upfront. When increasing shipping charges, however, merchants are better off keeping fees hidden until customers finish shopping, the experiments showed. The research contributes to findings from previous studies that, Brown says, “pushed in both directions—it is sometimes good to shroud and it is sometimes good to disclose.” Her and her colleagues’ research offers sellers guidance on when disclosure or shrouding of shipping fees works best, or as she puts it, when merchants should “shout or whisper.”

Shrouded Shipping Charges
For her field experiments, Brown sold ten different types of iPods on two different auction sites, Yahoo Taiwan in 2006 and eBay Ireland in 2008. The sites were chosen because they allowed sellers to shroud shipping charges; neither site automatically revealed shipping charges in its search listings, as eBay now does in the United States.

In the Yahoo Taiwan experiment, Brown sold a total of six different iPod Shuffles and Nanos. Some were assigned high shipping costs (the equivalent of about $6) and some were assigned low shipping costs (the equivalent of about $1). Shipping costs were either disclosed in the search results or hidden. The eBay Ireland site sold iPod Shuffles in four different colors with either high or low shipping costs that were disclosed or shrouded.

In both experiments, the shipping charges were selected after surveying actual shipping fees in the market. The average shipping charge observed in Taiwan was the equivalent of $3; the fees charged in the eBay Ireland experiment represented the 25th and 75th percentiles.

On both the Taiwanese and Irish sites, revenues fell when low shipping charges were shrouded, auction results showed. In each case, the revenue differences were statistically significant. When it came to high shipping charges, the impact of disclosure was unclear. Revenues rose in Taiwan but fell in Ireland when high shipping fees were disclosed.

The differences in revenue were not statistically significant in either case. Furthermore, raising the shipping charge had no clear effect when charges were disclosed. However, raising the shipping charge increased revenue when the charge was shrouded. The winning bidder paid 5 percent more in Taiwan and 7 percent more in Ireland when high shipping was hidden, increases that were statistically significant.

The experiments showed shipping charges had no statistically significant effect on the number of bidders. For example, while it seems logical to assume that disclosing low shipping charges would attract fresh swarms of competing bidders, Brown discovered that was not the case. In fact, she found that none of the revenue changes observed in her experiments were attributable to increases or decreases in the number of bidders.

Model Bidders

Brown and her colleagues propose a simple model to explain their findings. Say there are three types of bidders, each with a different response to information about shipping charges. Attentive bidders do their homework and are fully aware of the shipping charges. Naïve bidders do not know the exact shipping charge, but assume it is low. Suspicious bidders do not know the exact shipping charge either, but assume it is high.

When shipping charges are disclosed, naïve and suspicious bidders become aware of the exact charges and have an opportunity to adjust their bids. Suspicious bidders will raise their bids when the actual shipping charge is lower than they expected; naïve bidders will reduce their bids when the shipping charge exceeds their expectations.

Thus, when the shipping charge is low, revenue goes up, because the effect of higher bids from suspicious buyers outweighs the impact of lower bids from naive bidders. When the shipping charge is high, the situation is reversed—the impact of lower bids from naïve bidders outweighs the slight increase in bids from suspicious bidders who more or less expected higher shipping charges, Brown says.

Increasing the shipping charge boosts revenue when the charges are shrouded because suspicious and naïve bidders were unaware of the exact charge to start with and therefore do not react to the change. Gains from these unresponsive bidders outweigh losses from attentive bidders who reduce their bids in response to increased shipping charges. The revenue impact is muted when higher shipping costs are disclosed.

Next, Brown compared the results of her field experiments to data from a “natural experiment” that occurred when eBay modified its disclosure policy in the United States. In October 2004, eBay increased the visibility of shipping charges by giving prospective bidders the option of seeing the charges on the search page, and by displaying shipping charges on the bid confirmation screen.

Brown and her colleagues analyzed data on gold and silver coin auctions that took place approximately two months before and after the policy change. Auctions in which shipping charges were shrouded occurred during September and October 2004, while auctions in which the charges were disclosed took place in November and December.

The analysis showed that revenue was higher when shipping charges were disclosed. As in the field experiments, the difference was not due to the higher numbers of bidders at “disclosed” auctions, since shrouded and disclosed auctions attracted the same number of bidders. Raising the shipping charge—while holding the reserve, or opening bid, constant—had a greater revenue effect in shrouded auctions than disclosed auctions, a finding that supports the results of the field experiments. Still, the data analysis presented a conundrum. If revenue rises when shipping charges are disclosed, why do more sellers not disclose their shipping charges in their listings?

Brown explains that before the eBay policy change, sellers benefited from disclosing low shipping charges but received no advantages from disclosing high shipping charges. When eBay changed its policy, sellers with low shipping charges benefited from disclosure. But sellers with high shipping charges also benefited because of the way prospective bidders used the new information, she says.

Technologically sophisticated bidders were better able to adjust their preferences to view shipping charges than less tech-savvy bidders, Brown points out. Suppose that these tech-savvy bidders were more likely to be suspicious bidders and technologically unsophisticated bidders were more likely to be naïve bidders. Under these assumptions, newly aware suspicious bidders raised their bids when a seller raised a shipping charge—as long as the higher charge was within the suspicious bidders’ expectations. Consequently, overall revenues increased.

When to Disclose
“The lesson is that if you have a low shipping charge, you want to disclose it. If you are going to have a high shipping charge, maybe you don’t want to tell the world if you sell in a marketplace where shipping charges aren’t obvious,” Brown says. The research also offers a lesson for buyers, she notes. Because shipping charges are part of the total cost of an item, buyers should take them into account before making a bid.

Brown, an enthusiastic online shopper—“it’s hard to think of a day when I don’t search for something to buy,” she says—admits her research has not changed her own bidding behavior. “I’m probably suspicious enough already,” she says. “And I’m an economist—that probably washes away any sort of normal behavior.”

Related reading on Kellogg Insight

Increasing Revenue from Online Auctions: Buyer-seller interactions affect customer value in two-sided markets

When to Come Out Swinging: Devise the right strategy for negotiations or online auctions

Place Your Bids: Strategies for selling and buying in auctions