For whatever reason, a free shipping offer that saves a customer $6.99 is more appealing to many than a discount that cuts the purchase price by $10, says Wharton marketing professor David Bell. Bell noticed this phenomenon a few years ago while doing research for an online grocery store, and the observation prompted him to look more closely at the ways Internet retailers use shipping charges--or the lack thereof--as a promotional tool.

The result is a model that can help managers set shipping fees in ways that both appeal to customers and drive them to buy in quantities that can be efficiently processed. "There is no direct analog to this in the traditional retail world," Bell says. "It seemed to us that firms had not figured out the 'right' shipping policy, so there's a lot of experimentation going on without clear guidelines."

Internet-based shopping is the fastest growing sector of retailing in the U.S., Bell says, with sales exceeding $110 billion during 2004. Approximately 60 percent of online retailers cite "free shipping with conditions" as their most successful marketing tool.

Get the full story at CNET