The word “free” has an effect on purchasing behavior.
As a consumer yourself, you are aware that getting something for free can influence you to act.
In fact, 90% of consumers view free shipping as the top incentive that would encourage them to shop online more often.
Similarly, 86% of shoppers abandon their shopping cart because of the cost of shipping. Offering free shipping is a great way to help prevent any unwanted surprises at checkout.
[Infographic: The Truth About Shopping Cart Abandonment]
Free shipping has become a more common option when shopping online. As an online retailer, it has the potential to be one of your strongest marketing tools.
“We promote the fact that we offer free shipping for all orders on a site-wide banner. This encourages shoppers to add to their cart and get to the checkout process in the first place. On top of that, we can offer 2-day shipping and capture additional sales from people who value a speedy delivery.”
Founder of My Calm Blanket
Yet, with the high costs of shipping (and carriers increasing rates over time), many businesses may wonder how they could afford to offer free shipping at all. It may even seem counterintuitive or impossible.
The truth is there is no such thing as free shipping; someone is paying for shipping one way or another.
Unfortunately, there is no one-size-fits-all approach that works in all scenarios. Businesses must be strategic in their decision to find the right balance of driving more conversions and not breaking the bank.
Let’s dive in to how you can offer free shipping on your ecommerce store and make it part of your ecommerce fulfillment strategy. Review these common questions to determine if it’s right for you.
How do I cover the cost of offering free shipping?
Unless you sell very expensive products, offering sitewide free shipping will likely not be a profitable option for you.
Additionally, free shipping would not make sense when a customer buys a single small, inexpensive item, as the cost of shipping may be more expensive than the item itself. If your products are priced moderately, you may choose to bake the cost of shipping into the product price.
This strategy helps give the illusion of of free shipping when in fact you are increasing the product price tag to help make up for the exclusion of a shipping and handling fee.
To include the shipping cost in the listed product price, you’ll need to do the math and calculate the necessary markup using the average shipping cost per order.
You shouldn’t expect or try to make a profit on shipping.
You may even choose to eat part of the shipping cost yourself if you find the increase in orders from free shipping makes waiving the shipping fee worth it.
“We understand that whatever Amazon does, we also need to do or we are going to lose business. The cost of offering free 2-day shipping through ShipBob is more than covered and offset by all of the additional orders and revenue we’ve gotten as a result.”
Founder of My Calm Blanket
However, if you sell lower-cost items — and raising the product price tag will result in losing more customers than you gain by offering free shipping — this might not be the best strategy for you. Instead, you might consider requiring a minimum dollar amount to be spent to receive free shipping.
How do I calculate a free shipping minimum spend threshold?
Offering a minimum order requirement in exchange for free shipping can be a successful tactic, with 93% of shoppers claiming they will take action to qualify for free shipping by adding items to their cart.
“By encouraging customers to meet a spend threshold for free 2-day shipping, we’ve seen great results without harming our margins. Offering this shipping option to customers who live within ShipBob’s 2-Day Express coverage zone has increased our average order value in these zones from $75 to $148.”
Ryan Casas, COO of iloveplum
Yet, for this strategy to be cost-efficient, the minimum amount spent to qualify for free shipping should be greater than what a customer would typically spend. Incentivizing a larger cart size helps offset logistics costs for your business.
If you make the free shipping threshold too high, customers may not be willing to spend that much more money.
For example, doubling what you were planning to spend as a consumer might seem too far out of reach. Conversely, making the minimum amount required too similar to your average order value (AOV) will hurt your margins.
Common free shipping thresholds include $25, $35, $50, and $100, but you shouldn’t just choose one of those numbers without doing the math.
To determine the amount that must be spent, one recommendation is to increase your AOV by about 30%. If that number comes out to, for example, $94, consider rounding up to $100 for a more standard number that customers would expect to see.
Even if you see a great increase in people taking advantage of your minimum spend threshold offer at first, this tactic doesn’t always guarantee a profit.
While some customers simply love your products and will gladly stock up on more, it is important to note that others may be spending more with the intent to return some items. It’s no surprise that this type of free shipping results in higher return rates.
If you determine this is happening on your store and you’re ultimately losing money, you may need to make your returns policy stricter or alter how you charge for shipping.
It’s also worth noting that if you offer free shipping using a minimum spend threshold and your AOV increases, there is a chance your average shipping cost can also increase (i.e., it may require a larger box, the box becomes heavier, etc., increasing the shipping rate).
How do I know if offering free shipping is right for me?
Free shipping isn’t right for every store. In some cases, flat-rate shipping or real-time carrier shipping makes more sense.
If you’re still unsure if you should offer free shipping on your online shop, you can always start small and test it out as a promotion. For example, if you have a more expensive product, consider testing out a free shipping promotion on it and monitor the response you get.
Additionally, you can experiment with the minimum spend threshold tactic for a limited time or with some other limitations (e.g., “For two days only”).
Of course, you’ll need all the elements that work with the promotion — from email campaigns to banners on your site. It’s okay to start small before committing to a long-term strategy, and it’s best to continue testing it to see what drives action.
The key is to pay attention to how many people are meeting the free shipping threshold compared to historical data, including the number of shoppers who had previously spent that much money and the change in AOV.
You’ll also want to also measure any product returns that come out of new purchases to understand the ultimate effect on your profit margins.
How do I keep shipping costs low to offer it for free?
Absorbing the cost of shipping or eliminating the shipping and handling charge on your cart can be potentially costly for some businesses. There are a few steps you can take to keep costs down.
First, working with a third-party logistics (3PL) partner can help you access volume discounts for better shipping rates than you could get on your own.
Additionally, a 3PL’s fulfillment network and geographic footprint lets you store inventory at locations near your customers. This helps because the less distance or number of shipping zones your shipment is sent, the lower the shipping cost.
“The more fulfillment centers we have inventory in, the more potential shipping addresses we can offer this 2-day option to. And the more people that we offer the benefit of free 2-day shipping to, the more conversions we get.”
Founder of My Calm Blanket
Fulfilling orders closer to your customers also helps you reduce shipping costs and the time in transit. This makes fast options, like 2-day delivery, more affordable by using ground shipping instead of expedited air — a strategy used by companies like Amazon.
“ShipBob’s 2-Day Express Program has been phenomenal for us. Because of Amazon, our customers expect 2-day shipping and we couldn’t find other 3PLs that can provide that. If they do, you are going to pay a lot for it. Without ShipBob, it would cost more than $100 per order to ship that fast.”
Founder of My Calm Blanket
Offering free shipping is a great way to reduce a common barrier to purchasing items online. However, it can come at a cost for your business if you haven’t calculated the proper way to offer it. You must find the right balance of increasing conversions and keeping your prices competitive without losing money.
Learn how to compete with giant retailers by meeting customer expectations around inexpensive 2-day shipping. Download “The Guide to Offering Affordable 2-Day Shipping.”