There’s No Such Thing as Free Shipping: How to Choose the Right Shipping Pricing Strategy
January 18, 2018
Just as the popular economist adage states, “There’s no such thing as a free lunch,” there is also no such thing as free shipping. As online retailers know, it can be very expensive to ship a box from Point A to Point B. And shipping carrier rates continue to increase over time. One way or another, someone has to pay for the cost of shipping.
Offering something for free influences consumer behavior, and customers want to think they are getting a good deal. Maybe you’ve chosen to fly with an airline that gives you a free checked bag. The reality is that the perceived savings are typically hidden or inflated somewhere else.
Retailers that offer free shipping to customers should really call it a ”shipping-included” price. This strategy is used so there are no surprises at checkout.
Think about it: How many times have you gotten through nearly the entire process of making a purchase online, only to find yourself outraged by the shipping charge on the last page?
It’s easy to want to jump on the free shipping bandwagon since it is highly desired by customers. A Walker Sands survey found that 90% of consumers view free shipping as the top incentive that would encourage them to shop online more often.
Similarly, a FuturePay survey found that 86% of people abandon their shopping cart because of the cost of shipping.
Yet, offering free shipping goes back long before the days of e-commerce. Originally used as a promotion strategy for mail order catalogs, it has since become a standard pricing model.
When you think of free shipping today, you most likely think of Amazon Prime. Amazon has defined and set the expectations of online deliveries for retailers and consumers alike. Amazon Prime members benefit from free shipping and two-day deliveries, without having to spend a certain amount of money. However, Prime members do have to pay $99 a year for their Prime membership.
But even for the largest of e-commerce giants, shipping is far from free. According to a GeekWire analysis of Amazon’s financial results from Q4 2016, Amazon lost $7.2 billion on shipping costs in 2016.
So, why do they continue to offer free shipping? To beat their competitors, maintain their large market share, acquire new customers, meet consumer expectations, and encourage members to buy more from them.
Due to their immense order volume, they are able to negotiate much steeper discounted shipping rates with carriers. However, these shipping costs are still a large expense. Small businesses simply cannot compete with this or do this by themselves; Offering free shipping will take a harder hit on a small company’s bottom line.
Playing the free shipping game means finding the right balance of driving more conversions and not breaking the bank. So, what options do small to mid-sized online retailers have?
Considerations for free shipping of online orders
Here is what should ecommerce businesses do to determine if free shipping is right for them.
1. Be realistic about your margins
Your profit margins will be the most important consideration when it comes to offering discounted shipping to customers. The question isn’t around if you should offer free shipping, but whether you can afford it.
For cheaper items, you simply can’t absorb the cost of shipping. If your product costs $6 and the cost of shipping is $8, you are going to lose money by offering free shipping. Your margins may differ across products, depending on the cost of manufacturing, as well as the size and weight of different items.
It may also depend where your customers are located. If you ship internationally, it is going to be much more expensive. Calculate how much extra sales you’ll need to make up for reduced profits per order.
2. Increase the price of your products
If you offer free shipping, there’s a good chance you will need to raise your prices to make up the money you’re losing. Again, you’ll need to do the math and calculate the necessary markup.
Another important consideration is if increasing the price tag will result in you losing more customers than you gain by offering $0 on shipping.
Take weighted blanket company, My Calm Blanket. They have a higher product price tag and can afford to offer free shipping.
“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
Your business may not be in the same position as theirs.
3. Offer a minimum order requirement
By offering a free shipping threshold, retailers can increase the average order value and make customers feel like they are getting a good deal.
For this to be effective, the minimum amount spent to qualify for free shipping should be larger than your average order size.
According to a Shippo survey, 93% of shoppers will take action to qualify for free shipping, with the top action as adding items to their cart.
ShipBob’s 2-Day Express Shipping increased our AOV by 97% — from $75 to $148. And we were able to scale our business from $300,000 in sales per year to over $1.1M.
Ryan Casas, COO of iloveplum
If shoppers are trying to hit a minimum threshold, they may be trying to stock up or they are spending more because they know they will likely return some of these items.
If this happens, you may need to make your returns policy stricter and determine if you will lose money on sales that are returned from offering free shipping in the first place.
4. Make customers pay for the cost of shipping
Many retailers still pass the full cost of shipping onto their customers as a line item. While there are potential repercussions for this in the form of abandoned shopping carts, at least you can be sure to cover your costs.
With new technology comes more possibilities, including real-time shipping estimates from connecting your checkout to your shipping solution. This way, your customers will be given a dynamic shipping quote based on the items in their cart and by inputting their zip code.
When it comes to online purchases, retailers must decide how they will price their products in a way that is attractive to customers and feasible for their business.
With so many factors that go into pricing, there is no one-size-fits-all approach for offering free shipping.
It may make sense for some merchants to offer free shipping only when a minimum amount of money is spent, while others may be able to bake the cost of shipping into their product. Having the right ecommerce fulfillment strategy in place in key.
Learn how to compete with giant retailers by meeting customer expectations around inexpensive 2-day shipping, while reducing shipping costs yourself.
Download “The Guide to Offering Affordable 2-Day Shipping.”