How to Choose the Right Shipping Strategy

At OrderMetrics, we like to analyze our data to see if we can highlight areas of improvement for our merchants. To start with, we look at the most talked about metric of all time conversion rate. Currently the average global conversion rate is 2.42% (SmartInsights). Two things need to be mentioned when looking at this statistic. Firstly, you must consider your industry. For example, if you’re in travel or jewelry your average will be 0.7%. These industries have to deal with travelers looking at multiple holidays across multiple sites and shoppers hesitant to make such large jewelry purchase online. Secondly the type of device your visitors is browsing on and what channel they arrived from. Mobile conversion rates are typically 50% worse than desktop conversions. Whilst targeted PPC traffic has a higher average conversion rate of 3.48% according to Google.

At the end of the day, conversion rate is just the tip of the ice break and is oftentimes a red herring. Yes, it is important to watch your conversion rate and try to improve it. In today’s ecommerce environment though, merchants are being squeezed at every corner. Here are some of the factors facing merchants:

  • Virtually unlimited competition, due to the low barriers of entry
  • Advertising costs are constantly rising
  • More educated consumers, not afraid to shop around or wait for payday
  • Amazon’s same/next day delivery options have increased the pressure on other merchants to offer the same
  • Average order profit is declining. Currently the global average is $36.09

Considering all these factors, we know that merchants are now starting to focus more on retaining loyal users and increasing profitability. We all know that it’s cheaper to retain a customer than it is to acquire a new one. Therefore it is vital that merchants are continually optimizing their operations to ensure maximum profit from their already developed customer base and acquisition channels.

At OrderMetrics we live and breath everything to do with ecommerce profitability (learn more about us here). As a result we’re able to present to you the most overlooked metrics that greatly affect profitability. In this article we’re going to focus on shipping costs; specifically on the tradeoffs of over or under charging for shipping. Generally, we’ve seen that on average merchants are under charging on shipping by $2.20. With net profit being pushed lower and lower due to the factors mentioned above, it is critically important that merchants fix their shipping costs to ensure they're not losing money.

Shipping pricing can often be a contentious topic – some experts recommend pricing shipping at costs, others swear by free shipping for all orders and some find themselves somewhere in between. Shipping pricing can have significant impact on shopping cart abandonment and customer buying behavior. A good shipping pricing strategy should work with your current cost structure and shape customer buying behavior.

Free Shipping

Offering free shipping on orders is a great way to reduce shopping cart abandonment and is naturally the preferred option for customers. Free shipping, however, comes at a cost; namely, the cost for shipping needs to be accounted for with increases to product costs or as a cut of your profit margin. OrderMetrics can help users who provide free shipping to customers by providing an accurate portrait of their margins after product costs, shipping costs and without the added revenue from shipping.

Additionally, customers have had success with minimum order amounts e.g. in order to qualify for free shipping your cart value needs to over $20; this strategy can help store owners to increase average order value and to maintain profit margins with a free shipping strategy. We recommend using our product insights dashboard to find complementary products to upsell to customers in the checkout page and in related product pages.

Figure 1 The above screenshot shows the product insights dashboard which has a filter to highlight products purchased together

Flat Rate Shipping

Flat rate shipping is a good strategy for unique product stores and niche sites with a limited product catalogue. Generally stores with flat rate shipping will have products of similar size, shape and weight. A good example would be a hat store – we would expect that the majority of orders will be within a certain size and weight with the rare order of a dozen hats that could be fall outside the typical range. Customers are generally receptive to flat rate shipping and it has a relatively neutral effect on cart abandonment. Similar to with free shipping strategies, minimum order amounts can be useful in managing profit margins and increasing average order amount. Flat rate shipping can have some pitfalls; products that are sourced from more remote factories and others that are more costly to ship due to bulk / weight can sometimes contribute to poor profit margins and unprofitable orders. We recommend using the product insights dashboard to sort by average shipping costs to identify products that are potential loss leaders.

Figure 2 In the above screenshot we sorted by average order profit and discovered that orders including the product “Soft Winter Jacket” were on average losing $22.33 as a result of high average shipping costs. As a store owner we discontinue the sale of soft winter jackets since the shipping is above our flat rate shipping.

Shipping at Cost

Shipping at cost is simple to implement and easy to manage. Shipping at cost is good for companies with wider product catalogues and with items that have a wide range of shipping costs. Shipping at cost has the advantage of typically not undercharging for shipping and making per-order profit calculation easier. Shipping at cost can also be used in conjunction with flat rate shipping with order minimums.

Figure 3 The above screenshot shows an example of an order in the profit dashboard of OrderMetrics. We can easily the per order profit and margin after COGS and shipping costs are considered.

At the end of the day there is no right or wrong shipping strategy. Merchants must find what works best for them and their customers. One of the best ways to develop a profitable strategy is to use an analytics tool to see the whole picture. This is where OrderMetrics comes in. With OrderMetrics you’ll be able to quickly discover how shipping costs are affecting your margin and rank orders by shipping cost to identify and fix issues fast! Learn more now.