The Cost of Free Shipping - For You and Your Customer

Not long ago, Jeff Bezos offered some insight into the success of Amazon: “We've had three big ideas at Amazon that we've stuck with for 18 years, and they're the reason we're successful: Put the customer first. Invent. And be patient."

The same advice can be applied to any e-commerce brand, big or small. But Amazon has (for better or for worse) impacted the entire industry, from fulfillment to customer expectations. And one of those expectations, thanks largely to Amazon, is fast and free shipping.

“As a store owner, it’s easy to look at shipping, free shipping and say, ‘I can’t afford to do that because it’s expensive.’ But people are trained, thanks to Amazon to expect free shipping, and not just free shipping but a lot of times, free fast shipping. And that’s the worldly environment as independent store owners that we’re operating under.”

~ Andrew Youderian, eCommerceFuel

Offering free shipping in some capacity will be critical to scaling your e-commerce business. It can be a way to drive conversions, upsell customers and incentivize purchase decisions.

Whether you’re offering free shipping on Shopify or partnering with a 3PL, somebody has to pay for fulfillment. And if you offer shipping for free, the bill will land with your e-commerce business. How can you know at what price point it’s worth making the trade off?

In this post we dive into both why free shipping is critical for e-commerce business growth as well as what free shipping translates into for your bottom line and your customer.

shipping costs for e-commerce

eCommerce in the Amazon Age Means Fast & Free Shipping

These days, e-commerce customers expect free shipping as a packaged deal with shopping online. While the offer used to be reserved for higher ticket items and full shopping carts (“Free shipping on orders over $100!”), the National Retail Federation recently found that three quarters of US consumers expect free shipping for e-commerce — even on orders under $50.

On top of that, offering free shipping works as a deciding factor for many U.S. consumers: nearly two-thirds of those surveyed said they look of shipping cost before starting to add items to their cart. Another study found that half of shoppers abandon shopping carts because of unsatisfactory delivery options or prices.

Research from Retail Dive makes an even stronger case for free shipping as a means to increase Lifetime Customer Value — 91 percent of surveyed customers said “being offered free shipping from a seller would make them more likely to become a repeat customer.”

What Offering Free Shipping Can Do For Your Profitability

Free shipping offers can boost sales, but it will cost something. So how do you ensure profitability?

“Offering free shipping will improve your conversion rate,” digital strategy expert Neil Patel writes. “But, it also can kill your profit margins if you’re not careful.” Patel makes a few specific recommendations for ensuring maximized profits. For example,

  • Compare conversation rates with and without free shipping.
  • Set a threshold (minimum order value) for free shipping to test the margin improvement.
  • Increase product prices to compensate for the free shipping offer - but be sure to compare your profit.

In other words, it’s not just about conversion. It’s also about profitability. It’s a balancing act between the cost of covering logistics and the value of a satisfied, returning customer.

“Retailers need to be careful with free shipping promotions, given that they’re exchanging what they hope is a boost in demand for sure losses on the logistics side,” said Harvard Business School Assistant Professor Donald Ngwe. At the same time, the researcher says making free shipping profitable is largely contingent on your context: “Fulfillment is in a lot of flux these days, and I’m interested in seeing in the end what the predominant fulfillment strategy will be for online sellers.”

In other words, making free shipping profitable is a case by case math problem. Factors include flat shipping costs, packaging, A/B testing various promotions, advertising costs and more.

What “Free” Shipping Really Means for Your Product Pricing

Offering free shipping doesn’t have to mean you just swallow the cost, content to see lower margins and profitability. And free shipping doesn’t have to be your only offer. You have a few options on the table, including:

  • Free shipping with slower fulfillment
  • Free and fast shipping with an order threshold
  • Higher prices with fast and free shipping
  • Fast shipping that buyers pay for

There are a few different ways to start implement better shipping offers on your e-commerce site. The simplest is to both offer a free shipping threshold (something like $25, $50 or $100 or more per order) and increase product pricing marginally. After all, customers are willing to both pay more for products and buy more if free shipping is on the table — strange but true.

Once these two elements are in place, it’s a matter of tweaking your numbers to figure out which approach is the most profitable.

Free shipping on Shopify, for example, is a matter of balancing the ability to increase average order value and cover the fulfillment costs from partners on the platform. “There’s no one right way to offer free shipping that works to increases profit margins,” says Nick Winkler at Shopify. “Whether you outsource ecommerce fulfillment or do-it-yourself by optimizing around your ABS, turning fulfillment into a competitive advantage requires creativity and discipline.”

The Shopify free shipping guide walks users through how to set up free shipping thresholds, weight-based rates and free shipping discount codes on the platform.

calculate free shipping on Shopify

With OrderMetrics, you can quickly understand how shipping costs are affecting your margin. OrderMetrics’ profitability calculator can automatically plug in all of these factors, telling you how much you profit from each order and across the board. Import data from Shopify, Shippo, FBA and more.

With these numbers at your fingertips, you can better determine which free shipping offers are most effective for your audience and customers. See which shipping integrations we offer to get started!