Not long ago, Jeff Bezos offered some insight into the success of Amazon. He said, “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.” Also, free shipping. It’s hard to not think of the 2-day (now sometimes even overnight) shipping included with the Prime membership. And it’s a huge benefit on the customer experience.
Any ecommerce brand, big or small, should put the customer first. As we all know, Amazon has (for better or for worse) impacted the entire industry, from fulfillment to customer expectations. And one of those expectations is fast and covered 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 will help scale your ecommerce business by driving conversions, upselling 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 ecommerce 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 ecommerce business growth as well as what free shipping translates into for your bottom line and your customer.
Understanding the Cost
These days, ecommerce customers expect fast shipping without any fees 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 ecommerce — even on orders under $50.
On top of that, it can work 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 covering shipping as a means to increase Lifetime Customer Value — 91 percent of surveyed customers said “being offered zero shipping costs from a seller would make them more likely to become a repeat customer.”
Impact on Profitability
Free shipping can boost sales, but it comes at a cost. So how do you ensure profitability?
“Covering the shipping improves 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.
- Compare conversation rates with and without the shipping costs
- Set a threshold (minimum order value) for the offer to test the margin improvement
- Increase product prices to compensate for the 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 a deal on shipping doesn’t have to mean you just swallow the cost, content to see lower margins and profitability. And it doesn’t have to be your only offer. You have a few options on the table, including:
- Slower fulfillment
- An order threshold
- Higher prices
- Buyer pays for faster speed
There are a few different ways to start implement better shipping offers on your ecommerce 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 it’s 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 a shipping deal 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 thresholds, weight-based rates and free shipping discount codes on the platform.
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 offers are most effective for your audience and customers. See which shipping integrations we offer to get started!