Should I offer free shipping?
This is a question that has plagued ecommerce business owners since the dawn of time (or, at least, since the dawn of online shopping).
For merchants, the cost of shipping is a moving target. Can your profit margin actually cover the shipping costs? And what products should you be charging shipping on?
But for customers, shipping is simply part of doing business online – which is probably why they loathe getting all the way to check-out and finding out delivery costs extra. People not only want free shipping, they’re trained to expect it, thanks to companies like Amazon making it the norm.
When you look at the data, it’s hard to argue the impact free shipping can have on a sale. In a 2019 survey conducted by Forbes, 50 percent of respondents said they avoid retailers that don’t offer free shipping, and 77 percent have abandoned a purchase altogether due to unsatisfactory shipping options.
But while free shipping is a surefire way to increase conversions, that doesn’t make it profitable. Without the right strategy in place, free shipping can actually suck for your back pocket.
In this article, we’ll take a look at how online merchants can offer free shipping without hurting their bottom line.
- The true cost of free shipping
- How to offer free shipping without losing money
The true cost of free shipping
The thing about free shipping is: unless it drives repeat purchases, the cost to acquire a new customer could still outweigh your gross profit.
It’s like buying friends to make you happy. Nobody wants that.
But Jason, why don’t I just add the cost of shipping into my product prices?
This might seem like the obvious answer. Let’s say you sell an item for $50 and it costs you $9 to ship it. By charging $59 for the product and offering free shipping, you are creating the illusion of value – and a positive experience – for your customer.
But there’s a catch.
Let’s say Company A increases their product prices to bake in the cost of shipping. Sure enough, they’ll find conversion rate and return on ad spend (ROAS) are never better. The problem?
As each product price is inflated, customers that ordered more than one product are paying more than they have to. They could be paying four times the shipping cost. You run the risk of your price-conscious customers finding an alternative product from a competitor as they can see they’re paying an unnecessary premium. The overall result?
So how can we have our cake and eat it too?
How to offer free shipping without losing money
There are two levers you can pull to incorporate free shipping into your business model without impacting you financially. What works for one merchant might eat away at the profits of another.
Here’s the economics of it.
- Increase price to cover the shipping
- Increase conversion rate
Let’s tinker with these levers.
Scenario 1: Increase prices to cover shipping
The first lever is pretty obvious – in order for the business to offer free shipping and maintain target gross profit, the price needs to increase. Let’s take a look at an example.
The above is a fictitious ecommerce business with 100,000 online sessions per month, an average order value (AOV) of $100, and a current conversion rate of 2.5%. This equates to 2,500 orders and sales of $250k.
If we assume paid shipping at $10 per order, that’s $25k of shipping sales in addition to $250k of product sales. When you deduct the cost of sales and shipping, the business is left with $150k of gross profit and a 60% margin.
Scenario 2: Increase conversion rate
Let’s look at the same scenario – without charging for shipping.
The key is to sell enough products to maintain the target gross profit dollars. To do this, you’ll need to work out what additional conversion rate is required to generate more sales.
The above calculation tells us that we need to increase our conversion rate by 0.5% in order to reach high sales and the same gross profit dollars coming into the business.
What is the minimum additional conversion rate you require to make the same amount of gross profit dollars in your business?
Use this calculator to help you understand the minimum benchmark to offer free shipping in your business. (To use the calculator, just click Make a Copy first).
To free or not to free
Knowing which lever is more effective for your business will depend on a number of factors. Is your brand defensible enough to simply increase prices without impact conversion rate? If not,
you need to ensure offering free shipping will meaningfully lift your conversion rate against the benchmark.
Test out your theory by offering different shipping offers on a few select products. Try to find the ideal combination of conversion and profits that gives you a bump in sales. If you run the test for long enough, you’ll have ample data to help you make the right decision.
You might find that offering your customers free shipping isn’t viable at all, but at least you’ve done the math first.
At the end of the day, putting extra work into knowing your numbers will help you to understand your costs, set the right pricing strategy and protect your bottom line.
Whether you offer basic shipping for free or allow customers to choose express delivery for a fee, it’s important to give customers a choice in how they want to receive their products. Just make sure your cost information is up front – and do your math.