Shipping fees are barriers that may stop online shoppers from completing a purchase. Offering free shipping is a way to entice customers and make them more likely to complete transactions, but it can be costly for businesses. Discover how to offer free shipping in your online store without hurting your profitability.
Table of Contents
- What Are the Most Effective Free Shipping Models?
- How Can You Calculate the True Cost of Offering Free Shipping?
- Strategic Ways to Offset Free Shipping Costs
- Should You Offer Free Shipping on All Orders or Use a Minimum Threshold?
- How Can Fulfillment Partners Help You Offer Affordable Free Shipping?
- Build Your Free Shipping Strategy
- Frequently Asked Questions
What Are the Most Effective Free Shipping Models?
Even among businesses that offer free shipping, most don’t choose to provide blanket free shipping to every single customer. There are actually several different types of free shipping strategies, such as a minimum order threshold and a promotional free shipping offer. Consider which of these options might work best for your business, based on your preferences and your relationship with your customers.
Minimum Order Threshold Strategy
In the minimum order threshold strategy, each order needs to meet a minimum dollar value to qualify for free shipping. For example, Walmart offers free shipping on eligible orders of $35 or more for all customers. If a customer’s total is below the minimum order threshold, they still have to pay the standard shipping fees.
But how do you decide what your minimum order threshold should be? A good benchmark is to calculate your average order value (AOV) and set a threshold of about 20-30% above that average. If your average order is around $40, you might set your free shipping threshold around $50, for instance.
Setting the threshold slightly higher than your average order value encourages customers to add more items to their orders to qualify for free shipping. Consider A/B testing different threshold amounts to find an optimal balance between enticing customers to buy more and incurring excessive shipping costs.
Membership-Based Free Shipping
Another option is offering free shipping for members. Create a loyalty program and charge customers a monthly or annual membership fee to join. For example, Amazon offers Amazon Prime for $139 annually or $14.99 monthly. One of the benefits of Prime membership is free two-day shipping.
These membership fees provide a predictable revenue stream for your business. Feeling like a member may also improve customer loyalty, boosting customer retention. Since it’s much more expensive to bring in new customers than to keep existing customers, that retention boost is valuable.
Membership-based free shipping generally works best for businesses with frequent repeat customers. Consider offering additional perks beyond free shipping to add value and make membership more appealing.
Promotional Free Shipping
Just like many stores run promotions when products are discounted, you can run free shipping promotions. Consider offering free shipping during seasonal campaigns, such as holidays, back-to-school, or special events. Or offer free shipping to first-time customers only, to make it easier and more affordable for them to complete that first purchase.
Flash sales and limited-time free shipping offers create urgency, prompting shoppers to act quickly. During slow periods, you can offer promotional free shipping in an email marketing campaign to help boost website traffic.
Product-Specific Free Shipping
One of the less common, but still effective, free shipping strategies is limiting the offer to specific products. Offer free shipping only on high-margin items where you can absorb costs. Or, use free shipping as a loss leader on select products to drive overall sales.
You can also bundle complementary products together to help customers reach the free shipping threshold, making them more likely to buy additional items.
How Can You Calculate the True Cost of Offering Free Shipping?
Before committing to a free shipping strategy, you need to understand approximately how much it’s going to cost your business.
Consider these key elements of shipping costs:
- Shipping carrier costs: Compare USPS, UPS, FedEx, and regional carriers, then negotiate rates based on the volume of parcels you’re shipping.
- Packaging materials: Factor in boxes, padding, tape, labels, and branded packaging.
- Labor costs: Consider efficiency improvements that may lower your pick, pack, and ship time.
- Hidden costs: Don’t forget insurance, damaged package replacements, address corrections, and re-delivery fees.
If you’re considering product-specific free shipping, conduct a margin analysis. Calculate profit margins by product category to identify the ones that can support free shipping. You also have to decide if you’ll cover return shipping costs as part of the policy, too.
In addition, will your free shipping extend across all geographic zones? Make sure you understand how shipping zones affect your costs (local vs. cross-country vs. international).
Finally, run a break-even analysis to determine the minimum order value where free shipping doesn’t eat into profits.
Strategic Ways To Offset Free Shipping Costs
Free shipping is an added cost to your business, so to protect your bottom line, you’ll want to offset those additional expenses with more revenue. Try these strategies.
Optimize Your Product Pricing
Build shipping costs into product prices, so your profit margin doesn’t change (or at least doesn’t change much). Strategically increasing your prices by 5 to 10% likely won’t significantly reduce sales, but it will offer additional revenue to cover the cost of shipping.
One option is price anchoring. Position slightly higher-priced items as a better value with “free shipping included.” Or, try dynamic pricing strategies based on customer segment, location, or purchase history. Dynamic pricing is when businesses charge different prices for the same product depending on the circumstances of the sale. For example, you might charge customers from one geographic area a higher price if you know they’re willing and able to pay it, while charging a lower price to customers in a different area.
As you adjust prices, make sure to maintain transparent communication so your customers don’t feel deceived.
Improve Fulfillment Efficiency
Expenses related to order fulfillment can be significant. Improving your fulfillment efficiency helps cut those costs, making it more feasible to offer free shipping. But how do you make fulfillment more efficient?
Consider partnering with third-party fulfillment providers like AMS Fulfillment for volume discounts. You can also strategically locate inventory in multiple fulfillment centers to reduce shipping distances.
Implementing zone-skipping strategies, where you consolidate long-distance shipments into a single shipment that goes to a regional hub near the destination, can minimize carrier costs.
Plus, make sure you’re optimizing packaging to reduce dimensional weight charges and avoid packing material waste. Wherever possible, use automation and technology to reduce labor costs per order, too.
Negotiate Better Carrier Rates
If you’re shipping at least 100 packages per month, you may be able to leverage order volume for carrier discounts. Negotiate annual rate reviews as your volume grows. Compare multi-carrier shipping solutions to access the best rates per shipment.
For local deliveries, use regional carriers to keep costs lower. Consider hybrid carrier services combining multiple providers.
Cross-Selling and Upselling
In the product and checkout pages of your website, recommend complementary products to increase order value beyond the free shipping threshold. The easier you make it for customers to add more products to their order, the more likely they are to do so.
Create product bundles that naturally exceed minimum order requirements. Use cart notifications showing how much more is needed to qualify for free shipping, and suggest products that would take them over the threshold.
Implement “frequently bought together” recommendations, which show customers something else they may want based on what other shoppers buy.
Should You Offer Free Shipping on All Orders or Use a Minimum Threshold?
Universal free shipping (free shipping on every single order) is fairly rare. Consider these factors to decide if it’s the right choice for your business.
Pros and Cons of Universal Free Shipping
Pros:
- Simplest customer experience
- Maximum conversion potential
- Strongest marketing message
Cons:
- Highest cost burden
- May attract low-value customers
- Difficult to sustain for small businesses
Universal free shipping is best for brands selling mostly high-margin products. Established brands with strong cash flow may also be able to support a universal free shipping strategy.
Benefits of Minimum Order Thresholds
The main alternative to universal free shipping is instituting a minimum order threshold, which offers several advantages.
Crucially, minimum order thresholds help with revenue optimization. When you set your threshold strategically, you can increase average order value by 30 to 50% as customers buy more things to hit that minimum value. You’re influencing customer behavior. The threshold creates a gamification effect (“Add $15 more for free shipping”) that motivates customers to buy more so they “win” free shipping.
Minimum order thresholds also offer cost control. You only have to cover and absorb shipping costs when orders are large enough that their profitability justifies it. Remember that you have total flexibility, too. You can adjust thresholds based on seasons, promotions, or business needs as they change.
This free shipping strategy is the best approach for most eCommerce businesses, especially those with moderate margins.
Conditional Free Shipping Options
Beyond a minimum order threshold, consider putting other conditions on your free shipping offer.
For example, you might implement geographic restrictions, such as free shipping within the continental US only. Since shipping to Alaska, Hawaii, and other countries is often significantly more expensive, you would keep your shipping costs lower by only covering them for continental purchases.
Or, use product category limitations, such as free shipping only on non-fragile items. Fragile items like glassware, ceramics, and electronics require extra packing materials and sometimes more expensive shipping services, so offering free shipping on them might be too expensive.
Incentivize customers with customer segment targeting, such as free shipping for loyalty members or email subscribers. That way, you both benefit.
Many companies now also offer shipping speed tiers, such as free standard shipping and paid expedited options. That way, customers feel like you’re doing them a favor by providing free shipping, but they may still pay for faster shipping.
How Can Fulfillment Partners Help You Offer Affordable Free Shipping?
Partnering with a third-party logistics (3PL) company like AMS Fulfillment may be just what you need to keep profits strong while offering free shipping.
3PLs like AMS Fulfillment have negotiated rates with shipping carriers that individual businesses can’t access. Combined shipping volume across the 3PL’s clients results in better carrier pricing. When you partner with them, you gain access to those discounted rates. These partners also have multiple fulfillment centers to reduce shipping zones and transit times.
Shipping expenses depend on package weight and materials. Fulfillment partners are experts in packaging optimization, so they’re able to reduce dimensional weight and materials costs, reducing the amount you spend on free shipping.
If customers need to return something, your fulfillment partner helps manage that, too. Their streamlined reverse logistics reduces the total cost of free shipping programs. And with their technology integration, you gain real-time inventory visibility and order routing to the nearest facility.
Outsourcing fulfillment allows you to concentrate on marketing and growth, rather than the intricacies of packing and shipping. As your business scales, your fulfillment partner will handle volume fluctuations without you having to worry about fixed overhead costs.
Build Your Free Shipping Strategy
By carefully selecting a free shipping strategy, like setting a minimum order threshold, you can grow sales and protect your profits. Offset the added shipping costs with tactics like optimizing product prices and upselling. And partner with a 3PL service like AMS Fulfillment to access scalable, efficient packing and shipping that makes offering free shipping even more profitable.
Frequently Asked Questions
Should I offer free shipping if I’m a small business with tight margins?
It may still be worth offering free shipping when you’re running a small business operating on tight margins. The key is being strategic about your free shipping approach. Set a minimum order threshold that ensures profitability, only offer free shipping on certain products, or limit free shipping to promotional periods to draw in customers.
How to determine when to offer free shipping?
To ensure profitability, only offer free shipping when a customer’s order exceeds a minimum threshold. Calculate your average order value (AOV) and shipping costs over the last six to 12 months. Set a free shipping threshold 20-30% above your AOV, and make sure it’s high enough that your profits exceed shipping costs.
Is it better to offer a discount or free shipping?
Free shipping is generally more effective than product discounts. Customers often perceive shipping costs as unfair fees rather than part of the product price, making free shipping feel like a better deal than a discount on the products, even when the actual savings are identical.
