How to Offer Free Shipping Without Wrecking Your Profit Margin
February 25, 2020
The numbers don’t lie: Free shipping is one of the most powerful tools you can use to increase sales.
Seventy-four percent of online shoppers report that free shipping is the single most important option at checkout, and 94% have previously performed an action in order to qualify for free shipping (for example, adding more items to their cart so they would meet an order value threshold).
Not only is free shipping something shoppers enjoy — it’s something they expect. According to a National Retail Federation survey, 75% of shoppers expect free shipping to be an option for their orders. Thirty-nine percent of shoppers even expect free two-day shipping to be an option, and 29% have gone as far as to back out of a purchase because free two-day shipping wasn't available.
Finally, consider the effect that free shipping can have on abandoned carts. Nearly 70% of online shopping carts are abandoned before the customer completes their order, and the leading cause of abandoned carts is extra costs such as shipping fees.
At this point, you may be asking yourself, “But can I afford to offer free shipping?” Taking the above stats into account, the better question appears to be: Can you afford not to?
How to Make Free Shipping Work for Your Bottom Line
The challenge with free shipping, of course, is that shipping costs money. In fact, it can be quite expensive for heavy, large or oddly-shaped products. And for low-margin products regardless of weight or size, the cost of shipping might make the difference between turning a profit and taking a loss.
By using the strategies outlined below, you’ll be able to receive the revenue-boosting benefits of free shipping while minimizing how much the shipping actually costs you.
Raise Prices to Cover the Cost of Shipping
The easiest way to afford free shipping is to simply add how much shipping would cost to the base price of the product.
The customer doesn’t really benefit from this arrangement. When you break it down logically, they’re getting the same value whether they pay $30 with free shipping or $25 plus a $5 shipping fee for a product.
But on a psychological, somewhat irrational level, the former pricing structure is more appealing to the customer. This is because when a customer buys a product, the value they associate with the transaction is tied to the product itself, not the shipping.
For example, as soon as a shopper clicks the “Buy Now” button next to a new TV, they’re already thinking about what their favorite shows will look like on a big, high-definition screen. The emotional aspect of anticipating that experience makes the price of the product worth it.
But even though shipping is necessary for bringing that TV to the shopper’s home, it’s not part of the experience they’re looking forward to. So, it doesn’t seem worth paying for. Shifting the cost of shipping to the cost of the product makes the total cost much more palatable.
The only problem with this technique is that adding the cost of shipping to the base price of a product might raise the price enough for you to start driving potential customers away. To prevent this from happening, you can use the other techniques described in this guide to reduce your losses from shipping costs.
Set an Order Minimum for Free Shipping
For particularly small orders, it’s possible for the cost of shipping to not just eclipse your profit margin, but the value of the order itself. In these cases, trying to add the cost of shipping to the base price can raise the price by a factor of two, three or even more — it’s just not feasible.
That’s why many online stores require shoppers to reach an order value threshold before they’re eligible for free shipping. That way, offering free shipping won’t take as big a bite out of your profit.
Another benefit to this technique is that it motivates customers to add more items to their carts, which results in more revenue for your store. Specifically, a UPS survey found that 48% of shoppers have previously purchased extra items in order to qualify for free shipping.
Offer Free Shipping for Select Products Only
An alternative to order minimums for free shipping is to offer free shipping for select products. Generally, this would involve charging a shipping fee for low-cost/low-margin items while offering free shipping for high-cost/high-margin items.
This is an excellent way to encourage shoppers to purchase the items that net you the most profit, and you can also use free shipping to move products that aren’t selling well.
Offer Free In-Store Pickup
If your online store has a brick-and-mortar counterpart, then in-store pickup is an easy and affordable way to offer free “shipping” to your customers. Obviously, this isn’t as convenient for the customer as having the order shipped to their home, but it’s still a popular option — one survey found that 77% of shoppers purchase items online and pick them up in-store at least once per week.
You may even want to invest in automated lockers to help manage your in-store pickups. This technology has become quite popular in recent years, and it allows customers to collect their orders without pulling your staff away from other tasks. It won’t take long for the amount of employee productivity you save with these lockers to be worth more than how much they initially cost.
Use an Order Fulfillment Company
When working with carriers such as UPS and FedEx, your rates will be determined by how much volume you ship. That means, on a per-item basis, smaller stores end up paying more for shipping than larger stores.
This is why small and medium-sized stores should look into using an order fulfillment company for their shipping. These services ship a very large amount of products on behalf of their clients — this allows them to negotiate lower rates from shipping carriers, and then they pass the savings on to you.
Fulfillment by Amazon (FBA) is perhaps the most popular service of this kind. Using FBA means that the products you list on Amazon are automatically Prime-eligible, so Amazon Prime members can order them with free two-day shipping. Considering the aforementioned benefits of free shipping and the fact that a majority of U.S. households have an Amazon Prime subscription, this has the potential to generate a massive amount of sales for your store.
If a tree falls in the forest but no one’s around to hear it, did it make a sound?
Similarly, if you offer free shipping but no one knows about it, was there any point to offering free shipping at all?
Once you’ve figured out how to utilize the above techniques and make free shipping work for your bottom line, make sure that people know you offer free shipping. Include it in your advertisements. Feature it prominently on your product pages.
This is one of the most compelling offers that you can make to potential customers — they need to know about it.
Adam Ritchie is a writer based in Silver Spring, Maryland. He writes about ecommerce trends and best practices for Shogun. His previous clients include Groupon, Clutch and New Theory.
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