Marketing your website successfully doesn’t matter if your site isn’t meeting your business goals (ie, making money). Different types of sites may have different problems (ie, your leads are low quality), but there is one sure fire way to quickly kill your online store – getting less money from your customer than it takes to get the product to them.
Usually this problem comes up because of a free shipping offer – one of the most surefire marketing tactics for any online store. Hundreds of blogs, agencies, and studies show the impact of free shipping on both increasing visitors & getting them to hit the Buy! button (not to mention that it pretty much helped build ecommerce empires like Zappos! and Amazon – along with becoming a customer expectation online).
Here’s a look at the pros, cons & alternatives – along with an introduction to a new, free app to help you make the right decision for both your marketing & bottom line.
The pros and cons of offering free shipping are pretty straightforward.
- Increased order volume (typically more than 15%)
- Higher conversion rate
- Increase in customer retention
- Marketing edge over competitors
- Significant decrease in operating margins
- Decrease in operating margins reduces marketing budgets & overall profits
- Difficult to reverse free shipping once implemented
On first look, the advantages of free shipping outweigh the disadvantages. However, free shipping is not a one size fits all tactic – and your shipping & logistics strategy has to work for both your business and your customer.
Here’s an example – let’s suppose I have a store that sells widgets. Right now, I charge my customers for shipping, but I really want to drive higher order volumes. Also, I really think that higher conversion rates will positively impact my paid marketing campaigns. Here’s what my current numbers look like:
|Estimated Orders p.a.||15,000|
|Avg. price / order value||$80.00|
|Gross Profit Margin (%)||30.00%|
|Shipping Charge per Order||$10.00|
|Shipping Cost per Order||$8.00|
|Gross Sales p.a.||$1,200,000.00|
|Minus Shipping Costs||– $120,000.00|
You can see how shipping fees collected contributes $30,000.00 to estimated profits. That higher profit gives you room to pay for more & better marketing. It gives you a more competitive CPA price for CPC ads. Or it gives your business a higher ROI.
Now let’s look at how implementing free shipping would affect the numbers.
|Est. Increase in Orders||15.00%|
|Gross Sales p.a.||$1,380,000.00|
|Minus Shipping Costs||– $138,000.00|
You can see that despite the 15% increase in order volume, there’s still a $114,000.00 difference in your profits. In fact, you would have to increase order volume by over 63% before you would have the same profits as you have with shipping fees.
The key takeaway is that you shouldn’t implement free shipping just because it’s expected by your customers, or it might increase your order volume. Use the free tool here to plug in your numbers and get an estimate.
That said – there are a lot of in between alternatives that could increase order volume, without hitting your margins quite so hard.
Alternative #1 – Minimum Cart Value
This is the most well-known alternative to free shipping. Don’t offer it across the board – ask for a minimum order size. It’s how Amazon drove their early growth before introducing Amazon Prime. They had a minimum cart value of $25 before giving free shipping. And if you set the minimum cart value just right, you can even come out ahead.
But the key is setting the right minimum value:
- Set it too high, and it won’t increase order volume – and will just draw customer attention to the fact that they aren’t getting free shipping.
- Set it too low, and you’ll be hitting your profit margins
So how do you figure out the right threshold? Here’s what you’ll need:
- Average Order Value (example, $80)
- Average Shipping Costs (example, $8)
- Gross Profit Margin (example, 30%)
- Proposed Minimum Cart Value
Then, you will find the difference between Minimum Cart Value and Average Order Value. Multiply the difference by the Gross Profit Margin. Then subtract cost of shipping from the result.
$90.00 – $80.00 = $10.00 * .30 = $3.00 – $8.00 = ($5.00)
So every qualifying order still costs you $5. Still not good. Let’s adjust the minimum to $110.
$110.00 – $80.00 = $30.00 *.30 = $9.00 – $8.00 = $1.00
Now we’re still making money. Not every customer will top up their order to get free shipping, but even if only 33% top up, you’ll still be making $25,000 from shipping contributions. That’s only $5,000 less than your current contribution, but now you have an interesting & profitable promotion to work with.
That said, this alternative doesn’t work for every store. If your products don’t have complements, accessories, or it doesn’t make sense to order multiple items, this strategy won’t work well.
Tips to making this tactic work even better:
- Alert the customer if the are almost at the minimum order value & offer related or complementary products (Amazon is very adept at this)
- Advertise your offer on your site – especially on product pages near the minimum order value
Alternative #2 – Paid Upgrade
With this option, you offer free shipping across the board, but use priority handling or “rush option” as a paid upgrade. Think of it like a freemium business model for shipping. A minority of customers will “fund” free shipping for the rest of customers.
This option doesn’t even need to mean a pricier shipping option (ie, UPS Next Day, etc.) – just reduced handling time. Instead of shipping in 2 days, the upgrade will help get the order out the door on the same day.
To look at the numbers, let’s assume we get the benefits of free shipping, but get 10% of customers to choose the Rush Delivery option, which costs $15.
|Minus Shipping Costs||($138,000.00)|
Profits are still down $88,125.00, but it’s much better than $114,000.00. It’s not ideal, but if other variables make sense (ie, conversion rates, impact on paid spend, etc), then it might be a good route to take.
Those 2 options are the most commonly seen alternatives to across the board free shipping seen online, but there are several others, including:
- Free shipping during limited periods – think different holidays or seasonal sales times.
- Free shipping on selected products (hopefully high margin ones)
You can also simply have higher prices and build shipping into the cost of each product. You’ll have to be sure to heavily advertise the free shipping to deposition competitors – but this strategy can be the best of both worlds.
My favorite though is free shipping for members in exchange for an email sign up. A customer who gives you permission to market directly to them is extremely valuable, and often well worth the free shipping offered (again, think Amazon Prime). That said, it does depend on your product. Calculate your lifetime customer value and customer acquisition costs before diving head long into this alternative.
Which ever method you choose, remember to actually measure your results. Measuring is as important, if not more so than choosing the correct strategy in the first place.
A shipping strategy needs to be measured against the same criteria as any other marketing campaign. If you can’t see a visible improvement in site visits, conversion rates and order volumes then you should change it up. There’s little to no use in throwing money down the drain if it’s not improving your business’ bottom line.
Next step – check out the free shipping profit calculator here and see what your numbers will look like.
Image Credit – Wikipedia, Public Domain