Free, Flat, or Live Rate? A High-level Look at How to Price E-commerce Shipping
Whether or not to offer free shipping is a question that weighs heavy on many an e-commerce merchant’s mind, especially in the face of rising consumer expectations set by retail behemoths such as Amazon.
While 49% of consumers will abandon an order during the checkout process because they think extra costs – such as shipping fees – are too high, 58% of merchants say the cost of shipping is the biggest challenge facing their business, and 95% of e-commerce executives are prioritizing cost optimization this year.
Of course, optimizing for savings alone by driving up shipping fees could result in a greater overall cost to your business in the form of subpar customer experiences and missed revenue opportunities. The goal is to strike a balance, delivering a delightful in-cart experience – one that leads to high conversion rates, customer satisfaction, and repeat purchases – in the most cost-effective way.
Luckily, you’ve got options. While across-the-board free shipping is undoubtedly the darling in the space (for consumers, anyway), it’s important to understand the ins and outs of other pricing strategies so you’re well-equipped to make the best decision for your business.
Flat or Fixed Rate Shipping
With flat rate shipping, your customers see a set, static shipping cost regardless of what’s in their cart or their final destination. While charging a flat rate shipping fee across every order might make your online store less competitive (depending on your product and ideal customer), it does help mitigate the cost of shipping on your business. If you’re offering flat rate shipping as a way to ensure faster deliveries as a competitive advantage, however, be sure to communicate those timelines to your customers clearly within the checkout experience so they better understand why they’re paying the fee.
A good way to calculate your ideal fixed rate is by determining your average shipping cost across all orders, then deciding what’s feasible for your business without detracting from your customer’s desire to purchase. We recommend keeping numbers round – say $5 or $7.50 – as consumers tend to convert better in these instances than with more random-seeming amounts such as $3.27 or $8.84.
Live Rate Shipping
As mentioned above, overinflated shipping rates can deter shoppers from completing a purchase in the first place, when the goal is to deliver an experience that converts them into loyal customers. With live rates, however, charges are based on real-time carrier rates – as well as other factors such as the package’s weight, dimensions, and destination – to deliver a more transparent and authentic experience determined by the specific order.
With Shippo’s Rates at Checkout, for example, Shippo powers the shipping rates shown in your store’s checkout experience by calculating estimates of shipping costs based on the contents in the cart and shipping destination.
Rates at Checkout are currently available to Shippo customers with Wix Stores, and we’ll be rolling out rates at checkout across our other technology partners in the near future – be sure to stay tuned.
According to our most recent State of Shipping Report, 38% of consumers prefer free shipping, but it won’t prevent them from buying, while 33% of consumers say they only purchase online with free shipping, and 20% will swap stores if they have to pay for shipping. Interestingly, however, when asked whether or not they offer free shipping, 31% of merchants do not offer free shipping at all, while just 21.5% always offer free shipping.
Suffice to say, the ultimate cost of free shipping matters to both consumers and retailers.
While offering free shipping on every order may not be feasible, offering this option at least some of the time can not only help improve cart conversions, it can also drive more customer loyalty. Looking at your profit margins will help you determine if and when to offer free shipping. If your products are fairly inexpensive or have low-profit margins, for example, offering free shipping on every order may not be sustainable. However, merchants selling more expensive items might find free shipping successful across the board.
For those unable to offer free shipping with every order, there are still opportunities to cover the cost in specific instances as a way to drive more conversions:
- Purchase threshold-based free shipping: Studies show that 65% of consumers look at free shipping thresholds before adding items to their online cart, and 48% will add items to their cart to hit that threshold. We recommend a threshold that lands slightly above your average purchase value. For example, if customers typically buy a $35 from you, price your free shipping threshold at $40 or $45 to encourage larger purchases. This helps you increase the size of your orders and save on shipping, since you’ll be able to package multiple items in one box or envelope.
- Free shipping as a loyalty program perk: Free shipping is the leading reason US consumers would sign up for a loyalty program, with 64% citing this as their biggest motivator. By using free shipping as an incentive to join a rewards program, you’ll build more stable and longer-lasting relationships with your customers, which will allow you to increase ROI and cover the cost of shipping over time.
Address, Test & Optimize
Once you’ve addressed the question and considered what your most lucrative options are, it’s time to test the most promising pricing strategies to see what drives conversions without seriously impacting your bottom line. For example, if you find that 2-day shipping with free returns is what inspires more purchases and brings back repeat customers, you should try to figure out how to deliver that in the most economical way.
There is no one-size-fits-all when it comes to determining the right pricing strategy, but by testing, learning, and optimizing according to what you find works best for your business, you’ll set yourself up for e-commerce success and continue discovering more opportunities for growth. And by utilizing a shipping software solution such as Shippo, you can access the lowest rates from a network of 85+ carriers to help determine which services work best for your business and your customers overall.