All Things Shipping
Aug 13, 2020

Is Free Shipping Best for My Business?

Free shipping. There’s just something about the phrase that evokes instant satisfaction—if you’re a shopper, that is. 

It’s also literally everywhere these days. 

Any cursory retail or item search on Google will yield a vast array of merchants offering free shipping as a way to entice shoppers to click further. And, it works. The offer of free shipping will invariably contribute to higher conversions. In fact, 48% of consumers will add more items to their shopping carts if it means they’ll qualify for free shipping. 

While it’s a no-brainer that free shipping is a highly compelling benefit for consumers and can ultimately boost the value proposition of shopping on your site, it’s not necessarily the right fit for every business. When engaging in the aforementioned Google search, many of the top businesses that show up will be larger legacy merchants (Walmart, Nordstrom, et al.), and those companies are obviously well-positioned to be able to offer it. 

But, is free shipping a realistic option for smaller online merchants? That depends. In our 2019 State of Shipping Report, survey data indicated that 21% of small to medium online businesses always offer free shipping. That percentage may seem a bit low, but that doesn’t mean that other smaller and medium businesses don’t offer it, just not on every transaction (we’ll get to that in just a bit). 

A number of factors come into play when evaluating the possibilities of offering free shipping. Here, we’ll delve into some of the key considerations on whether or not it might work for your business. 

Crunch the Numbers

One of the first things you should explore is whether or not free shipping is a viable option, financially. As mentioned, free shipping will invariably lead to higher conversion rates, but as each business is different, you need to evaluate if offering it will lead to net-positive gains for your business (or at least be net-neutral). 

Looking at your profit margins is an important first step. If the products you sell are fairly inexpensive or have low-profit margins, then offering free shipping on all orders may not be sustainable. But for more expensive items, it could be very workable. By modeling this out, it will give you a clearer picture of whether or not free shipping is a possibility.

Survey the Landscape

Another key factor in the overall equation is that of your competitors. Do they offer free shipping? If so, it could put you at a disadvantage if you’re not able to do so. But on the other hand, if they’re not offering free shipping, it could be a big differentiator for your business and help you gain an edge on the competition.

Ways of Offering Free Shipping

There are several ways that businesses cover the costs of free shipping:

Setting a Minimum Threshold

One way to compensate for shipping costs and build up your average order value (AOV) is to offer free shipping on a minimum spend threshold. With this approach, customers will qualify for free shipping if they spend a minimum amount, or add a certain amount of items to their cart. 

For example, let’s say you’re selling T-shirts where the cost of production (including any non-last mile shipping) is $7 per shirt and you are selling them at a retail price of $15, with an additional charge of $7 to ship. In this scenario, offering free shipping would eat up virtually everything above cost. But, if you were able to get your shopping cart up to $60 with four shirts for the same (or close to the same shipping cost) and provided free shipping, you’d garner a $25 minimum profit on the transaction. 

Things to keep in mind:

• Defining a minimum threshold involves establishing a baseline that factors in your AOV for a given period of time (like six or 12 months, adjusted for seasonality), the volume of orders during that period, plus your margins and overall shipping expenses. One rule of thumb is to set your minimum threshold just above the AOV to encourage customers to add more to their carts.

But even with the potential benefits of a higher cart total, you’ll still need to ensure that your margins can sustain this—and that overall, it makes sense financially to justify footing the bill for shipping. Also, minimum thresholds may not always yield the same results over time, so you’ll want to continually monitor for that in case an adjustment is needed. Testing all of this out would provide further insights to inform your decisions (more on this in a few).

• Be thoughtful about what you decide. If you set your minimum threshold too low, it may not move the needle much in terms of justifying the free shipping costs. If you set it too high, you may risk alienating your customers and driving them elsewhere. In Shippo’s Ultimate E-commerce Shipping E-book, data shows that 48% of customers will increase the volume in their carts in order to meet free shipping thresholds.

• Ensure your minimum threshold ultimately maps back to your minimum sales or conversion requirements. Do the additions of incremental sales added to qualify for free shipping, still ultimately allow for profitability? Are your margins secure? Again, testing will help you get a clearer understanding.

Rewards and Loyalty Programs

Having a program in place that rewards customers for their loyalty can be a great way to weave in free shipping. Here’s an example: you offer customers the option to enroll in the program when they register for an account to purchase on your site. You then track their purchases and when they’ve met certain minimum thresholds, you can send them a promo code to qualify for free shipping on their next purchase of “$XX or more…” 

Other ways to incentivize repeat shoppers as part of your loyalty program would be to offer free shipping for special occasions such as birthdays or holidays. 

Offering Free Shipping for a Limited Time

One way to create some buzz around free shipping is to offer it as part of a limited-time campaign. By promoting these types of campaigns a few times a year, you could go full-force in highlighting the benefit, and create some excitement and anticipation for these “special events” in advance.

Free Shipping on Specified Items

Say you just got a special deal or incentive from your distributor on a specific item and think it will be a hot seller. You could offer free shipping on the item, or qualify the entire cart for free shipping if the specified item is included. On the flip side, you can also do similar for older inventory that you’re looking to clear out. 

Incorporating Shipping Costs (or a portion thereof) into the Price of the Item 

As mentioned above, if you sell items with a high-profit margin, this may be an option. But, if your items are not very expensive, raising the price to cover shipping will make you less competitive. 

This approach may also not be optimal for all of your inventory, especially if sales of specific items decrease (in general or seasonally). Raising prices to cover free shipping on items that have been dipping won’t help you stay competitive. 

And overall, if your prices aren’t competitive, any shipping benefits will likely be seen as an afterthought to prospective shoppers. 

Testing the Effectiveness of Free Shipping

Conducting controlled A/B tests on your site is an effective way to determine if free shipping may be right for your business. Here’s what that could look like: a portion of your traffic is served up free shipping messaging, while a parallel sample size is not. 

Here are a few ways to structure this:

Running tests like these in a controlled environment would provide insights into the levels of conversion rates and give you a better idea of the types of offers that are most compelling to your customers. 

If running a full-scale A/B test is not feasible right now, another option would be to offer free shipping for a limited time, like two weeks or a month.

After running the test, you’ll be able to analyze the net effects of offering vs. not offering the benefit. If it results in a net gain in sales and conversions for your business, then it may be time to consider free shipping. 

Determine the Right Mix of Shipping Options

Similar to the various options available for offering free shipping, you can also get creative with the mix of shipping services you employ. Are you able to offer both free and fast shipping? If not, how about a slower delivery option that’s still free, but with an optional upgrade to 2-day or overnight shipping (at an extra charge)? However you decide to structure your shipping service options, it’s always a good idea to survey the various carriers, their specific service levels, and pricing for the types of shipping options you’re offering. 

By utilizing a shipping software solution, you can access a mix of carriers, often at discounted rates to help determine which services work best for your business and customers. And, to get an idea of how much you could actually save on say, USPS shipping rates, for example, try out our USPS shipping calculator.

Displaying Your Free Shipping Offer 

Once you’ve landed on a shipping strategy that works best for your business, it’s important to communicate it in an effective and compelling way on your site, and related channels. Customer expectations need to be set so that there are no surprises during the checkout phase, which will also help minimize cart abandonment. 

Ways to communicate your shipping offers include:

Is Free Shipping Best for Your Business?

That’s a question that should be considered once you’ve done a bit of homework. 

As mentioned, free shipping can be a highly effective lever for boosting conversions, building customer loyalty, raising AOV, and more. But, not at the expense of your profit margins. After careful cost/benefit analysis and testing (if feasible), there will be several options available to explore, if and when you’re ready. 

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Jim Kazliner
was Shippo's senior content editor, creator, and overseer. His background spans business, retail, financial, and automotive sectors, as well as music and film journalism. When not spinning yarns on his long-suffering laptop, you’ll find him collecting vintage vinyl and obscure BMX bike parts.

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