How to Calculate Your Free Shipping Threshold
They say nothing is free in life—even “free shipping.” That’s because, even if you offer free shipping, someone has to pay for it. Usually, that’s going to be you, the business owner!
Today, many consumers (75% of them, according to the National Retail Federation) expect to receive free shipping when they make an online purchase. This is due in large part to big eCommerce retailers like Amazon that have made it the norm. Of course, retailers of that size can afford to take the hit, but it’s a different story for startups and small eCommerce businesses. So, here are some ways to offer free shipping and how to calculate your free shipping threshold.
The Importance of Free Shipping
Before diving into how to offer free shipping without losing money, let’s take a look at the importance of doing so. First and foremost, studies show that shipping costs (and the availability of free shipping) impact the purchase decisions of more than 50% of U.S. consumers. Another study reveals that 9 out of 10 consumers say free shipping is their biggest incentive to shop online. With so much competition in the online marketplace, offering free shipping is no longer a nicety, but a necessity.
Still, there’s another reason people want free shipping other than the fact that everyone likes getting something for nothing: Free shipping gives customers a simple pricing structure. Nothing frustrates customers more than going through the checkout process only to be blindsided with a steep shipping fee at the end of their transaction (this is the reason behind an estimated 55% of all abandoned carts).
So, the benefits of free shipping include the ability to compete with others in your space, the ability to attract more customers, and fewer abandoned carts!
How to Offer Free Shipping
If you offer free shipping, it’s going to come out of your bottom line, and most startups and small eCommerce retailers are already working on small profit margins. How can you offer free shipping without losing money—or at least without losing much money? Here are four ways you can offer free shipping.
1. Increase the price of your product.
This may seem counterproductive, but remember, customers like the simple pricing structure of a free shipping model. They may not notice that the product costs more. Instead, they’ll be attracted to the free shipping angle.
The Wharton School of Business even shows that free shipping that saves a customer $6.99 is more appealing than a discount that cuts the purchase price by $10. Again, it comes to simplicity and not having to do any calculations.
2. Offer free shipping on orders over a certain dollar amount.
Many online shoppers will add additional items to their shopping cart to receive free shipping. You wind up selling more and, by shipping the items together, can save on the cost of individual shipments. Wharton also reveals that the average consumer will increase their spend on an order up to 30% just to get free shipping.
3. Buy two or more items.
Another form of upselling that allows you to sell more and save by shipping only once.
4. Free shipping at certain times.
You may not want or need to offer free shipping when you’re busy and the money is coming in, but consider changing your model during slow periods to attract customers when you need them.
How to Calculate Your Free Shipping Threshold
Setting a free shipping threshold is critical if you’re going to use method #2 from the list in the previous section. Setting an arbitrary threshold could be useless to customers, or could eat up your margins. For example, if your average order value is $50 and you set your free shipping minimum at $500, no one is going to bite.
By the same token, if your average order value is $50 and you set your minimum at $40 and never change the pricing, most customers will qualify and you’ll be taking a huge hit. So it’s time to do a little bit of math!
Here’s how to calculate your free shipping threshold.
- Calculate your Average Order Value, without shipping costs (for example, $40)
- Determine your Average Shipping Costs (for example, $8)
- Calculate your Gross Profit Margin. To do this, subtract the Cost of Producing Product from Total Sales and divide that number by your Total Sales (for example, if your Total Sales is $100k and your Cost of Producing Product is $60k, then the formula would be ($100,000 - $60,000) / $100,000 = 40% Gross Profit Margin)
- Propose a Minimum Cart Value (for example, $45)
Now, it’s time to put that Proposed Minimum Cart Value to the test.
- Determine the difference between the Proposed Minimum Cart Value and the Average Order Value ($45 - $40 = $5)
- Multiply the difference by the Gross Profit Margin ($5.00 * .40 = $2)
- Subtract the result from the Average Shipping Cost ($8 - $2 = $6)
As you can see, you’re going to wind up paying $6 for shipping on qualifying orders, which is too much of a hit for your bottom line. So, let’s try adjusting the Proposed Minimum Cart Value. This time, use $55 as the minimum.
- Proposed Minimum Cart Value minus Average Order Value ($55 - $40 = $15)
- Multiply the difference by the Gross Profit Margin ($15.00 * .40 = $6)
- Subtract the result from the Average Shipping Cost ($8 - $6 = $2.00)
By upping your threshold by $10, you still provide value for customers while dropping your shipping cost to just $2.00 per order. That’s much more do-able, right? You may have to play around with the numbers a bit to find your sweet spot, but it’ll be worth it to your bottom line!
One More Way to Offer Free Shipping
If you’ve been wondering, “Should I offer free shipping?” for a while, the answer is almost always “YES!” Unless you have a very niche product that consumers can’t find elsewhere, chances are they’ll pass your product by in favor of a seller offering free shipping if you do not.
One other way to offer free shipping, of course, is to partner with The Fulfillment Lab. Using one or more of our national and global fulfillment centers, especially as your eCommerce business begins growing, offers significant savings to offset the cost of shipping.
For example, we ship your product from the location closest to your customer (the fewer zones it crosses, the less money it costs). Because we do bulk business with all major carriers, we’re also able to negotiate better shipping rates in general. Of course, that’s not all we do. Check out our blog, 10 Reasons to Use a Fulfillment Center for Your Ecommerce Shipping, and then contact us to learn more about what we can do for you!