How to Offer Free Shipping – Without Losing Money

They say nothing is free in life – even “free shipping.” That’s no surprise to ecommerce entrepreneurs competing against business giants, like Amazon, that offer free shipping on almost everything. Customers often expect free shipping. For online retailers, knowing how to offer free shipping – without going broke – is crucial to ensuring long-term success.

“Striking a balance between profitability and your customers expectations for shipping fees cannot be taken lightly. Too often businesses lose out on valuable customers simply because shipping fees are beyond what they’re willing to pay."

Rick Nelson, Founder and CEO, The Fulfillment Lab

Recent statistics support Rick’s sentiments.

• Almost 60% of online shoppers say free shipping is a top factor affecting their purchasing decisions
• 54% of shoppers will make future purchases from a retailer if they know they’ll receive free shipping.
• 59% of customers will spend more in order to reach established free shipping minimums.

But, how can companies offer free shipping? It’s no secret that offering free shipping is easier said than done. Of course, retailers like Amazon and Walmart can afford to take the hit on free shipping, but it’s a different story for startups and small ecommerce businesses.

However, free shipping is not impossible for small- and mid-size businesses to offer, and the benefits of free shipping outweigh the costs. Here are some ways to offer free shipping and how to calculate your free shipping threshold.

First, Is Free Shipping Worth It?

In short, the answer is yes. With free shipping, retailers are better able to convert shoppers into customers, improve customer relationships, outshine the competition, and generate higher sales numbers.

While there are risks associated with free shipping, when a free shipping offer is done correctly, there are a number of benefits. Examples of these include:

• Lower cart abandonment rates. Nearly 70% of all online carts are abandoned and shipping costs play a huge role in this. Free shipping encourages customers to complete their purchase.
• Increased overall sales value. Would you rather spend money on a $45 item with free shipping or spend $30 on an item with a $15 shipping fee? 78% of shoppers would rather buy more to qualify for free shipping.
• Build trust with customers. 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. Free shipping gives customers a simple pricing structure.

Before You Begin Free Shipping - Know Your Free Shipping Threshold!

As mentioned earlier, free shipping is never “free” and someone, be it the retailer or customer, has to pay for shipping. A big mistake many online retailers make is not knowing if they can afford to offer free shipping or not having a free shipping strategy. Without careful planning, offering this type of incentive can cut too deep into profit margins and harm the business.

So, the first thing you can do is know what you can afford to offer in free shipping and how to calculate your free shipping threshold. Once you have a better understanding of the numbers you’re working with, you can establish a free shipping strategy that both your bottom line and customers will be happy with.

How to Calculate Your Free Shipping Threshold

Let’s explore how to determine what an online seller can offer in terms of free shipping. This threshold is crucial so you don’t create a free shipping program that doesn’t protect your business. Afterall, 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, most customers will qualify – and you’ll be taking a huge hit. The key is to find the right balance that both you and your customers can live with.

Here’s how to calculate your free shipping threshold.

1. Calculate your Average Order Value, without shipping costs (for example, $40)
2. Determine your Average Shipping Costs using a shipping cost formula (for example, $8)
3. 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)
4. Propose a Minimum Cart Value (for example, $45)

Now, it’s time to put that Proposed Minimum Cart Value to the test. 

1. Determine the difference between the Proposed Minimum Cart Value and the Average Order Value ($45 - $40 = $5)
2. Multiply the difference by the Gross Profit Margin ($5.00 * .40 = $2)
3. 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.

1. Proposed Minimum Cart Value minus Average Order Value ($55 - $40 = $15)
2. Multiply the difference by the Gross Profit Margin ($15.00 * .40 = $6)
3. 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!

How to Offer Free Shipping: 5 Strategies to Consider

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 asking your customers to do calculations themselves.

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. Offer free shipping for first-time customers.

If providing free shipping on a regular basis is not sustainable, don’t worry. There are other ways to incorporate this customer-preferred feature. Consider offering free shipping exclusively to first-time buyers as a welcome gift that also encourages them to buy.

Experiment with this strategy by generating a single-use promo code for new accounts that are making a purchase. Attracting new customers is significantly harder than persuading current customers to return, even if it means they must cover shipping costs. Therefore, this approach could be an effective method to boost new customer sales.

4. Offer a limited-time free shipping offer. 

You might also consider offering free shipping for a brief period to spark a surge in sales. Why not run a special promotion for one weekend each month, or align it with major celebrations like Christmas, Mother's Day, or Father's Day?

This approach leverages the power of urgency, a proven sales booster that can skyrocket sales by as much as 332%. Set up a short-lived promo code and spread the word across your website and social media platforms.

Introducing free shipping for just a few days can be the nudge your customers need to go from thinking about a purchase to making it, potentially driving up your sales and boosting your revenue in the process.

5. Offer free shipping on select items.

Depending on the types of products you sell, it may be easier to offer free shipping on some items and not others. For example, if you ship heavy items, such as organic laundry soap in glass bottles, free shipping may not be feasible for that product. However, if you have other items that cost less to ship, you may want to consider offering free shipping only on those items.

Streamline Shipping Costs (So You Can Offer Free Shipping!) with The Fulfillment Lab

One other way to make free shipping more comfortable for your business 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!