Practical Ecommerce

Solving the Free Shipping Dilemma

For many merchants, free shipping is an effective online promotion. During the last holiday season, large retailers like Walmart, Target and J.C. Penney offered free shipping for all items. Nordstrom also recently changed its policy to offer free shipping for all purchases. All of this has made free shipping increasingly important for doing business online. For retailers, this is concerning as free shipping does not actually come free, of course. This article will address different ways to solve the free-shipping dilemma.

Include Shipping Charges in the Price of the Product

If you sell unique or hard-to-find products, you can include your average shipping cost as part of the product price. Customers cannot compare prices when purchasing one-of-a-kind unique products, but the free-shipping offer can improve the conversion rate.

A good example of a site that follows this strategy is 1800flowers.com. The site sells one-of-a-kind flower arrangements. Hence, it is able to absorb the shipping costs as part of the product price.

If you are in the business of selling high-margin products like Nordstrom, you can offer free shipping. This will initially cut into the margins but the increased sales volume — because of free shipping — will likely make up for the reduced margin.

Free Shipping Threshold

If your site sells inexpensive products or if the overall profit margins are already thin, consider offering free shipping after the order value has hit a defined threshold. Amazon has been doing this for a long time and offers free shipping on all orders over $25. Several other retailers follow the same model and the free shipping thresholds have been coming down because of competition. Staples.com recently reduced its free-shipping threshold to $45, presumably because of competition from OfficeMax.com and OfficeDepot.com, both of which have $50 thresholds. Since all three sites sell similar products, the objective is to gain more business by keeping the threshold lower.

As a small retailer, you need to determine what should be your free shipping threshold based on your expected profit margins and the average order size. If, for example, the average size of an order is $30 and you need the order to be at least $45 before offering free shipping, this will likely push the customers to buy $15 worth of additional products from your site to get free shipping.

For some products, the free shipping threshold works like an outlet mall. Oftentimes, customers drive several miles to an outlet mall to buy discounted clothing and other merchandise and, usually, buy more than a “regular” shopping trip because of the discounted prices. The free shipping threshold works the same way where customers buy more to hit the threshold that saves them the few dollars in shipping.

Free Shipping Membership

A growing trend is to offer free shipping to customers who join an “unlimited free shipping club,” for an annual fee. Amazon was the trendsetter with its Amazon Prime program — see our recent Amazon Prime article. Several other retailers have started similar programs. For example, Williams Sonoma launched its “Reserve” program: for $30 per year it ships free all its online products. Sears launched “ShipVantage,” which ships all products for free for $79 a year, the same price as Amazon Prime.

Another free shipping membership program is ShopRunner, an independent shopping service that works with retail partners. It offers free shipping for a $79 annual fee. As a small retailer, this might be a good option, versus creating your own free shipping membership program. The major benefit is it encourages repeat purchases as the customers have already paid shipping for the full year.

Ship a Subset of Items for Free

If your site cannot afford to offer any of the above options, then consider shipping only the high-margin products for free. You need to determine at what price point you can afford to offer free shipping, and then select products above that price point. This is not drastically different from setting a free-shipping threshold but works more effectively for retailers with different profit-margin percentages across multiple products.

A good example is a jewelry site that sells both artificial and diamond jewelry. The site could, perhaps, afford to offer free shipping for all diamond orders but cannot absorb the free shipping expense for the artificial jewelry shipments because of competitive pricing and the small profit margins.

Flat Rate Shipping

If free shipping is not possible, then keep the process simple by offering flat rate shipping. This avoids customers getting surprised with the shipping costs during the checkout process. The rate can be determined by the average shipping costs for your orders, recognizing that too high a rate will not improve sales. Usually keeping it under $10 works best, such as a $9.95 rate for all orders.

My experience is that for flat rate shipping to be effective, it needs to be offered “per order” versus “per item.” This will result in increasing the number of items per order as customers will try to fit more products within the same flat rate shipping cost. This needs to be considered and calculated before finalizing the flat rate shipping rate for your site.

Other Shipping Options

If none of those options work for your business, then consider some of the following methods.

  • Ad supported shipping. AdShip offers companies a discount on shipping if they are willing to include ads as part of their shipment. This is a good option if you are not worried about your competition stealing your customers using ads or if the customers might get offended with the ads.
  • Vendor discounted shipping. Certain vendors might be willing to absorb the shipping costs for pushing their products on your site. As an example, a printer manufacturer may offer free shipping to push its products, versus all the other printer manufacturers selling their products on the site. If your site sells several similar products from different vendors, you can negotiate with your vendors to offer free shipping on their products.
  • Pick up from store. If you have brick-and-mortar stores, you can offer free order pickup, versus free shipping. Even with a single store, this can be a great option.
  • Drop ship. If your site currently ships from its own warehouse, drop shipping — where an item is shipped directly from a supplier or manufacturer — might be an option to reduce costs. These cost savings can then be passed on to the customer by offering free shipping. This is not a sustainable option, however, if in the next year there will be no savings to offset the free shipping costs.
  • Free upgrades. If you cannot offer free shipping, determine if offering free shipping upgrades — such as free overnight or second-day shipping — is an option. This can be negotiated with your shipping vendor to minimize the cost impact and could turn out to be a good incentive for customers to shop on your site.

Summary

Free shipping is a great promotion, but once you start offering it, it is not easy to stop without impacting sales. Free shipping may also result in increased returns, which will increase your overall costs. But free shipping could also result in lowering your overall marketing costs and offset added expense.

With the hundreds of comparison-shopping sites allowing customers to compare full price, including shipping and taxes, this makes even more important to offer free shipping. Free shipping is not going away anytime soon; it is way too premature to think that. But I hope one of the shipping options above will help.

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Gagan Mehra
Gagan Mehra
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Comments ( 5 )

  1. Lauren September 27, 2011 Reply

    As an eBay seller, AdShip has worked great. If I ever feel like I am advertising for a competitor, I can select a different ad.

  2. Jagath Narayan September 27, 2011 Reply

    Great article! This is a very comprehensive description of free shipping strategies.

  3. August Chimera September 27, 2011 Reply

    Very thorough article, thanks for detailing all of these different options. As a new business owner, it’s a gift to find an article like this instead of having to do countless google searches to find some useful information.

  4. Alison Wren September 28, 2011 Reply

    Great article. Customers hate shipping charges but it’s a challenge when selling low value products where customers will buy multiple items per order. Free shipping isn’t an option but it can be hard to charge a realistic amount. Some loading of shipping cost into products is inevitable even when shipping isn’t free.

  5. knaveenchand February 15, 2012 Reply

    Indeed, its a great article. I want to add one more strategy. Product Bundling could be tried by putting a bunch of small margin products into a basket and giving it a nice name. For example, "Comic Combo" can be the new product comprising of some 20 different comic books.

    Individually, these 20 comic books might have low margins. But when clubbed together, they may give higher margin on single purchase and thus can help you cover your shipping costs.

    This strategy is for the small retailers who might be selling products that are low priced with thin margins.

    I am sure there might be several other strategies. I wish the author or the readers can mention these tips as it will help a great number of ecommerce retailers who are seeing shipping costs as major hindrance (or opportunity?)!

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