Paying Too Much For Free Shipping?
I was talking to a "quasi" competitor of ours a few months back about the jewelry supply industry and various trends. One trend we observed that we both keep hoping will go away is the one of completely "free shipping" to all customers with no minimum orders.
He suggested the slogan "Are you paying too much for free shipping" as a way to engage customers and prospects about the fact there is really no "free" in shipping to them. I've read many arguments on both sides of the free shipping debate. My conclusion is that the value and cost of free shipping varies based on your market and customer base. For us, the cost of free shipping with no minimum is way too high for the benefits, but we are stuck offer some type of "free shipping" as long as our competitors offer it. We've done enough research to know it's a very important buying incentive.
Here's a view on "free shipping" as it applies to our market and how we deal with it.
Costs vs Benefits
We mostly sell parts that people use to make jewelry and do craft projects. The price of these parts ranges from $0.18 for some jewelry findings to $155.00 for diamond gemstone beads. If we were selling only diamond gemstone beads, I'd gladly offer fully "free priority shipping" on every order because our margins support that. But, selling an $0.18 part and absorbing the $1.25 shipping cost, $0.15 cost for the padded envelope, and overhead of pulling shipping and packing it? Not gonna happen! Even selling a package of 20 for $3.60 is insane from a cost perspective unless I've just locked in a long term customer.
Believe it or not, one of the largest on-line supplier for beads and jewelry supplies offered free shipping with no minimum order for about 2 years. Several of our other competitors matched their offer. I'm sure they were trying to remove any purchase barriers and hoped they would capture that loyal, long term customer. But, we found that when we did a "free shipping promotion with no minimum order", we got lots of single item orders for less than $10, but very few new and loyal customers. In fact, the orders seemed to come from people shopping for "free shipping" and not ones shopping for a trusted, long term supplier.
The real question is, does "free shipping" increase your conversion rates and lead to long term revenue enough to offset the costs of doing business that way? I've run a lot of spreadsheets on this and can't see that for our business.
We currently offer "free US shipping" on all orders of $35 or more. We can live with that and see benefits since most orders cost about $2.50-$3.50 to ship using USPS First Class Mail. We've tested "free shipping" with no minimum order, and with minimum orders of $25, $30 and $35. Our cart and checkout abandonment decrease a fair amount with "free shipping with no minimum" and are slightly lower at $25 than at $35. But when I run the math on the actual increased numbers of orders placed with "free shipping no minimum" versus $35 minimums, we lose still lose money on the "free shipping no minimum". You obviously need to evaluate that in your own business to determine your "optimal" or at least "not losing money" level.
But also consider this fact, even at a minimum order of $35, we are essentially giving our customers a 10% discount when we include "free shipping". That greatly reduces our ability to offer larger promotions unless we can incent customers to go beyond the minimum order size. Let's say we do a 20% off promotion on a line of products. Right off the bat, we've reduced our margins by 30% on a $35 order for the promotion items when you factor in the "free shipping".
Maybe that promotion needs to be at 10% or 15% instead? Now the question emerges: can I get more buyers and incremental revenue with a 20% promotion than at 10% with "free shipping". I believe in our business we can. These are simplistic examples, but hopefully you follow the huge number of variables that start entering into the equation.
Another harsh reality is that since customers are being trained to shop and use "free shipping" whenever possible, we are much less likely to receive a well planned order that includes other items beyond the minimum order size. Customers see a product they want or a new promotion, react to it, and figure they are not paying for shipping, so let's do it, but only to the level they need to for "free shipping". We've also seen a higher level of returns over the last 2 years since we've offer some type of "free shipping".
We noticed last month that the previously mentioned "free shipping" instigator has now added a $10 minimum order requirement. Apparently, they finally looked at their costs and realized they were bleeding some red. I suspect they still will be.
I know whenever I'm buying things with "free shipping", which I admit is an incentive for me too, I look carefully at the prices of the items in my cart. More and more, the vendors with unrestricted or low minimum "free shipping" don't have the "best price". As ecommerce vendors wise up and the price of fulfillment continues to rise, it only makes sense that if they are going to continue to offer free shipping, they will have to raise the prices to offset the costs.
I suggest we all as the question "Am I paying too much for free shipping" each time we shop and each time we make decisions about offering "free shipping" to our customers. At the very least, as a merchant we need to try a lot of variations of the "free shipping" theme to find ones that actually make sense.
Carlos Rivera says:
Great article, Dale. I've often thought deeply about this issue, too. It is a very tricky case trying to increase conversion rates without chopping away at your bottom line.
I agree with you: it takes a combination of research and experimentation to find the right balance.
Dan Megan says:
Good read, we see this issue front and center at many clients. It will be interesting to see how it plays out over the next few years. I would say we still see many companies that require a minimum and seem to be doing ok with it. like you said, its about finding that balance and point of entry where it makes sense, and sometimes there isn't one.....