Should You Offer Free Shipping? A Data-Driven Answer

package shipment deliveryIn the vastly competitive world of eCommerce, it can be a challenge to stand apart from the crowd. With limitless options available at their fingertips, consumers are always looking for the lowest price and the greatest value. As a business owner, you must walk the fine line between offering competitive prices and still keeping your head above water in terms of margins.

When it comes to grabbing the attention of consumers and converting them into paying customers, it is sometimes the little things that matter most. While most business owners understand the importance of branding, marketing, and advertising when it comes to improving sales, many underestimate the true value of offering free shipping.

You may be surprised to learn that high shipping costs are attributed to an astounding 55% of abandoned carts. So, the answer is clear — offer free shipping, and the sales will come, right? Well, it’s not that simple.

Keep reading to learn more about the pros and cons of offering free shipping and how to effectively make it work for your business without going bankrupt.

What’s So Great About Free Shipping?

One of the greatest benefits of shopping online is that it is incredibly easy to compare prices. Amazon, Google et al. want to show you the highest rated products, at the lowest prices, with the least expensive (or free) shipping options. With so much competition out there, eCommerce stores need to find ways to convert visitors into paying customers and to keep those customers coming back.

That’s Where Free Shipping Comes In

Free shipping is a huge benefit for customers, and it is often the deciding factor between one site and another. Though shipping is free for the customer, however, it’s not free for the merchant, and those costs can add up quickly. That’s why you see so many websites offering free shipping for a minimum spending amount – the sale of those add-on items helps the company recoup the costs associated with shipping the order.

To give you an idea of just how powerful offering free shipping can be, consider research that showed 58% of shoppers will add additional items to their cart in order to qualify for free shipping at a set dollar amount. Not only that but shoppers will also spend 9.4 percent more when they need to meet a free-shipping minimum. So, while you may still be eating the cost of shipping yourself, by using free shipping strategically, you’re able to generate more revenue from it.

The Psychology Behind Free Shipping

The question any eCommerce business owner wants to know is, “Does free shipping really work?” The benefits for the customer are obvious, but how do you actually make it work for your business without dipping into your margins too much? The first step in answering this question is learning about the psychology behind free shipping.

First and foremost, it must be mentioned that free shipping is rapidly becoming the norm. Consumers are less likely to think of it as an option and more likely to think of it as a given. Everyone from giant online retailers like Zappos and Wayfair to department stores and small businesses have begun to offer free shipping. For many of those companies, free shipping is only available for customers who meet a spending minimum but, for others, all orders ship free.

What’s the psychology behind the free shipping strategy? It all comes down to the consumers perceived value of shipping. Prior to purchasing, a customer determines the overall value of their purchase by performing quick subconscious math, weighing the costs and benefits associated with buying the product. If shipping ends up being too expensive for an item that we could just as easily get at a nearby store, the math doesn’t add up and the cart is abandoned.

Another reason why free shipping is so powerful has less to do with the shipping part and more to do with free part. According to Dan Ariely, Professor of Psychology and Behavioral Economics at Duke University, people change their behavioral patterns when something free comes along. In his book, “Predictably Irrational”, Ariely gives us a real-world example of the power of free in action. When Amazon introduced free shipping on some of its European sites, the number of orders increased dramatically. However, not in France. That is because instead of being reduced to zero, the shipping price in France was reduced to only 1 franc (about 10¢ USD). Yet this minor cost was enough to prevent a jump in sales.

How Free Shipping Is Typically Used

Though free shipping is everywhere, companies use this tactic in various ways. Here are some of the different free shipping techniques you’ll typically see in action:

  • Free shipping on all orders – no qualifications or restrictions.
  • Free shipping for members or subscribers only.
  • Free shipping on orders that meet a minimum threshold.
  • Free shipping on qualifying items.
  • Free shipping to a brick-and-mortar store for pickup.
  • Free shipping for buying during a certain window.

Every eCommerce store is different, so the free shipping policy you select will be unique to your company. You’ll need to find the right strategy that keeps your customers happy, that drives sales, and that helps you recoup the costs for offering the program.

What Are the Benefits for Your Company?

Though the idea behind free shipping is sound, it isn’t fool-proof. There will certainly be times when the customer simply isn’t interested in adding more items to their cart to qualify for the discount. There are also cases where the additional revenue from those add-ons doesn’t actually cover the cost of shipping. Additionally, and most importantly, free shipping may fail to work if the consumer isn’t in the right phase of the buying cycle.

The buying cycle begins when the consumer becomes aware of a need that must be filled. Next, the consumer considers ways (products) to meet that need and starts to assess the pros and cons of different options. Eventually, the consumer settles on a particular product and makes the purchase. Free shipping comes into play during the final stage of this process – the purchase. If the consumer isn’t ready to make a purchase, the lure of free shipping may not be enough to close the sale.

On the other hand, when free shipping DOES work, it provides several benefits. Here is a quick summary of the potential benefits free shipping has to offer for e-commerce business:

  • Increase in sales We’ve already covered the fact that offering free shipping increases sales, but how exactly does it do it? For one thing, offering free shipping leads to a reduction in cart abandonment – it helps push potential customers over the edge to close the sale. It can also set your company apart from the competition and increase perceived value.
  • Increase in ARPU – Average revenue per user (ARPU) is heavily affected by free shipping policies, especially when you set a minimum spending threshold. In a way, free shipping is an upsell technique you can use to increase the size of an average customer’s order.
  • Increase in loyalty – Offering free shipping makes your customers happy, and a happy customer is more likely to come back. When you offer free shipping as part of a loyalty or membership program, it helps to increase repeat sales. Just take a look at what Amazon Prime has done to increase loyalty in the Amazon marketplace.

Free shipping is a tool eCommerce businesses can use to increase conversion rates and keep customers coming back, but it is not a perfect system. Keep reading to understand how to make it work for your shop.

How to Make Free Shipping Work for You

If implemented properly, free shipping could make a big difference for your business. You’ll need to design a free shipping policy that suits your business and ensures that you recoup the costs of shipping on most orders.

Here are some simple steps to follow when designing a free shipping policy for your business:

  • Calculate how much you need to sell to recoup the cost of shipping. Spend some time running the numbers to see whether you can make up the money you lose by covering the cost of shipping yourself. This will help you determine whether you can offer free shipping for all orders or if you need to add some stipulations such as a minimum purchase.
  • Decide on a minimum purchase threshold. If you run the numbers and see that you could be losing too much money by offering free shipping on all purchases, consider adding a minimum spending threshold. By requiring customers to spend a hypothetical $50 or $100 to qualify for free shipping, you can guarantee that your profit margin on those orders will be higher and consistent.
  • Use free shipping as an incentive during short-term campaigns. If it simply isn’t feasible for your site to offer free shipping all the time, you can still use it as a promotional tool for short-term marketing campaigns. Seasonal sales and new product releases are excellent opportunities to drive sales and adding free shipping as a bonus can boost sales even further.
  • Consider offering free shipping on certain items. If your business sells a wide variety of products, the profit margins are going to be different for different goods. You can choose to offer free shipping only on items where the profit margins line up or on items you want to sell more of.
  • Offer free shipping as a benefit for membership, subscriptions, and loyalty programs. Membership and subscription programs are a great way to get repeat business, but you need to offer your subscribers benefits – free shipping is a good one.
  • Limit free shipping offers to returned items. If you’re not in a position to offer free shipping on all of your orders, offering it for returns is still a step in the right direction. It gives your customers peace of mind knowing that if they are unhappy with the product, it won’t cost them anything to return it.
  • Use free shipping as a loss leader. The definition of a loss leader is a product sold at a loss to attract customers. However, it can also be applied to free shipping. For example, if you owned a subscription based eCommerce business, you may find that offering free shipping on the first order may increase conversions. Whereas you can make up the cost of shipping due to the higher average lifetime value of the customers (since they’re recurring orders).

Any of these free shipping strategies might work for your business, but you’ll have to take the time to choose the right one. To give you an idea what these strategies look like in action, here are some statistics from companies that have successfully implementing a free shipping strategy:

  • According to research published by CNBC, offering free shipping on returns (a policy offered by Zappos) boosted sales by 357%.
  • Red Door saw a 90% increase in sales after establishing a minimum purchase threshold – free shipping on orders over 75%.
  • Research from Marketing Land revealed that 9 out of 10 customers were more likely to do their shopping online when offered free shipping. Of those, about 30% made weekly purchases.
  • According to David Bell of Wharton University of Pennsylvania, customers find a free shipping offer with an average savings of $6.99 to be more appealing than a product discount worth $10.

As you can see, there are many ways to work free shipping into your business plan. It may take some work to find the right tactic, but it is definitely worth implementing.

Simple Tips for Implementing a Free Shipping Strategy

Now that you have a better understanding of the psychology behind free shipping and the benefits of offering it to your customers, you may be wondering where to start. Here are some simple tips to help you implement a free shipping strategy for your online business:

  • Calculate your free shipping threshold. This number should be close enough to what your average customer typically spends but enough to cover your costs. To determine this number, look at data from your last 6 to 12 months of sales to find the sweet spot between setting your spending threshold too high and setting it too low.
  • See what your competitors are offering. Though the most important thing is to make sure you’re not losing money, you also want to see what your competitors are doing because you want to give potential customers a reason to choose you over them.
  • Do a test run before committing to a free shipping strategy. You don’t have to commit to any free shipping tactic right away – you can run a promotion for two to four weeks to test out your free shipping policy and then evaluate the data to see what works best given your unique e-commerce scenario.
  • Don’t forget about returns. Returns are a necessary evil in the world of e-commerce, and it is your challenge to find the balance between keeping your customers happy and keeping your business alive. Think about the options such as free returns, customer-financed returns, or a flat rate for customer returns.
  • Once you settle on a free shipping policy communicate it clearly. Customers want to know exactly what they’re getting when they make a purchase. Think of it less like a policy and more like a marketing tactic. Make sure everyone that lands on your site is well aware that you offer free shipping.
  • Work the cost into your product prices. If you really want to offer free shipping but you can’t afford to eat the costs yourself, you might be able to work the cost (or at least some of it) into your product pricing. Just make sure you don’t go so high that you lose out to your competition.

Though including free shipping on your eCommerce store has the potential to increase sales and customer loyalty, it might not be right for your business at this time. If your profit margins are already low, for example, adding free shipping to the mix may cut your profits even more or negate them entirely.

The Bottom Line

Free shipping is an excellent marketing tool that has led to incredible benefits for many e-commerce businesses. Before you tack on a free shipping policy for your own business, however, you need to weigh the pros and cons – you also need to think practically about whether it will work and how to implement a free shipping policy.

When considering a free shipping policy, there are three questions you need to answer:

  1. Are your margins high enough to cover the costs?
  2. Will you still be making a profit once all costs are covered?
  3. How do you plan to use free shipping as a marketing tool?

Answering these questions will help set you on the right path toward determining whether free shipping could be a beneficial tool for your company. If you decide that it is, take the time to choose the best policy and follow the tips you’ve received here to start implementing your policy.

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