Many store owners consider Free Shipping as the holy grail to getting more sales but, if incorrectly implemented, can end up being your greatest enemy.

Hundreds of blogs, articles and studies laud the benefits of free shipping. ComScore, a leading digital market intelligence agency, concluded that almost 72% of consumers would prefer to buy from stores that offer free shipping. Based on such reports, it’s easy to see why it appeals to so many store owners!

But before you switch, consider the pros and cons:

Pros

• short term: can increase order volume by as much as 15%
• long term: claimed to increase customer retention, but exact percentage is still unknown
• does give you the edge over your competitors
• can help to quickly establish a stronger market share in competitive environments

Cons

• a dramatic increase in operating margins!
• very difficult to stop stop shipping one it’s in place
• It will cost you your business if implemented incorrectly

BEFORE YOU TAKE THE PLUNGE

Yes, the advantages of free shipping clearly outweigh the disadvantages. But, despite this, the decision to change your shipping strategy must be an economic one. Free shipping has a dramatic effect on your operating margins, so careful calculation and an attention to detail is required before you commit to anything! And remember why you’re in business: to be successful and to be profitable, so your shipping strategy has to work for both you and the customer.

I’ll illustrate this by example:
Let say that my store sells the latest MP3 device called the iSod3. We currently charge our customers for shipping, but we’re considering free shipping as a way to increase our order volumes. Here’s what our current strategy looks like on paper:

Estimated Orders p.a.	15,000
Avg. price / order value	$80.00
Gross Profit Margin (%)	30.00%
Shipping Charge per Order	$10.00
Shipping Cost per Order	$8.00
Gross Sales p.a.	$1,200,000.00
Gross Profits	$360,000.00
Shipping Contribution	$150,000.00
Minus Shipping Costs	- $120,000.00
Estimated Profits	$390,000.00

We can see from the example above that our shipping contributes $30,000.00 to our profit margins. Don’t worry if you’re unsure of how to calculate these numbers: we’ve created a mini app that will help you do this (http://shipster.marketbrain.net). Now lets see how a free shipping strategy will affect our numbers:

Est. Increase in Orders	15.00%
Gross Sales p.a.	$1,380,000.00
Gross Profits	$414,000.00
Minus Shipping Costs	- $138,000.00
Estimated Profits	$276,000.00

Ouch! So, despite the 15% increase in order volume, there’s still a $114,000.00 difference in your profits. In fact, you will need to increase your order volume by a whopping 63% before you see the same profits as before!

In this example we can clearly see that free shipping might not be the way to go.

There are alternatives that yield similar results, but limit the costs to your margins. In some cases we can even make it almost as profitable as your current strategy!

FREE SHIPPING BASED ON MINIMUM CART VALUE

 
This is probably the most popular alternative to offering free shipping. Although it doesn’t necessarily increase your order volume as much as free shipping, it does have the added advantage of increasing your average order value.

The key to successfully implementing this lies with determining the correct minimum order threshold:

• Don’t set the threshold too high. If our average order value is $80.00, setting it to $230.00 will have no positive impact on your order volumes. The chance that a customer will triple their order value just to get free shipping in almost zero.
• Setting it too low can have an adverse affect on your profit margins, and it will have a negative impact on your average order values.

So how do you determine the correct threshold? It’s easier than you’d think. We’ll need the following numbers:

• Average order value ($80.00)
• Average shipping costs ($8.00)
• Gross profit margin (30%)
• Proposed minimum cart value (x)

And the sum will look like this:

1. difference = Min. cart value – avg. order value
2. Take the difference and multiply it with the gross profit margin
3. Now subtract the cost of shipping from the result

Lets take a look at how various values can affect our margins:

Example A:
In this example we’ll set the minimum cart value to $90.00

$90.00 - $80.00 = $10.00 * .30% = $3.00 - $8.00 = ($5.00)

The threshold is clearly too low here. Each qualifying order will end up costing you $5.00 in shipping. Even if 50% of our orders qualify, you’ll still end up $37,500 poorer. Not ideal!

Example B:
Now lets adjust it to a more realistic threshold of $110
$110.00 - $80.00 = $30.00 *.30% = $9.00 - $8.00 = $1.00

We can safely assume that some customers won’t be willing to top up their orders to meet the minimum threshold. If a mere 33% of your customers top up their orders you’ll still be making $25,000 pa from shipping contributions. That’s only $5,000.00 lower than your current contribution, and this way both you and the customer benefit from a fairer system.

Although it looks great on paper, this method might not be best for our example business model. If we sold iSod3s, and nothing else, then we’d be limiting our customers on ways to top up their orders to meet the threshold. There’s little chance that our customers will buy two of the same product just to avoid shipping charges.

If, however, we sold accessories such as an iSod3 holder, or headphones, etc. then the likelihood is high that the customer will add more products to their cart to meet the threshold.

Some useful tips to maximize your selling opportunities:

• Alert the customer if their cart is almost at the threshold. Something like a “You almost qualify for our free shipping offer...” notice with a link to associated accessories is a good way to entice them to add extra products.
• Advertise your free shipping offer on every page. The banner area is an obvious candidate.
• Try to set up an additional category that lists associated products and link to it in the customer’s cart. This will make it convenient for the customer to view (and hopefully buy) more products.

FREE SHIPPING WITH PAID UPGRADE

 
Another way to mitigate the damage of free shipping to your profit margins is to offer an upgrade option. The idea is fairly simple: you still offer free shipping to all orders, but advertise a “PRIORITY DELIVERY” or “RUSH ORDER” option. This doesn’t mean an upgraded shipping service, but a reduced handling time. Instead of despatching the order in 48 hours, the upgraded service will guarantee a same-day despatch service.

Before we look at the numbers, we’ll need to make some assumptions here:

• since it’s still a free shipping strategy, the increase in order volume is the same: 15% or 2,250 orders pa
• 10% (1,725) of our customers go for the upgrade option. This is a conservative estimate, but better safe than sorry!
• The upgrade option costs $15.00

The numbers:

Gross sales pa.                     $1,380,000.00
Gross profits                         $414,000.00
Minus shipping costs           ($138,000.00)
Plus Upgrade charge             $25,875.00
Est. Profit                                 $301,875.00

We’re still down $88,125.00, but it’s a hell of a lot better than $114,000.00! It’s not ideal, but if you’re convinced that free shipping is your only alternative, then this might be the better route for you to follow.

OTHER OPTIONS & CONSIDERATIONS

 
You’re not limited to the options above, but as far as free shipping is concerned, it’s the most used. Other interesting options include:

• Free shipping for limited periods only. This is great for boosting holiday sales, and is especially effective if you combine it with an email newsletter to existing customers.
• Free shipping on selected products only. This is usually applied to high margin items only, since you’re able to absorb the associated costs.

Which ever method you choose, remember to measure your results. This is as important as choosing the right strategy, so do not neglect this.

A shipping strategy needs to be measured against the same criteria as any other marketing campaign. If you can’t see a visible improvement in site visits, conversion rates and order volumes then you must stop your offering. There’s little to no use in throwing money down the drain if it’s not yielding the desired outcomes.

Happy shipping!