Future of Commerce Blog

6 tips for offering free shipping without losing profits

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This is a guest post by Jake Rheude, the Director of Marketing for Red Stag Fulfillment: an ecommerce fulfillment warehouse that was born from ecommerce. He has years of experience in ecommerce and business development. In his free time, Jake enjoys reading about business and sharing his own experience with others.

Free two-day shipping is synonymous with Amazon, but it’s also expected from retailers across the board. However, it’s not always easy to figure out how to make it work for your brand without bleeding your profit margins dry; you aren’t a billion-dollar company with tons of fulfillment centers across the country, after all.

But, all hope is not lost! With a little finesse, you can make free shipping work for your brand and get all the benefits that come with it: increased competitiveness, higher conversion rates, and even lower cart abandonment rates. 

Here’s how you can offer free shipping without losing profits.

Changing product price

If an item costs $3 to ship, simply add $3 to the total price and call it good. Well, this can technically work, and it is probably the simplest option, but it comes with some downsides. 

First, you can lose your competitive edge. If your niche is extremely competitive on price, your customers might be willing to sacrifice free shipping for that cheaper product cost (whether or not that math actually works out in their favor). Even better, with the prevalence of sites like eBay and Amazon which shows the lowest total price including shipping, customers won’t have to do any math at all.

There are scenarios where increasing price can work, particularly if your products are extremely niche and there are very few close competitors. However, you might want to consider one of the methods below.

Free or fast shipping?

You may not be able to offer free and fast shipping, but you may be able to choose one! Consider offering free economy shipping, since that’s the least expensive option and you can absorb the cost of that a lot more easily than priority shipping. If your customers are willing to be patient and wait the week or two it might take to get to them, they can reap the reward of free shipping — if not, they can always pay to upgrade to a faster option.

This is a pretty simple option, but it doesn’t always work. If your margins are low on a lot of your products, you may actually lose money by offering this option without any strings attached. If that’s the case, you might benefit from putting some restrictions on the offer, and some of those options are listed below.

Encourage larger orders

Offering free shipping above a certain order amount can hit the perfect sweet spot for a lot of companies: it guarantees that the shipping will be cost-effective, encourages customers to order more to hit that target, and reels them in with that oh-so-tempting free shipping. This just takes a little work beforehand to pull off.

The trickiest part is getting the minimum order amount number just right. Too low and most of your customers will hit the threshold anyway; too high and they’ll feel like it’s not worth spending enough to get there. So how do you figure out what that magic number is? 

Take a look at your average order amount, and try to push it just a little higher. After all, one of the benefits you can enjoy is increasing your average order amount by encouraging your shoppers to reach for that free shipping and spending a little more in the process. Start out with a 10-20% increase and adjust from there. 

If you’re worried about being able to handle higher and heavier shipping orders, consider a third-party logistics service. It may seem like yet another thing to throw your money toward, but outsourcing can actually save you money in the long run.

Narrow your offering of free shipping

Let’s say you’re still a little wary about that minimum order option above. 

What about offering free shipping on a select group of products? These can be products with high-profit margins, low shipping costs, or both! Small items that are fairly expensive but cheap to ship are great candidates for this option. So are larger, kitted batches of smaller items. With this method, you know you can absorb the cost easily, and you can see how positively your customers respond. If they love it, you can consider expanding your free shipping offerings with a bit less risk.

Get it before it’s gone

This is the “dip your toe in the water” method of free shipping, and won’t permanently affect your bottom line or profits if you decide it isn’t for you. Do a trial run of free shipping to see whether or not it’s a financially sustainable practice for your business. You can also combine it with one of the methods above, like free economy shipping or a minimum order amount. 

Free returns

Finally, free shipping for returns can be a great draw for customers buying products that are hard to get right (apparel is an obvious one, and also why Zappos has been so successful). It is technically a form of free shipping. By offering free shipping on returns, you’re assuring your customers that they don’t have to worry if the item isn’t right for them: they can return it with no extra cost or hassle, which is a huge draw. 

The only downside to this option is that it can encourage higher orders, but with the expectation of returning many of the items — and this takes a little extra work to keep track of. If you choose this option, collect data on returns and make sure it isn’t eating into your profits.

Is free shipping worth it?

Even after you try one (or more) of these methods, you may still be wondering if it’s worth it. 

Sure, your competitors are doing it, but do you need yet another thing eating into your costs? Is it really making a difference?

First, choose your method and do a test run for a few weeks during a normal sales period. Make sure you’re collecting all your regular data, which will include the average order amount, conversion rate, and cart abandonment rate. 

Once the promotion is up, compare your numbers against a similar time period to see if it moved the needle. Losing a bit of money by absorbing the cost of shipping can be more than made up for with higher conversion rates and average order amounts. 

However, sometimes this doesn’t work out, and that’s okay! As long as it doesn’t make things worse, you can keep it in your back pocket to use as a promotional option, and turn your attention to new strategies instead.

Michelle Laham

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