Ecommerce Shipping: Simple Steps to Make Free Shipping Profitable
Your business goals are what matter most. Different websites might have different problems (e.g. Low quality leads, but there is one way to quickly ruin your online store. Get less money from customers than it takes for you to deliver the product.
Free shipping is one of the most popular online marketing strategies.
Let’s look at the pros and cons of all options. A free app is also available that will assist you in making the right marketing decisions for your bottom line and marketing.
Overview
It’s easy to see both the benefits and drawbacks of free shipping.
Pros
- Higher order volume (typically higher than 15%).
- Higher conversion rates
- Increased Customer Retention
- Marketing advantage over your competitors
Cons
- Operating margins have been drastically reduced
- A decrease in operating margins can hurt marketing budgets and overall profits.
- It’s impossible to reverse an order once shipping has been completed.
The benefits of free shipping appear to be more appealing than the potential drawbacks. Your company’s shipping and logistics strategy should be customized to meet the needs of your customers.
Let’s say you have a widget shop. At the moment, we charge shipping fees to customers but want to increase our order volumes. Here are our numbers:
| 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 |
| Shipping charges are negligible | – $120,000.00 |
| Estimated Profits | $390,000.00 |
Shipping fees are $30,000.00 in addition to estimated profits.
Now let’s see how free shipping can affect numbers.
| Est. An increase in orders | 15.00% |
| Gross Sales p.a. | $1,380,000.00 |
| Gross Profits | $414,000.00 |
| Shipping charges are negligible | – $138,000.00 |
| Estimated Profits | $276,000.00 |
As you can see, even with a 15% increase in order volumes, your profits remain $114,000.00 less than shipping fees. You would need to increase your order quantity by at least 63%.
Free shipping is not something your customers want. This could lead to increased order volumes. You can get an estimate using the free tool here.
Shipping Profit Calculator
Please enter the numbers below!
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You have many options to increase your order volume without having to reduce your margins.
Alternative #1 – Minimum Cart Value
This is a great alternative to free shipping. Instead, you should ask for a minimum amount.
This is the key to achieving minimum value.
- It is not a good idea for it to be too high. Customers will notice an increase in shipping costs.
- If you set it too low, you’ll lose your profit margins.
How can you calculate the threshold? These are the steps:
- Average Order Value (example: $80)
- Shipping costs average $8 (example).
- Gross profit margin (example: 30%)
- Proposed Minimum Cart Value
Find the difference between the Minimum Order Value and the Average Order Value. Subtract the gross profit margin from your result. Add shipping costs to your result.
Example 1:
$90.00 – $80.00 = $10.00 * .30 = $3.00 – $8.00 = ($5.00)
Each qualifying order will still be $5. We need to raise the minimum price to $110.
Example 2:
$110.00 – $80.00 = $30.00 *.30 = $9.00 – $8.00 = $1.00
We are still making money. You now have a lucrative and interesting promotion to offer.
This option is not appropriate for all stores. If your products don’t have accessories or complementary items, or if ordering multiple items is impossible,
These are some tips to make this tactic more effective:
- Notify the customer when you have reached the minimum order value. Offer complementary or related products. Amazon is great at this.
- Promote your offer on the website, particularly on pages with a minimum order value
Alternative #2 – Paid Upgrading
This option gives you the option to offer free shipping anywhere in the country. However, customers who order shipping will only pay a small fraction of the cost.
However, this does not necessarily mean you will receive a more expensive shipping option (e.g. This doesn’t necessarily mean that you will get a more expensive shipping option (e.g. UPS Next Day span>
Let’s take a look at the numbers. We receive free shipping, but 10% of our customers choose Rush Delivery which costs $15.
| Gross Sales | $1,380,000.00 |
| Gross Profits | $414,000.00 |
| Shipping charges are negligible | ($138,000.00) |
| Estimated Profits | $301,875.00 |
Profits are still less than $114,000.00 but they are higher than $88,125.00. Conversion rates, the impact of spent money, etc. ).
There are many other options
These are two of the most popular options for free shipping worldwide online. There are other options.
- Shipping is limited time and free of charge for holidays and seasonal sales.
- Choose products that are eligible for free shipping (hopefully at a high margin).
You can have higher prices but include shipping.
I love the idea that members get free shipping in return for signing up for my email. Calculate your lifetime customer value and customer acquisition costs before you look into this option.
Conclusion
It doesn’t matter which method you use, measuring your results is crucial.
Your Shipping strategy should be evaluated using the same criteria as any other marketing campaign. If you do not see an increase in site traffic, conversion rates, or order volume, then it is no good.
