People like free shipping. They like it so much, in fact, they’re willing to spend up to 30% more at checkout if they know they won’t have to foot the bill to get their packages sent to them. But as a quick Google search of the phrase “there’s no such thing as free shipping” will quickly reveal, eliminating shipping costs is an obstacle retailers have been battling for years.
Really, at its heart, free shipping is something you should only entertain if you’re confident you can offset the revenue you lose by not charging for shipping in some other way. And if you’re looking to do more than just offset these costs—actually profit from offering free shipping—consider the following strategies.
1. Set a minimum order amount
One simple way to boost revenue through free shipping is to set a minimum order amount at checkout. Take Amazon, for example: While the ecommerce giant offers free shipping for all Prime members regardless of the size of their cart, non-Prime members can qualify for free shipping if their purchase hits a minimum of $25. Granted, there are some caveats:
- Items must be eligible for free shipping
- Some handling fees may apply
- Items must be fulfilled and shipped by Amazon
Despite those li’l conditions, this has proven to be an effective and profitable strategy. According to a UPS survey, about 48% of shoppers will add items to their carts just to quality for free shipping. And Amazon is not the only one who knows it.
For example, Nike not only sets an order amount minimum of $150 non-member purchases to qualify for free shipping, but they also use the customer’s quest to hit a minimum as an opportunity to cross-sell or bundle related items. This comes in the form of a “You Might Also Like” section beneath your cart breakdown.
How to calculate an order amount minimum
The question is, how do you set a minimum order amount for your business? Finding the right dollar figure is a balancing act between setting it too high and losing potential sales, or setting it too low and taking a hit to your profit margins.
To hit your store’s free shipping sweet spot, you need to know your customers have a solid understanding of the following metrics:
- Average Order Value: How much, on average, are your customers spending on each transaction sans shipping costs? If the goal is to offer free shipping while boosting revenue, you’ll need to know this number and set your order amount minimum above it.
- Average Shipping Cost: What are you currently paying for shipping? This number should include the direct costs of packing materials (boxes, tape, etc.).
- Average Gross Profit Margin: Use this equation: (total sales – the cost of producing goods) / total sales
- Proposed Amount Minimum: Here’s an educated guess to plug into the equation:
(Proposed Amount Minimum – Average Order Value) x Gross Profit Margin – Average Shipping Cost
((Desired Revenue Amount + Average Shipping Cost) / Average Gross Profit Margin) + Average Order Value = Proposed Amount Minimum.
Using this equation, you’re able to determine how much profit a new proposed amount minimum will earn you. For example:
- Desired Revenue Amount: $5
- Average Shipping Cost: $7
- Average Gross Profit Margin (%): .40
- Average Order Value: $35
((5 + 7) / .40) + 35
(12 / .40) + 35
30 + 35
$65 = the amount minimum you would need to make $5 off of each transaction.
2. Build Shipping into the Product Price
Another way to eliminate shipping costs for your customers is to build the cost of shipping into the price of your products. Not surprisingly, raising prices usually has a negative impact on conversion. It can also reduce your competitive advantage—people won’t pay more for a product they can get for less somewhere else. But when slightly higher prices are coupled with free shipping and employed in the right industry, it not only increases your average order value, but also your net margin per order.
The Zappos method
Perhaps the greatest success story of this strategy is Zappos, which offers both free shipping and free returns on all items—no minimums or exclusions—with the possibility of free expedited shipping on some items. Per ecommerceDB, the company netted $568.3 million in revenue last year, which begs the question of how they’re makin’ bank while offering free shipping. While there’s no way to truly erase the shipping cost burden, Zappos has shown that there are ways to minimize it.
Like other ecommerce retailers, Zappos has built the cost of shipping into the price of their products, in essence treating it like a marketing cost. But Zappos, a shoe company that operates exclusively online, takes it a few steps further:
1. Build strong relationships with shippers: Zappos ships exclusively with UPS, giving them access to high-volume discounts. They also encourage their vendors to ship through their UPS account, meaning even more discounts. Zappos even built its warehouse mere miles away from a UPS shipping facility, which is some next-level logistical genius.
2. Use returns as a sales driver: By eliminating shipping and returns costs, and encouraging customers to buy two sizes of shoes at a time, Zappos has effectively removed an important barrier to purchase (i.e. “I don’t want to get stuck with something that doesn’t fit”), which results in more sales.
3. Point of order: Shoppers are not stupid. While bumping up prices to advertise “free shipping” into your marketing copy is a widely used tactic to increase sales, you’re still largely passing on the cost of shipping to your customers. However, establishing a trusted relationship with your shipping partner and alleviating customer fears about the returns process can help mitigate your shipping costs while also driving sales.
3. Free shipping promotions
Some companies can’t afford to offer free shipping all the time. Perhaps they can’t break even with a minimum amount threshold, or their market is too competitive to build the cost of shipping into the price of their products. If these scenarios sound all too familiar, don’t fret; you can still work free shipping into your business through a limited-time promotional event.
The power of urgency
If there’s anything customers hate more than paying for shipping, it’s missing out on a good deal. According to a report from Experian, customers respond positively to email and marketing copy that conveys a sense of urgency. Their stats for emails promoting limited-time offers alone are pretty convincing:
- 14% increase in click-to-open rates
- 59% increase in transaction-to-click
- 2X the transaction rate of regular marketing emails
As urgency marketing relates to free shipping, you need to make sure your offer window is narrow enough to create pressure, but not too narrow that people miss out on it. For example, discount retailer Lakeside Collection offered customers free shipping on orders over $100 in the form of a promo code set to expire on a specific day:
Here are a few other ways to beef up your free shipping promotion:
- Frequency: Most retailers that use free shipping as a promotional tool often schedule the offer around major holidays. Louis Vuitton for example offered “complimentary shipping” on all orders made in the week leading up to Father’s Day as a way to convert virtual window shoppers into sales. If you plan to go this route, use it sparingly—one a month for up to a week at a time at the most.
- Specificity: Urgency only works when the deadline is clear and specific. “Free Shipping for the Holiday Season” will not drive sales the same way that “Free Shipping Until December 24” will.
- Language: When creating a sense of urgency about your shipping, you need to be clear without being overbearing. Whether you’re crafting an email headline or a social media campaign, don’t be afraid to use those emotionally charged and urgent words to grab your customers’ attention.
- Metadata: In addition to your email and social media messaging, you also need to gear your site’s metadata around the free shipping offer. Working terms like “free shipping” or “limited time only” into your website’s meta filters is an effective way to get the message across without beating your customers over the head.
- Site Components: You might also consider adjusting some site or app components to drive urgency. Inserting a simple countdown timer in the banner space at the top of the window has been shown to lift conversions by nearly 10%.
- Variations: A free shipping promotion doesn’t need to be time-based to be effective. You could also consider offering free shipping to the first x amount of shoppers who complete a purchase on your site.
4. Create a membership program
If you want to offer free shipping to your customers without reaching too far into your own pocket, why not set a premium on it by creating a paid membership program?
Retailers across all industries are quickly jumping on the membership bandwagon as a way to secure customer loyalty and establish brand identity. As of 2015, Americans totaled over 3 billion memberships in customer loyalty programs. These programs include all sorts of perks from exclusive discounts and rewards to (you guessed it) free shipping—and demand is growing:
- 70% of millennials are willing to pay a premium for perks like free shipping.
- 61% of customers expressed a willingness to invest in paid loyalty programs in exchange for free shipping.
These programs are popular, true, but is the revenue gained from membership dues enough to offset the costs that come from offering free shipping? When Amazon first introduced its Prime membership program back in 2005 at $119 per member, they were able to offset their shipping costs by more than $475 million. How? Because when done right, membership programs incentivize customers to buy more; members spend two to three times more than nonmembers.
Macy’s, leading the parade
If you’re looking for a model on ways to reduce shipping costs while also investing in customer loyalty, look no further than Macy’s. Through their multi-tiered membership program, Macy’s has found a way to both invest in their most loyal customers while improving their own margins on shipping:
- Tier the benefits: Macy’s offers free shipping with no minimums or exclusions to all its top-level members, which has proven to be enough of a carrot to entice lower-tired members to up their spending enough to elevate their membership status. The increased spending resulted in over $5 billion in fiscal first-quarter earnings.
- Promote in-store pickup: In-store pickup is a great way to reduce costs in your shipping supply chain. Macy’s makes member purchases available, same day, for pickup in their stores.
- Learn from your members: If you have more than one location or warehouse, loyalty member data—how much and where your best customers are shopping from—can provide valuable insight into how you can streamline your shipping supply chain by ensuring the right amount of merchandise is being sent to the right place.
The best place to start building your store’s membership or loyalty program is your email list. By gathering email addresses, you unlock loads of information about your customers. You’ll have a better understanding of who is buying, what they’re buying, and how often they’re buying so you can deliver personalized emails and incentives that drive loyalty and customer lifetime value.
A loyal member’s boost in LTV and repeat purchases will offset shipping costs while raking in revenue. However you structure your membership program, though, remember that customers are opting into a better experience. As long as you can enhance the customer relationship, they’ll only become more loyal with time.
5. Keep shipping cheap
If you truly want to make free shipping available to your customers, you need to find a way to reduce your own shipping costs. While offering promotions and membership programs are proven and sustainable ways to offer free shipping and boost revenue, you might also consider a few of these essential approaches:
Affordable shipping materials
Every cardboard box you send out and every piece of tape you use to secure it eats into your margins. Thankfully, many major carriers offer free or flat-rate shipping materials to partnered vendors, allowing them to pass those savings onto their customers. But if free packaging is either not an option, or you want to avoid sacrificing too much of your brand identity, you have other options at your disposal:
- Poly mailers: not only are they cheap to buy, they’re also lightweight, making them chepa to ship. They’re great for products like clothing that don’t require rigid packaging.
- Recycled materials: eco-friendly packing peanuts can secure your items for little cost, while plain paper packaging is easily customizable as well as inexpensive.
Want to know how important free shipping is to customers? Nearly 90% of them are willing to wait longer to receive their products if they don’t have to pay for shipping—and ground or economy shipping is one of the easiest ways to clear your margins. Ground shipping carries a number of benefits for online retailers:
- Compared with faster methods, ground shipping can save ecommerce players up to 50% in shipping costs.
- Ground shipping provides flexibility for LTL (less than a truckload) shipments that allow you to split the cost of shipping with other sellers.
- All major carriers offer affordable ground shipping options, making it easy to find a competitive shipping partner for your business.
6. Switch to third-party logistics (3PL)
In a similar vein to seeking out a less costly alternative to traditional packaging and shipping methods, opting for a third-party logistics (3PL) provider over a traditional carrier is another effective way to save on shipping costs and, more importantly, pass those savings onto your customers. This is done by delivering products faster, cheaper, and with typically better service than what some retailers could offer on their own.
Nearly all Fortune 500 companies utilize 3PLs in some capacity as part of their supply chain, and the global logistics market is projected to surpass $1.3 trillion by 2024. Going with a 3PL offers three main benefits for smaller ecommerce companies that might lack the resources and wide-reaching customer base of an Amazon or Macy’s:
- Connections: 3PLs give retailers access to an established direct carrier network. In other words, they’re able to find (and in some cases, open) a direct carrier location that’s closer to your warehouse, reducing freight costs two and from your product HQ.
- Negotiating Power: 3PLs can also advocate for their retailer clients by negotiating shipping costs to secure optimal service. They can also identify creative solutions like dropshipping and combined shipments to reduce the number of trips between locations.
- Cost-Saving Tech: 3PLs give retailers access to a number of cost-saving technologies that might be too expensive for the retailers to maintain themselves. Tools like transportation monitoring systems that can optimize routes and plan shipments, as well as sales channel integrations (e.g. Shopify, Woo Commerce, etc.), can help retailers plan better and save more money on shipping.
Is a 3PL right for your business?
As has been demonstrated, 3PLs represent a vital partnership for many e-tailers small and large. But is it right for your business? Per Shopify, there are three key questions to answer to help you know for sure:
- How many orders are you fulfilling each day? If it’s more than 10 to 20, you may benefit from partnering with a 3PL to both maintain strong profit margins and expand your business’s growth potential.
- Are you running out of space? Partnering with a 3PL can positively impact every aspect of the supply chain—including warehousing. If storage is taking up too much space in your fulfillment costs, you potentially combine storage costs with outsourced fulfillment through a 3PL.
- Are you prepared for growing pains? Scaling a business at the right rate can be hazardous for a company unprepared to handle the sudden rise in demand. If you anticipate rapid growth that transcends a single spike, you might want to measure the costs of building that infrastructure internally versus outsourcing.
Free shipping and more revenue isn’t just for the behemoths
While free shipping might seem like a marketing play reserved for the biggest sellers on the web, it’s not out of reach for even the smallest shops. Even if you opened up your digital doors just yesterday, free shipping is something you could offer your customers while growing your revenue if you take the time to consider the strategies you just read about.
It won’t be long before free shipping becomes the norm. Customers already expect it, and businesses are pulling out all the stops to provide it to them. Every business is different, so as you strategize ways to bring valuable service to your customers through free shipping, remember there’s no one-size-fits-all approach. No matter which pathway to free shipping you forge for your store, your customers will take note and come back again and again.