The Real Cost of Free Shipping

According to a UPS study, free shipping continues to be the most important factor driving customer satisfaction when checking out online (73%).  Consumers are willing to pay a premium for faster delivery.  For personal reasons, such as birthdays and holidays, 50% of consumers will pay for faster shipping.

According to a comscore survey, 93% of online shoppers will take additional actions, such as purchasing more or electing for slower shipping, in order to qualify for free shipping.  Adding extra items to the cart also increases the average order value (AOV).

From a conversion point of view, free shipping is extremely important, and you are likely to experience an increase in turnover and you will have more customers in your database.  To get more customers and an increase in turnover, free shipping is a no brainer.  But we all know that shipping is never free and you don’t want to “grow broke”.  Before making the decision to implement free shipping, it is important to consider the financial and operational impact and investigate potential ways to implement free shipping while protecting your gross profit margin.

To assess whether or not free shipping is suitable for your business, first calculate the average cost of shipping to your business.  This should be done regularly as your business continually changes, as do freight rates.

 

The financial impact of free shipping:

• Profit margin – free shipping impacts the profit margin. The retailer’s profit margin is reduced as the business tries to absorb free shipping expenses.

 

• Operational costs – There will be programming and marketing costs associated with the implementation of free shipping. If free shipping is right for your business and as anticipated there is an increase in sales, does the business have capacity to pick and send more orders?

 

• Unneeded incentive – Some customers would buy from you without free shipping. As such, the offer of free shipping is loss of income.  It is difficult to quantify and if you offer free shipping across all sales, the more likely you have unnecessarily discounted shipping.

 

Options for free shipping to ensure you don’t “grow broke”

• Offer free shipping on certain products. This way you can select those products that have a higher margin which allows the business to more easily absorb the shipping cost.  (Be sure to include a popular item, even if it is lower margin so that the offer of free shipping is communicated to customers.)
• Minimum purchase amount. Calculate your average cost of shipping, and your profit margin.  This will enable you to calculate at what point you would breakeven with the offer of free shipping.  Offer free shipping ABOVE your breakeven point.
• Calculate savings by purchasing prepaid packaging. Can you purchase prepaid satchels?  The catch here is to understand the impact on cashflow.
• Differentiate different shipping methods. Regular, express, snail.  Offer free shipping on regular and charge for express.  Many customers will pay for express shopping as the product purchased, must meet a need or be needed by a certain date.
• Flat rate shopping. Technically, flat rate shipping is not free.  However, if you offer flat rate shipping often customers will add extra items to their cart in order to get maximum return on the shipping paid.
• Price products to include free shipping. If customers love your brand and you offer a unique customer experience, customers are prepared to pay.
• Review packaging. Understand the prices charged for parcel weight and size.  Will the same products fit in smaller packaging?
• Be organised. Plan ahead.  If a customer has paid for express delivery, is it possible to send the package a day early and only pay for standard delivery.  The gain will help offset the loss of free shipping.
• Offer free shipping at certain times of the year. Review at what times of the year your sales are weak.  Offer free shipping at these times on your higher margin products and assess the impact on sales.  This will help inform the decision to offer free shipping more regularly.
• Offer free shipping to certain locations. Based on your average cost of shipping consider offering free shipping to a certain distance and charging for those outside the boundary.  A location can also be your bricks and mortar store.  If customers pick up at your store, they may be enticed to purchase more.

 

5 – steps to free shipping

1. Before offering free shipping, it is imperative that you have calculated the average shipping cost to your business.
2. Assess and calculate the financial and operational cost of free shipping.
3. Test the strategies above. This is the only way to find the most profitable way of implementing free shipping.  The above strategies are suggestions only.
4. Research and follow the competition. Purchase from the competition and understand their customer experience.
5. Consider where expenses can be cut. Is there another courier company that is more competitive?  If you are fulfilling in house, can you outsource your warehouse?

 

The only way to monitor and assess the impact of free shipping is to have a budget and to regularly review accurate and timely management reports.  This way you can assess actual results against the budget, check if you are on track or if you need to make changes within the business.  A budget together with accurate and timely management reports will ensure you don’t make toxic business assumptions and “grow broke”.