Free shipping is ubiquitous, with marketers confidently saying that it is the best way to get customers.
There are many alluring statistics:
- 9 out of 10 customers were incentivized to shop online when offered free shipping.
- 65% of consumers look up free-shipping thresholds before adding items to their online shopping carts.
- More than 1/3 of consumers (39%) expect free two day shipping.
Free shipping is an eCommerce shipping strategy that can help you stay competitive and in line with the expectations of consumers. The logic is if your competitors are offering free shipping, you should too, and if they aren’t, doing so can give you a competitive advantage over them.
Today’s consumers are also conditioned to expect free shipping when shopping online (thanks to Amazon) so it’s crucial for SMBs meet these demands to remain competitive.
Is offering free shipping a good idea?
While it’s tempting to buckle under the flashy statistics and peer pressure, you need to ask yourself whether free shipping can actually help your business.
Calculating whether your business can handle free shipping isn’t a straightforward task- you’d have to figure out how to pass the fees on to your customer in other ways (such as raising prices on your products) along with the proper pricing that gives you enough net margin.
What we tend to forget is that free shipping is just one of many different promotions to help you increase sales, and it shouldn’t be the end all, be all to get more paying customers.
Lisa Suttora, an eCommerce consultant, brings up a good point that in the past, "free shipping was designed to be used as a promotion, NOT a standard pricing model." It’s worth remembering that there are so many other discounts and less riskier promotions you can offer instead, which could be end up being more profitable for you.
In this post, we’ve outlined the risks associated with free shipping so you’ll know how to make it work for your business.
Offering free shipping year-round can be unsustainable
Amazon has created a monster. According to MarketWatch, Amazon's shipping costs totaled $26 billion in the 12 months leading to Q3 2018.
This will most likely continue to rise, as Amazon currently offers Prime members free two day shipping on eligible items, with future plans to include more products that qualify for free one day shipping.
Additionally, they are working on building out their own fulfillment infrastructure so that they don’t have to be reliant on other express couriers. That’s great for the behemoth, but smaller eCommerce businesses do not have this luxury.
International trade is on the rise, with 50% of cross-border online purchases happening in Africa and the Middle East versus only 14% of cross-border sales happening in North America. This means that eCommerce sellers need to start selling internationally if they’re serious about increasing sales, which in theory means that if you start shipping internationally, costs will rise.
Bottom line: while you might be able to get away with free domestic shipping, free international shipping is costly and just doesn’t make any business sense.
Sometimes, businesses are okay with free shipping as they are profitable enough to pick up the tab for the cheapest rates available. However, one must remember that shipping rates are dependent on fuel prices. When fuel prices rise, so your shipping costs will follow. Therefore, it’s best not to assume that low shipping rates will last forever.
Free shipping can negatively impact customer service
When you’re running an online store, you lose the opportunity to meet your customer face-to-face. In eCommerce, customer service is delivered differently: through live chat, UI/UX, the way you communicate your return policy, and the shipping experience.
When companies offer free shipping, it usually means that they are using the cheapest option available. It's likely you’re going to get what you paid for.
Customers may be willing to wait for a free delivery, but by using a cheap, unreliable shipping solution, you run the risk of experiencing delayed service and limited tracking abilities.
This could make you vulnerable to damaged stock, lost shipments, and frustrated customers asking you where their package is. It’s best to prepare for the worst and hope for the best when choosing the cheapest shipping options.
If not done carefully, free shipping can destroy your business
If free shipping becomes your standard pricing model, things can get a bit complicated. While your margin is easily calculated as an applied markup percentage, shipping costs depend on dimensions, volume, and destination.
These factors can vary greatly between shipments, not to mention other outside factors such as fuel prices and additional courier handling fees. This makes it hard to compute the proper pricing that gives you enough net margin, after shipping costs.
Mark Walker, the CEO of JackThreads, mentioned in a 2016 Fast Company interview that “You absorb the cost of shipping through repeat shopping, but that conversation doesn’t fit nicely into an Excel spreadsheet. It’s not easy to quantify the repeat rate and referral rate.”
Furthermore, in the spring of 2016 JackThreads decided to give free shipping and returns a try with their program “TryOuts”, where customers get sent items for free to try out, and if they don’t return the items in seven days their credit card gets charged.
By the fall, they had to ask investors for more money, and by the beginning of 2017, they were looking for a buyer after this business model failed.
Though this example could be considered extreme, it still goes to show that if your business isn’t profitable enough, offering free shipping can force you to work on thinner margins to remain competitive, and at worse, wipe you out completely.
Free shipping doesn’t always increase sales
As with any type of promotion, free shipping is not the end all, be all for your business. When a customer arrives on your website, they are looking to buy your products, not free shipping.
Research shows that free shipping works only if the customer is in the right phase of the buy cycle: “purchase” mode. When free shipping is offered at checkout, their purchase is validated even further and they are unlikely to abandon their cart, as “free” anything is a good thing.
However, if customers are still in “decision” mode, offering free shipping will not lure them to buy from you.
Explaining your “no free shipping” policy
If you want to avoid free shipping altogether, you can try being honest and upfront with your customers. Explain that offering free shipping means passing on these costs in other ways, and that the last thing you want to do is increase the prices of your products to make ends meet.
One of the arguments for free shipping is that when we visit a brick and mortar store, we don’t have to pay additional shipping and handling fees. This is actually not the case – we are definitely still paying for shipping.
The fact is the goods we buy had to be transported by ground or by air, and the fuel and manpower needed to get your goods from point A to point B has always been included in the prices we pay for anything.
You can consider offering flat rates as an alternative shipping promotion, as it can be perceived as a good shipping deal even if it's a paid option.
Calculated rates at checkout can also help. These are shipping rates that are based on the weight of your shipment and its destination. Third-party plugins like Easyship can also provide information on additional handling fees, shipping times, and taxes, which helps manage the expectations of your customers.
Not only does it allow you to remain transparent to your customers, but charging exact rates allow you to avoid overspending on shipping.
How can I offer free shipping?
When done correctly, free shipping can lead to a conversion rate increase.
Here are some tips on how SMBs can offer fast and free delivery:
- Offer free shipping at a time when your best selling products are in season. If customers are in purchase mode, you have a better chance of them converting as the free shipping offer will be appealing to them.
- Have customers spend a certain amount before offering free shipping. This makes customers spend more than they intended, and helps you cover the cost of shipping.
- At the same time, don’t make your minimum qualifying purchase price too high. This could end up turning customers away. One way to determine your free shipping price is to figure out your average order value and increase by 10-15%.
- Cap your shipping costs for certain destinations. Some places can be difficult to reach and expensive to ship to. Should a customer’s shipping cost go over your threshold, they can pay for the difference.
- Only offer free shipping for returns. This is a brilliant strategy, as the chances of returns are lower. It also helps build trust with your customer, as it gives them peace of mind that they do have the option to return if they need to.
- Share how much your customer is saving at checkout. Customers love knowing that they got a good deal!
Originally published on February 21, 2018. Last updated on June 10, 2019.
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