Free shipping is ubiquitous, with marketers confidently saying that it is the best way to get customers. There are many alluring statistics:
- “According to Marketing Land, 9 out of 10 customers were incentivized to shop online when offered free shipping.”
- “80% of U.S. shoppers cite shipping cost and speed of delivery as a heavily influential factor in if they buy a product from certain brand.”
- RJ Metrics says “60% of ecommerce companies cite ‘free shipping with conditions’ as their most successful marketing tool.”
Free shipping also helps 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 you meet these demands to stay relevant.
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 an easy 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 more promotion 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 is unsustainable
Amazon has created a monster. In 2016, the company’s shipping losses reached an all-time high of $7.2 billion. 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 and all 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. And let’s be real: you’re going to get what you paid for.
Even if your customer believes they’re fine waiting an extra few days for their package, 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 should also consider offering calculated rates at your store’s checkout, rather than fixed or flat rates.
Calculated rates are shipping rates that are based on the weight of your shipment and its destination. It also provides 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.
Offering free shipping responsibly
As with all things, free shipping is good in moderation.
Here are some tips on how to make it work best for you:
- 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, as 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%.
- Be sure to put a cap on 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 do 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!
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