Free Shipping – Why it Works

The phrase “Free Shipping” is an eye-catcher, and according to marketing professor David Bell at the Wharton School of Business, “Free Shipping” discounts are more appealing than discounts directly off of the purchase price. Bell also states that approximately 60% of all online retailers in 2004, cited “free shipping with conditions” as their most successful marketing tool. Shoppers are attracted to free shipping offers, perhaps because it makes the online retail transactions more comparable to the brick & mortar stores. It’s been made pretty clear over the years that consumer behavior does change when shipping fees are imposed. But with fees, shoppers will make fewer shopping trips and purchase more goods at a time – similar to shoppers who drive great distances to get to a particular store, and then decide to “stock up” while they’re there. Alternatively, extra fees at checkout can also prompt shoppers to simply walk away. Another study from 2004 found that shipping and handling costs triggered 52% of the abandonment of online shopping carts, Bell says. While some might argue that shipping fees are merely a substitute for the time and travel costs involved with visiting a bricks-and-mortar retailer, consumers may not buy that argument and many simply overlook it. Maybe because the travel costs are not collected at the traditional retailer’s point of sale.

Some companies have tried finding a middle ground by waving shipping costs when customers exceed a certain threshold. This strategy makes customers think differently about price, Bell says. Where higher prices are bad for customers in traditional retailing, customers of online retailers can benefit from higher prices because they push the total closer to the free shipping threshold. If you’re not offering “free shipping” on your site yet, you may want to calculate your “break-even” point. We’ll go into this and more in the next slide. I can already hear you saying, “But shipping is X% of my overall operating costs!” Never fear, there are ways you can make this work. If you’ve driven down your shipping costs as low as they can go, and can’t see any way that you would be able to offer free-shipping and still make a profit, then it can pay to look at your break-even point.

The break-even point is where the margin of an order equals the cost of shipping. The simplest way to calculate your approximate break-even point is to use a range of average shopping-cart values, and then calculate both the average margin and the average cost of shipping, for each of the different average basket sizes. After this calculation you should be able to set a minimum order value where offering free shipping all the time should be feasible and still leave you with a sufficient profit margin. This kind of permanent “free shipping” promotion works well because of two reasons. One, It partially answers the “price of shipping objection;” and, two, it should increase your average order value. That’s right, once you have this promotion in place you should find that customers love free shipping so much, that they will actually spend more on your site just to get it! Here are a couple more ideas to make “Free Shipping” promotions more feasible:

  • Only offer free shipping for your most affordable shipping options. For example, provide free shipping only for ground delivery, not for overnight or 2-day or 3-day.
  • Test the “Free Shipping” promotion by only offering it on certain products to monitor its impact.
  • And lastly, if it comes to it, consider changing the overall pricing structure of your products to provide a cushion that absorbs free shipping costs.

Of course, you have to make the decision that is most appropriate for your particular business needs. If you just can’t provide free or discounted shipping, at least make sure your customers aren’t surprised when they see the additional fee on their checkout page, provide messaging throughout your site about your shipping policy to minimize your cart abandonment.

Bottom Line: “Free Shipping” is a huge promotion that you should at least test out on your site to see how it can impact your conversion and add-to-cart rate.

Image courtesy Eric Bowers

Discussion · No Comments

There are no responses to "Free Shipping – Why it Works".

No one has posted a comment on this post yet. Start the discussion!

Leave a Comment