How to Offer Free Shipping Without Losing Money
As one of the most competitive industries, many retail companies offer various benefits, such as free shipping, to attract and retain customers.
While consumers are drawn to this perk for obvious reasons, businesses can also benefit from offering this incentive. Companies that offer free shipping experience an immediate boost in online orders, promoting revenue and profit margins. Organizations that set a minimum order amount to earn free shipping can also increase their purchase size.
As many online stores offer free shipping, retailers should consider covering delivery expenses to remain competitive. In fact, many consumers even expect free shipping and will seek stores that cover this fee. A Baymard Institute study showed that 61% of online shoppers abandon their carts because of an unexpected shipping cost.
Therefore, retailers should consider the benefits of offering free shipping and how to cover this expense.
How to Cover the Cost of Free Shipping
Unless a retailer has an established clientele or offers expensive products with high-profit margins, offering sitewide free shipping can seem unfeasible. However, there are different strategies companies can use to implement free shipping while maintaining healthy profits-
- Increase Prices
For example, offering an item for $15 plus an added $5 shipping may cause customers to abandon their carts. However, businesses can increase the price to $20 and give the illusion of free shipping.
Retailers should be careful not to increase prices too significantly to generate more profit as this can deter customers.
- Increase the Customer Lifetime Value
By increasing returning customers, companies can boost their customer lifetime value (LTV), which determines how lucrative a consumer is to a business throughout their relationship. This ensures that any profit lost by the first purchase will be reconciled by the returning buyer with future orders, supplementing the cost of free shipping.
- Use Bundling to Increase the Average Order Value
For example, Amazon Prime offers product bundling and item suggestions to promote additional purchases. Not only does this boost inventory turnover and revenue, but it reduces fulfillment costs as well. So while consumers believe they are getting a good deal, the retailer saves on shipping, handling, and inventory expenses while generating profit.
How to Calculate the Free Shipping Minimum Threshold
A popular strategy that retailers use to cover shipping fees is implementing a minimum threshold that customers have to meet to avoid delivery costs. For example, Target offers free shipping on orders of $35 and above.
However, this method is only cost-efficient for the retailer if the minimum cost is greater than what the average buyer typically spends. Therefore, setting a relatively high threshold guarantees the business can cover logistic expenses.
It is essential to find a reasonable figure when setting a shipping threshold. While doubling what the average customer spends is too extreme, minimizing the limit can negatively affect profit margins. Many businesses calculate their purchase minimum by increasing their AOV by 30% or rounding it up to the nearest standard value. For example, if a company's AOV is $92, they can round it up, making the free shipping threshold $100.
However, companies should consider the behavior of new customers versus returning online shoppers. While loyal consumers may be happy to spend extra money to reach the threshold, new buyers may be skeptical.
Oftentimes, new customers initially spend the minimum purchase amount to receive free shipping with the intent of later returning the extra items. Therefore, retailers should implement a strict return policy to reduce return rates and avoid losing money.
5 Ways to Offer Free Shipping
There are a variety of ways companies can offer free shipping to their customers, such as-
1. Sitewide Free Shipping
Major retailers with a large clientele base are able to maintain profitability while offering free shipping throughout their store without a minimum threshold. This shipping option is also feasible for retailers that handle lightweight products that do not require significant shipping charges. However, there may be delivery limitations, such as expedited or international shipping.
2. Free Shipping on Specific Items
Other companies chose to only offer free shipping on specific products, typically with larger profit margins that can supplement the additional fee. However, it is essential to provide this incentive with some lower-margin items, so customers are made aware of the offer without having to purchase expensive goods.
3. Free Shipping During Specific Seasons
Retailers can also choose to provide free shipping during specific seasons rather than making it available all year round. Many businesses make shipping free during competitive holidays such as Christmas, back-to-school shopping, Mother's Day, and Valentine's Day. Others offer the incentive when launching new products to generate customer reviews and feedback.
4. Free Shipping at Select Locations
Aside from domestic and international shipping limitations, some companies offer free shipping to specific locations. The customers can then pick up their items from the store, increasing sales and additional in-store purchases.
5. Free Shipping for Loyalty Program Members
Offering loyalty programs with benefits promote customer retention and satisfaction through various incentives, including free shipping. Some programs can charge annual fees to unlock certain benefits or exclusive items.
As a significant retail management element, providing buyers with incentives, such as free shipping, promotes customer retention and satisfaction. This method also helps businesses stand out among the competition and extend their consumer reach, boosting sales and traffic.