How to Make Free Shipping Profitable, Part 1
Free and fast shipping is the name of the game now. It has become a table stakes to satisfy your online customers. While shipping may be free for the customer, merchants have to absorb the costs. But the question remains: How can you do it profitably? We've put together the ultimate collection of strategies and tactics for making free shipping and profits co-exist, which will be shared with you in a 10-part series. Here’s our top five strategies in part one:
1. Structured Negotiation With Multiple Carriers
Carrier label fees comprise the majority of your shipping costs. Therefore, it makes sense to get the best deal possible from your carriers. Businesses that sell online most likely already have some negotiated rates with their top carrier. However, understanding your shipping profile intimately is key to getting a well-negotiated contract with your carriers.
First, understanding the true cost of your packages is essential. A deal might look very appealing on paper, with a very low per-pound shipping cost. However, it can come with a minimum charge per package. If your orders are typically smaller/lighter than the minimum, then your actual cost may be higher under this contract.
Second, focus on the fees that impact your business the most. For example, a deal may offer deep discounts on expedited service, but it won’t benefit you much if you rarely use it.
And lastly, compare carriers via a structured process. With Amazon.com building its own fleet and severing ties with FedEx, carriers are hard-pressed to find sustainable clients. Carriers are looking for reliable sources of repeat business, and are willing to negotiate with reputable businesses. The best way to do this is through structured negotiations. Start by analyzing your shipping profile and create a formal request for proposal (RFP) for carriers. Logiwa does an excellent job of explaining how to do this. There are also third-party negotiators and consultants you can hire that can examine your shipping history and negotiate on your behalf.
The advantages of a structured negotiation process are:
- analyzing your shipping spend helps you negotiate on what matters;
- it becomes easier to negotiate with multiple carriers at once; and
- the RFP can be repurposed to negotiate with suppliers, facilities and software vendors.
Negotiating a contract seems like a proven way to lower your shipping costs, but there are a few things that you should keep in mind:
- You can get locked in with a carrier. This might mean you lose out on short-term discounts that other providers may offer.
- Your shipping needs may change. If you change your SKUs and product catalog significantly, you may no longer be able to ship at the negotiated rates for new sizes and weights.
- If the carrier is sloppy with your deliveries, even if there are reimbursements, a few unhappy customers can really damage your business reputation and future sales.
2. Convince Suppliers to Use Your Shipping Account
Most sellers get inbound shipments from their suppliers for inventory replenishment or direct order fulfillment. Suppliers typically invoice you for transportation costs separately. Convincing your suppliers to use your carrier account allows you to take advantage of your negotiated rates and adds more shipping volume on your account.
There are three major advantages to this strategy:
- it increases your shipping spend so that you can negotiate better volume rates;
- it enables you to receive your discounted rates for inbound shipments; and
- it prevents suppliers from marking up transportation costs on their invoices.
However, you must exercise some caution. Your carrier account number is like a credit card. Things can go wrong, such as the following:
- If your supplier isn't careful with billing, there can be mixups. You could end up paying for someone else’s shipments if they ship those packages billed to your account number.
- Adding more users on the account adds complexity when auditing your carrier invoices as well as raising reimbursements for errors and missed service level agreements (SLAs).
- It's difficult to enforce which service types the suppliers should use. They may end up using more expensive shipping methods over the most practical based on your lead time and other imperatives.
One solution you can try is to provide your suppliers with shipping labels that you generate on your account. Suppliers can provide all the details of the shipment to you and you can email them the shipping labels. Your supplier can then print the label(s) and prepare the order for pickup or drop-off. However, this can be cumbersome to operate as well as being time consuming.
There are third-party solutions such as Boxton which let you securely manage account access rights for shipping with various partners. It allows multiple users to print labels and track packages without giving up full control of your account.
3. Intelligently Set Minimum Order Value
Delivering low-cost items for free hurt the most as shipping costs eat into the already thin margin. By compelling your customers to make a bigger purchase, you can recover your shipping costs. One study revealed that about half of shoppers will add items to their shopping cart just to qualify for free shipping. So, there is merit to setting a minimum order value for free delivery.
However, there’s a fine line between setting a minimum order value that will increase total sales and setting a value that will drive away potential customers. There are different ways to test what that optimum value is. Don’t set a limit too high from your average order value. It should be just enough for customers to add a couple of items at the most.
The following is a simple model developed by a data analytics company RJ metrics:
Shipgooder does a solid job of explaining different ways to calculate minimum order value.
The advantages of having an optimum minimum order value are:
- spread shipping cost across multiple items, therefore margin per item is higher; and
- your average cart size goes up (i.e., a typical customer spends more every time she buys from your site).
There are a few things you should keep in mind while using this approach:
- If your most popular product isn't very expensive, customers will see a big gap between their cart size and free shipping requirement (e.g., $15 vs. $65 minimum). This might lead to cart abandonment.
- If you're in growth mode, subsidizing shipping may be the only way to get your products out there and create a proven track record of customer service. And hence, setting a minimum order value may not be in your best interest at an early stage.
4. Use Association Discounts
Trade organizations aren't just good for the annual conferences and galas; there are a host of other advantages that you can enjoy if you're a member. Shipping discounts is a perk offered by several trade organizations.
Shipping carriers often have relationships with many professional associations and offer member discounts. Depending on the size of the organization, you could be eligible for discounted rates of up 50 percent with UPS and FedEx.
While carriers don't advertise the associations they offer discounts to, don’t hold back from asking your account manager or your association whether your business qualifies.
The advantages of building a relationship with a carrier through a professional association are as follows:
- Saves time and effort required to quickly build your own relationship directly with the carrier, especially if you're a young company. The association may have better volume discounts or terms than what you might be able to independently negotiate.
- Immediately avail of discounts even for low-volume shippers (under some programs).
However, there are a couple of things to keep in mind when doing this:
- You might not stay on as a member of the organization forever. Building a direct relationship is more ideal for the long term.
- Paying membership fees and dealing with other organizational commitments just for the discount might not be worth it in some cases.
5. Maximize Ground Shipping Usage
According to a 2017 survey by Bizrate Insights, nine out of 10 shoppers are willing to wait longer for a free shipment. Hence, using ground shipping to provide free delivery is a viable option. Offer a no rush delivery option to customers who are willing to wait a little for free shipping. Ground shipping allows more time for carriers to transport their packages. Furthermore, it's greener and more economical compared to air cargo.
Some of the options you have with ground shipping include:
- FedEx Ground: Offers delivery to commercial destinations with the certainty of delivery on a pre-informed day. It delivers within working hours, and the delivery duration is between a day to five days.
- FedEx Home: This is like FedEx Ground, but with deliveries to residential addresses. It's slightly expensive, but has a wider window of delivery (between 9 a.m. and 8 p.m.). The delivery duration is between a day to five days.
- UPS Ground: UPS Ground shipping is a ground delivery service with a guarantee of delivery on a specific date similar to FedEx.
- USPS Parcel Post: The delivery duration, in the case of USPS, is between two days to eight days. It's less expensive than UPS Ground and FedEx Ground, but takes a little bit longer.
This comparison by Shipping Easy gives the 2019 rates for ground shipping by different carriers:
The advantages of using ground shipping are:
- it’s more cost efficient and a good option if products aren’t urgently needed; and
- ground shipping produces 80 percent less carbon emission compared to air cargo.
Ground shipping may not always be ideal, however. If you stick just to ground shipping, be ready to deal with the following issues:
- Amazon Prime shifted buyer expectations to two-day shipping or faster. Ground shipping can reach only certain nearby regions within two days or less.
- Perishable items may not survive the long journey across the country.
- Ground shipping can be impacted by delays due to unexpected stoppages and detours because of weather conditions or accidents, making deliveries even longer.
Stay tuned for parts two through 10 to learn more about key strategies and tactics for making free shipping and profits co-exist.
Manish Chowdhary is the founder and CEO of Cahoot, a peer-to-peer network where merchants collaborate to increase their sales and margins by offering profitable one-day and two-day free shipping to customers nationwide without spending a penny more than the economical ground shipping.
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Manish Chowdhary is the founder and CEO of Cahoot, a peer-to-peer order fulfillment network where merchants collaborate to increase their sales and margins by offering profitable one-day and two-day free shipping to customers nationwide without spending a penny more than the economical ground shipping.
Manish is an innovator, thought leader, and a highly sought after speaker for all facets of e-commerce. Manish has founded multiple industry-leading companies starting from his dorm room at the University of Bridgeport, CT. Manish’s specialties include e-commerce strategy, business methods innovation, supply chain and logistics optimization, and he holds 10 U.S. patents. He has been featured in The New York Times, Internet Retailer, and many other leading publications. Manish’s mission in life is to positively impact millions of lives through technology and leave the planet in a better state than when he arrived.
Manish is a 40 Under 40 Competition Winner and holds an Honorary Doctorate, the highest honor from his alma mater, University of Bridgeport, CT.