How to Make Free Shipping Profitable, Part 2

The internet has made price comparisons very easy for consumers. This has compelled many merchants to compete aggressively on price. Often the lowest price wins the Buy Box on marketplaces such as Amazon.com and comparison shopping sites like Google Shopping and PriceGrabber. This puts immense pressure on sellers to set a “just right” price that's both low but profitable, even with free shipping.

Shipping costs are now an important component of the online product pricing strategy. Here are five ways to recover your shipping costs by strategically setting your product prices:

1. Include shipping costs in product prices.

Remember the last time you were irritated about hidden resort fees during hotel checkout? Or those bloated “service charges” when buying event tickets online? Similarly, customers perceive a separate shipping charge as an unpleasant surprise. A 2019 study by Baymard Institute shows that 53 percent of shoppers abandoned their carts because of extra fees like shipping cost. To avoid such shocks, consider baking shipping costs into the item price.

Imagine having to pick between these two offers for something you’re ready to buy:

• Option 1: $25 + $6 shipping charge
• Option 2: $31 with free shipping

Bill D’Alessandro of Rebel CEO, a consulting firm, ran this very test for a skincare product. Option 2 converted twice as many sales.

So how can you intelligently incorporate shipping costs into individual item prices? You can add the shipping costs directly to items above your free shipping threshold. And for items cheaper than your threshold, you can prorate the shipping costs according to their price.

Say a merchant offers free shipping on orders above $50, and on average the shipping cost is $5. For a $25 item, which is roughly half the minimum, add 50 percent ($25/$50) of the shipping cost to the item price. For a $10 item, which is a fifth of the minimum, add 20 percent ($10/$50) of the shipping cost to the item price.

Pros:

• More transparency from search to checkout removes the shock factor towards the end of the purchase cycle, leading to fewer shopping cart abandonments.
• Your listing stands out with the free shipping badge against other competitors.

Cons:

• Getting customers to click the buy button can get tougher even with slightly higher prices.
• If the customer initiates a return, you would need to refund the item price, which includes the now baked-in shipping cost.
• Customers buying multiple quantities would prefer a separate shipping charge on the entire purchase than higher per-unit prices.

2. Offer free shipping on select items only.

It's not always profitable to offer free shipping on all the items in your product catalog. It can be problematic with low-priced items or very large and bulky items. Two things can happen: one, shipping adds so much to your item price that it would put off customers or, two, your margins aren't large enough to cover the shipping cost without raising the item price. You can, however, pick out which items you can offer free shipping on.

The key to this strategy is to communicate the offer effectively to the customer. Be clear and upfront about any restrictions that will help the customer navigate your site with confidence. Below is an example from a gift retailer — its products are mostly large gift baskets that are expensive to ship. The company is offering free shipping for only select gifts using a promotion code.

Credit: Harry and David

Peer-to-peer e-commerce order fulfillment network Cahoot has also tested this strategy extensively and found a marked improvement in net profits despite lower margins per SKU. This is because of the increase in sales and a positive margin per order.

Pros:

• Offering free shipping increases your sales volume, negating any decrease in margin per single item.
• Free shipping is a way to recruit new customers. There will be upselling opportunities when these satisfied customers return to your store.

Cons:

• This works best when you have at least one top-selling item with a low shipping cost.
• Promoting free shipping on one or a few items only may signal to the customer that you only specialize in select items.

3. Offer free shipping when a certain order amount threshold is met.

Setting a minimum order value to qualify for free shipping increases your sales so that you may be able to recover your shipping costs. However, this strategy doesn't work for everyone. If you offer limited product selection, the customer may abandon the purchase because they cannot find enough relevant items to add to their order. For example, if you specialize in $19.95 socks, setting a $40 minimum for free shipping can be frustrating for customers because it ends at an awkward quantity. Buying two pairs may not be enough, while buying three pairs might be too much above the minimum.

Requiring a minimum order value forces the customer to find items to meet the price threshold. It's easier to gently nudge the customer with a prompt that says, “buy 3, get free shipping.”

Credit: Seapa

This is especially true in the case of items that customers buy regularly, like personal care or household products. For such products, customers are used to expecting savings when buying in bulk. The end goal is similar to minimum order value in that the merchant can increase average order value and ship the items together for a low cost.

Credit: CPC Strategy

This is similar to multi-quantity packs of deodorant often seen on Amazon, Boxed or Costco. Selling as a bundle helps distribute the shipping cost while keeping the item unit price low.

Pros:

• It’s easier for customers to add one more quantity of an item they already want to buy and will need to repurchase soon.
• Much simpler and straightforward mental math (e.g., “buy three and get free shipping” instead of “spend more than $30”).
• Shipping multiple quantity orders are typically cost effective, especially for small and light items.

Cons:

• It's most suitable for regularly purchased consumer items, but not so easy for diverse or one-off SKUs (e.g., clothing, kitchen essentials, toys).
• It will not be as effective for items that cannot be shipped together to reduce packaging and shipping costs (e.g., toilet paper, large bags of dog food).

4. Implement a flat rate shipping charge.

If it's still not possible for you to bake shipping costs into your product prices, there's another way to manage customer expectations. With a flat-rate shipping offer, customers are aware of the total price they'll be paying, irrespective of what items they buy. The shipping cost transparency would motivate them to find an item they want and complete the purchase.

Credit: Fat Brain Toys

Consider your average profit per unit and average shipping cost to calculate a flat rate that works for both your customers and your desired margin. Here’s a gift retailer advertising flat rate shipping very effectively: “We don't want our customers to experience sticker shock when they see the shipping rates at our store.”

Having a flat shipping charge also provides an option for customers who aren’t interested in spending above a certain amount — e.g., gift card holders who only want to redeem their balance. Standard shipping for a flat rate is popular among many categories of retailers, including Dollar Tree, Hot Topic, Abercrombie & Fitch, Bath & Body Works, and others. Below is an example of the shipping table from Abercrombie & Fitch.

Credit: Abercrombie & Fitch

Pros:

• Sales grow as customers increase their average order value to get the most out of the flat rate shipping offer.
• The shipping options on-site are much easier to configure.
• Provides a clear and up-front charge to customers who are not interested or able to meet your minimum free shipping threshold (e.g., gift card holders).

Cons:

• Flat rate shipping isn't suitable for large or heavy items, depending on how much you charge. Shipping multiple big items at a flat rate can easily lead to an overall loss.
• If you’re charging the same shipping cost to all customers (including those located near you), your competitors can beat you on price in some regions by adopting a more aggressive shipping strategy.

5. Offer a dynamic, real-time shipping charge.

Many merchants charge a fixed shipping fee irrespective of the customer's location. If your fulfillment center is located close to where the customer resides, you might be able to charge a lower shipping cost than the average computed across your entire customer base.

For example, if you ship nationwide from a single warehouse, your flat rate shipping cost will most likely be in line with Zone 5 or Zone 6 rates from your carriers. This average cost ensures that you don’t lose money when you take orders from across the country. This can, however, risk potentially losing customers that live closer to you because your competitors can undercut you on price by charging regional Zone 2 or Zone 3 shipping rates to those customers.

With a dynamic, real-time shipping rate, you can make sure you’re charging the lowest possible shipping cost and remain competitive in all markets. Connect your shipping solution directly to the shopping cart and checkout page, and then each customer will be shown the most accurate shipping cost tailored to them.

This blog by Squarespace explains one way to do it in great detail.

Credit: Squarespace

Pros:

• You can always cover your shipping costs, no matter the location of the customer or changes in carrier rates.
• Offer even better rates to customers in your proximity and stand out against other merchants.

Cons:

• If your fulfillment location is situated away from the concentration of your target customers, you'll end up charging your core market more-than-average shipping costs.

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.