Will Free Shipping Boost E-Commerce Sales Enough to Be Profitable?

There's no disputing how powerful the words “free shipping” are when it comes to driving e-commerce sales. Sixty percent of U.S. consumers say that getting a great deal is a top factor that influences their purchasing decisions. According to many online shoppers, the deal they want most is free shipping.

A survey of holiday shoppers found that the cost and speed of shipping is what 57 percent of consumers consider first when contemplating an online purchase — even ahead of a product’s price. However, while consumers want (or expect) to have their purchases sent to them at no cost, e-tailers know someone has to cover shipping costs. Therefore, they must determine whether subsidizing shipping is profitable. Doing so requires testing and exploring low-cost delivery options.

How to Test Shipping Offers

Finding the right shipping strategy — one that's both attractive to customers and profitable — takes careful calculation and testing. Running a two-week A/B test that alternates subsidized and unsubsidized shipping for site visitors is a smart way to learn how free shipping affects conversions vs. site visitors, cart abandonment rates, gross margins, and more. Even simply turning free shipping on and off — alternating days — for two weeks will provide similar data. The point is to capture information about customers’ buying habits and analyze the data to find the impact on the bottom line.

Consider What’s to Gain 

Offering free shipping will almost certainly increase total sales. But will absorbing the costs of that free shipping eat away too much at profits? In cases where subsidizing shipping hurts margins significantly, businesses should avoid offering free shipping or consider raising product prices and building the cost of shipping into purchases. However, if businesses see margins dip very slightly, there may still be a payoff to offering free shipping. Specifically, offering free shipping can help businesses gain the following:

• more customers purchasing a product (which can drive future business growth and long-term success);
• loyal repeat customers; and
• a competitive edge (so businesses don’t lose sales to competitors that offer cheaper shipping options).

Find Ways to Lower Shipping Costs

It may seem obvious, but it's easier to subsidize shipping when the cost of shipping is low to begin with. Therefore, e-tailers may want to explore different options for reducing shipping costs. One example is to give customers the ability to select shipping to a store (BOPIS) vs. residential shipping.

When customers choose to buy online and pick up at a convenient location (either the brand’s physical storefront or an alternative retail location such as a grocery store or pharmacy) it eliminates the final and most expensive portion of shipping — the last mile. By cutting the cost of shipping, businesses that could not otherwise subsidize shipping may be able to do so because the cost they need to absorb is lower.

Another cost factor that gets overlooked is the nonconventional savings that shipping to secure pickup points offers. Many businesses routinely pay for additional shipping-related costs such as:

• surcharges for deliveries that require a signature from the recipient and/or multiple delivery attempts; and
• replacement shipments for stolen packages.

Shipping to safe and secure pickup locations eliminates these and other costs for businesses, and those benefits should be included in calculations.

Online shoppers simply don’t have much tolerance for added shipping expenses. When shoppers see shipping fees at checkout, they’re more likely to abandon their cart or buy from a competitor. Therefore, it’s smart for e-commerce brands to consider offering free shipping. At the end of the day, what matters for businesses is that free shipping is profitable. Know for certain that it requires diligent testing and a willingness to try cheaper shipping alternatives.

Mitchell Nikitin is founder and CEO at Via.Delivery, the company enabling pure-play and direct-to-consumer online merchants to compete with giants, such as Amazon.com, by offering BOPIS experiences.