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How to offer free shipping while protecting your margins

Free shipping is every online shopper’s dream. It dominates consumers’ decision making when it comes to whether or not to place an order. Shopify found that 75% of shoppers care about free shipping, even more than fast shipping (60%) and flexible shipping (53%).

As eCommerce becomes the norm, customers have high expectations regarding their online experience. Free or low-cost shipping is one of the main reasons why customers prefer shopping online. Knowing this, it’s no surprise free shipping can skyrocket your eCommerce conversion rate.

But for eCommerce retailers, it can be a financial nightmare if done incorrectly. Offering free shipping isn’t as easy as clicking a button in the back end of your eCommerce website. It requires careful consideration.

Create an affordable free shipping model and you may find your dispatch times are slow — much slower than customers expect. On the flipside, if you offer free shipping at faster speeds without optimizing for distance, it can get expensive and even break into your bottom line.

Simply put, a free shipping option can seriously harm your profit margins and business growth without a strategic plan. If you don’t build the cost of free shipping into your store margins, you run the risk of your eCommerce store operating at a financial loss.

So, how can you offer free shipping while protecting your margins?

In this article, I’ll walk you through various strategies you can use to make sure free shipping doesn’t kill your profits.

Why you should offer free shipping

If you haven’t been scared off by the risk free shipping can pose to your profit margins, then you’re ready to hear why you need to offer it.

Free shipping is guaranteed to improve your conversion rate. While there isn’t a single hard figure for how much it will, there are plenty of case studies out there sharing free shipping success stories. Retailers all around the world constantly report how free shipping has amplified their eCommerce conversion rates.

Along with this, it also helps online stores recover abandoned shopping carts and could boost your average order value.

Outside of the financial benefits, free shipping can also give you a competitive advantage within your product niche by making your product seem more desirable. This is especially true for retailers selling goods through marketplaces such as Amazon or Walmart.

Remember that psychology is also at play here. Psychological pricing strategies can carefully and subtly influence the way consumers react to product costs.

When it comes to product prices and shipping rates, every cent counts. According to Ben Kennedy, CTO and co-founder of The Feed, changing the shipping fee to $7.99 outperforms a shipping rate of $8. Reducing the shipping rate from a two-digit figure to a one-digit figure (i.e., from $10 to $9) has the biggest impact on purchase behaviors.

The psychology of free shipping is far more complex than you may initially think. And, of course, there is a downside.

Before you slash your rates, make sure you first consider how you plan to account for the cost of shipping. You can absorb the cost of free shipping in several ways, but, if you fail to account for these, it can and will kill your bottom line.

Offsetting free shipping isn’t as easy as increasing the price of your products. Marking up your prices can counteract the benefit of free shipping if it means your products are no longer competitively priced. Similarly, offering free shipping at the expense of slow delivery times can also harm customer sentiment towards your brand.

Fear not! I have a few eCommerce strategies up my sleeve that’ll help you protect your margins while reaping the benefits of free shipping.

How to offer free shipping while protecting your margins

Free shipping doesn’t have to be expensive. You can give your customers the luxury of free shipping while maintaining ROI. To do this, you need to be smart about how you offer free shipping.

Implementing free shipping rules such as a minimum order volume or creating up-sell rules to boost average order value are just a couple ways you can make free shipping an affordable sales tactic for your eCommerce store.

1) Unlock free shipping at a minimum spend

You don’t have to offer free shipping on all orders. In fact, being selective with free shipping could work in your favor.

Rather than exercising an “all or nothing” shipping policy, create a tier of exclusivity where customers can only unlock free shipping once they’ve met the minimum spend threshold. You could, for example, offer free shipping on orders with a value of $20 or more.

Setting a minimum order threshold for free shipping can increase your average order value. If a customer needs to spend $20 or more to qualify for free shipping, it can tempt them to buy more. After all, would you rather spend $10 plus $4.99 for shipping, or spend $20 and receive free shipping? Chances are, like many other online shoppers, you would prefer the latter option.

2) Boost average order value with upsells

If you don’t want to offer free shipping for spending a flat $20 (or whatever minimum spend you choose), you could use upsells to boost AOV and qualify customers for free shipping.

Upselling at the checkout is a great way to increase cart value while offsetting the high cost of free shipping.

This can be done in one of two ways. First, you could upsell products on all orders. This tactic is similar to the Amazon strategy of add-on items. It’s great for encouraging customers to add related, often high-margin products to their order before they check out.

Alternatively, you could upsell online customers by only offering free shipping if they buy a specified upsell or add-on item with their main purchase. With this method, you get to strategically choose items from your add-on collection and select high-margin products to offset the cost of free shipping.

Using upsells helps protect your margins while providing your customers with another item to enjoy.

3) Provide free shipping for product bundles

Product bundles are a not-so-secret eCommerce tactic for increasing sales and shifting stock. But did you know they’re also an effective free shipping strategy?

In simple terms, product bundling is the act of offering a pre-defined collection of products at a lower price point than if they were bought individually.

Product bundling is a careful balancing act of pairing high-value items with relevant low-value ones. The idea is to build an attractive product bundle that customers want to buy. Stuff your bundle full of low-value items, and the desirability isn’t going to convince shoppers to buy.

You can then offer free shipping on any bundle purchases, including pre-defined or custom-built bundles.

For pre-defined product bundles, you can build the cost of shipping into the price of your bundle. This covers the cost of shipping while also boosting order value and selling surplus stock — a winning strategy for online retailers.

If you want to offer free shipping on custom-built bundles, you could, for example, set a rule whereby customers who buy three of the same item receive free shipping on their order. This lets customers build their own bundle to unlock free shipping.

4) Build the cost of shipping into your product margins

A free shipping option requires you to absorb the cost of dispatching orders. The easiest way to do that is to build the cost of shipping into your product margins. By doing this, the customer will unknowingly cover the cost while still receiving the free shipping incentive.

You can increase product prices to cover the full cost of shipping, or you can increase prices slightly to cover partial costs.

Let’s look at an example to illustrate how to build the cost of shipping into your product margins easily.

Say your average order value is $20 and you sell products at an average price of $5 per item.

If the average shipping cost is $3 per order, that means you would lose $3 each time you provided free shipping.

If, however, you increase product prices by 20% so the average product price is $6, you can offset the cost of shipping on an average order.

Buy 4 x $5 items = $20 order plus $3 shipping ($23 total order value) vs. buy 4 x $6 items = $24 order plus free shipping ($24 total order value)

However, incorporating the cost of shipping into your product prices isn’t always the best route. This method could be damaging if it makes your products more expensive than competitors’. You need to make sure your products are still competitively priced so as not to price yourself out of the market.

You also need to be aware of how large or heavy items might impact your shipping rates. If you don’t account for higher shipping rates for bulky items, your free shipping calculations likely won’t work in your favor. To be safe, you may want to exclude large or heavy items from your free shipping offer.

5) Create a loyalty program

In the world of eCommerce, loyalty pays.

Customers are more likely to promote their favorite brands online, especially if those brands offer high-quality products, rewards such as discounts and free gifts, and great customer service, according to the Brand Watch 2021 Customer Loyalty Report.

Launching a loyalty program with free shipping as a reward is a lucrative way to recoup the cost of shipping.

You could create a loyalty program where customers pay $10 per month to receive VIP benefits like free shipping for a year. This means you get to reward your customers for their loyalty and recover some of the cost of free shipping.

The most obvious example of how this works is Amazon Prime. Prime members can pay $12.99 per month or $119 per year to receive a number of shopping benefits, including free shipping, early access to deals, and a “try before you buy” initiative.

Granted, Amazon is a trillion-dollar industry. However, you can implement your own version of a free-shipping loyalty program on a smaller scale.

Get creative to craft a process that works for you and keeps your returning customers happy. Your loyalty program could, for example, have different tiers that customers reach by either paying more money for the loyalty program or for being a frequent shopper. Within that hierarchy, one of the tiers could unlock free shipping.

If you choose to develop a loyalty program, consider the various risks and requirements. Loyalty programs can be wildly rewarding, but they do need careful implementation.

6) Give away free shipping as a referral perk

Free shipping doesn’t have to be restricted to loyal customers; you could also use it for new customer acquisition. Similar to building free shipping into your loyalty program, you could offer free shipping as a referral perk.

Referral programs let you reward existing consumers, reach new customers, and drive sales across the board.

You could launch a like-for-like referral reward where customers get free shipping off their next order each time they refer a new customer to your store and once that new customer places their first order. The more friends they refer, the more free shipping opportunities they acquire.

In turn, you could give new customers free shipping off their first order. This offer entices new customers to shop with you, increasing your number of average orders. You could pair this offer with a minimum spend threshold to help offset the cost of free shipping and protect your profit margins.

Wrapping up — How to offer free shipping and protect your margins

Free shipping can be a gamechanger for your business, but only if you protect your profit margins while doing so.

To make free shipping financially viable for your business, be smart about how you offer it. Make sure you fully understand how you plan to recover the cost of free shipping and whether it’s a viable option for your eCommerce store.

Choose the free shipping tactic that works best for your store — and remember, you can always change it! Keep an eye on competitor and customer activity so you’ll know whether you need to change tactics to suit the current landscape.

Whatever you do in eCommerce, always keep your bottom line as a top priority.

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