Apart from the general preference for receiving something for free, there is another reason why people seek free shipping when shopping online: it provides customers with a straightforward pricing structure. Nothing frustrates customers more than going through the checkout process only to encounter unexpectedly high shipping fees at the end, leading to approximately 55% of all abandoned shopping carts. Therefore, the advantages of free shipping include the ability to compete effectively, attract more customers, and reduce the number of abandoned carts.
How to Offer Free Shipping
Offering free shipping can impact your profit margins since the costs will come out of your bottom line, which can be challenging for startups and small online retail sites operating on slim profit margins. However, there are ways to offer free shipping without losing substantial amounts of money. Here are four methods you can employ:
- Increase the price of your product: Although it may seem counterproductive, customers appreciate the simplicity of a free shipping model. They may not even notice if the product price is slightly higher, as they are more attracted to the free shipping offer. Research from the Wharton School of Business suggests that customers find free shipping that saves them $6.99 more appealing than a discount that reduces the purchase price by $10. The key lies in providing a straightforward and hassle-free shopping experience.
- Offer free shipping on orders over a specific dollar amount: Many online shoppers tend to add extra items to their cart to qualify for free shipping. This approach allows you to sell more products and save on individual shipment costs by combining items in one package. The Wharton study also reveals that, on average, consumers are willing to increase their spending by up to 30% to benefit from free shipping.
- Encourage the purchase of multiple items: This upselling technique enables you to increase sales while minimizing shipping expenses by sending a single shipment for multiple items.
- Introduce free shipping during specific periods: While you may not need or want to offer free shipping when business is booming and revenue is flowing, consider altering your approach during slow periods to attract customers when you need them the most.
Calculating Your Free Shipping Threshold
Establishing a free shipping threshold on your online retail website is crucial, particularly if you plan to utilize method #2 mentioned earlier. Setting an arbitrary threshold can render it useless to customers or result in significant profit loss. For example, if your average order value is $50 and you set the free shipping minimum at $500, customers are unlikely to take advantage of the offer.
Similarly, if your average order value is $50 and you set the minimum at $40 without adjusting pricing, most customers will meet the threshold, leading to substantial financial impact. Therefore, it’s necessary to perform some calculations to determine an appropriate free shipping threshold. Follow these steps:
- Calculate your Average Order Value (excluding shipping costs). For example, $40.
- Determine your Average Shipping Costs. For instance, $8.
- Calculate your Gross Profit Margin by subtracting the Cost of Producing Product from Total Sales and dividing the result by Total Sales. For example, if Total Sales is $100k and Cost of Producing Product is $60k, the formula would be ($100,000 – $60,000) / $100,000 = 40% Gross Profit Margin.
- Propose a Minimum Cart Value. For example, $45.
Now, let’s evaluate the Proposed Minimum Cart Value:
- Determine the difference between the Proposed Minimum Cart Value and the Average Order Value ($45 – $40 = $5).
- Multiply the difference by the Gross Profit Margin ($5.00 * .40 = $2).
- Subtract the result from the Average Shipping Cost ($8 – $2 = $6).
In this scenario, you would be incurring $6 in shipping costs per qualifying order, which would be too significant of a hit to your bottom line. To address this, let’s adjust the Proposed Minimum Cart Value. Let’s set it at $55 this time.
- Calculate the difference between the Proposed Minimum Cart Value and the Average Order Value ($55 – $40 = $15).
- Multiply the difference by the Gross Profit Margin ($15.00 * .40 = $6).
- Subtract the result from the Average Shipping Cost ($8 – $6 = $2.00).
By increasing your threshold by just $10, you still provide value to customers while reducing your shipping cost to just $2.00 per order. This approach is much more manageable, isn’t it? You may need to experiment with different numbers to find the optimal threshold for your business, but the effort will be worthwhile for your bottom line!
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