Why Offer Free Shipping - A Definitive Guide to Make it Work for your Business

Global ecommerce figures reached an all-time high during the Covid-19 pandemic, and with things settling now, online shopping is becoming the new norm.

From April to June 2021, retail ecommerce sales in the United States passed $220 billion, the highest in history.

Shipping is at the heart of online shopping and is a make-or-break factor for many customers.

In fact, 24.9% of customers only purchase online with free delivery, while another 15.2% will swap stores for free shipping.

Free shipping might seem like a stretch for many small businesses, but it's been widely adopted.

The question is, how do these businesses turn a profit, even after scraping off a key revenue stream like shipping?

This article will explain why ecommerce businesses offer free shipping and how you can make it work for you.

What is free shipping?

Free shipping is a feature implemented by online retailers where customers don't pay the cost of shipping. Under normal circumstances, customers who buy commodities online pay for their goods and an additional shipping cost, depending on their location.

Before online shopping was widely adopted, free shipping was available during specific periods as a special offer for customers. In some cases, it was given as a coupon.

But it's becoming more common in the ecommerce industry, and with the rise of Amazon Prime, businesses often have to offer it if they want to stay competitive.

Free shipping has a couple of competitive advantages for any company, but it isn't that simplistic. Shipping makes up a significant chunk of any ecommerce store's costs, and that's a trend that's shooting sharply upward. A good example is Amazon, as seen in the image below.

Chart showing growth of Amazon shipping costs from 2011 to 2020Any free shipping strategy should be implemented carefully since it impacts your bottom line. If you are wondering how to approach it, read on. You'll soon understand why free shipping is so crucial today.

What are the benefits of free shipping?

The main benefits of offering free shipping include increased sales, higher average order values, and better customer loyalty. Let's dive in and look at what the data says.

Increased sales

Online buyer traits are sporadic, and people spend time online checking out product pages, looking for some luring factor. With free shipping, they're encouraged to make purchases since they feel like they're saving money.

As a result, online businesses that offer free shipping tend to land more sales and revenue. Case studies have indicated that online stores can increase conversion rates by 17% to 20% with free shipping.

Competitive advantage

In a highly competitive ecommerce space, businesses need to offer attractive features to get more customers and stay ahead of the competition.

Marketing campaigns and strategic messaging can work, but only to a certain extent. You need offers and perks that give customers real monetary value to drive more sales. A recent survey found that 82% of people see discounts as the most valuable part of a loyalty program.

In addition, 43% of online shoppers are more likely to shop with Amazon over other retailers because the ecommerce giant offers free and cheaper shipping options. As such, free shipping, a promotion that saves customers some money, is an effective way to get more customers to buy from you rather than a competitor.

Higher average order value

Average order value (AOV) is a key metric for any growing consumer business to monitor. It's one of the primary metrics ecommerce stores try to grow when attempting to increase revenue or boost the impact of their marketing campaigns.

Screenshot of formula used to calculate AOV

(Image source)

The AOV is the average amount a customer spends on every purchase. Typically, you'd want customers to spend more on average.

Free shipping can boost AOV if you are using the threshold model. Here, you give customers free shipping if they spend past a certain amount, for instance, free shipping for orders above $40. It gives every customer an incentive to push their shopping cart price above that number.

A case study on the impact of free shipping showed AOV increased by 7.32%.

Since customers are willing to increase their spending to get this benefit, your AOV will increase. A good strategy for this is to determine your current AOV and to what level you want to grow it. From here, you can set the minimum free shipping threshold to reflect the new AOV you want to hit.

Set Free Shipping Threshold to Increase AOV

Increased customer loyalty

Free shipping can boost customer orientation toward your business, and all that success stems from one thing.

Delight.

Free shipping pleases your customers and encourages them to return to spend more. Don't forget, customer retention is cheaper than acquisition, and businesses that focus on it get better profit margins.

Probability of Selling to a New vs Existing Customer

This way, it makes sense for any business to invest in an initiative like free shipping that boosts their loyal customer base. You can mix it up with a loyalty program to make it more effective.

90% of customers are more likely to prefer a brand where they are members of a loyalty program. In addition, the top three factors that motivate customers to join these programs are free shipping, faster shipping, and instant discounts.

Just like offering cashless spending, free shipping is a key benefit that drives long-term loyalty.

What are the downsides of free shipping?

Free shipping benefits a business, but it isn't a silver bullet. It has a few downsides that owners should be wary of if they don't implement it well.

Here are some of them.

Additional costs

Shipping costs are massive in the ecommerce world, and ignoring them won't cut it for any business. While you can develop some initiatives to cover these costs, there are limitations.

Free shipping can present any business with a new problem since some of these costs eat into profits. Don't blindly implement a free shipping strategy without analyzing the financial impact.

Always have a plan to cover these shipping fees as they could easily rise to serious figures. Simulate your preferred free shipping model and get accurate figures showing the impact of this campaign before implementing it.

Impact on product prices

One of the most effective ways to cover free shipping costs is by including them in product prices. However, this often doesn't turn out well.

In a competitive world, bigger businesses have an advantage due to economies of scale. Since they sell huge volumes, they can offer lower prices and let some of the profits cover their shipping.

As a result, the product prices listed by smaller and bigger businesses can be different, even though both of them offer free shipping. Customers tend to pick ones with lower prices and leave out the others.

Effects of Shipping Prices on Cost of Products

Increasing product prices to cover shipping is a good strategy, but it can work against you. Try blending multiple initiatives to cover the costs so your business isn't disadvantaged due to price.

How to make free shipping work for your business

Free shipping isn't simple as it might appear on the surface. Businesses have to tie up many loose ends, explore various options, and allocate resources before implementing free shipping.

Free shipping models

Businesses can implement free shipping in multiple ways. This could include implementing various conditions or offering to ship completely free no matter what.

Conditional free shipping

This model requires customers to meet a certain condition before they qualify for free shipping. It's a reliable way to cushion small businesses from the high costs of free shipping and losing money on small orders. They include:

  • Minimum order threshold: Here, customers qualify for free shipping if they buy goods above a certain amount. The minimum amount should be high enough to protect your business from losses and low enough still to attract customers.
  • Free shipping on certain items: Businesses have different margins on items they sell, and not everything has a high enough margin to offer free shipping. Also, items attract different shipping charges depending on destination, size, and weight. This model encourages businesses to offer free shipping on items with low shipping costs and enough mark-up to maintain profits.
  • Limited-time promotions: This works with marketing campaigns that run during specific periods or deal days, like holiday seasons. The idea is to get the word out on free shipping benefits and acquire new customers. You can choose to foot these costs from your marketing budget or run them on a specific number of purchases.
  • Economy Free Shipping: If you have access to a low-cost, slower delivery option, you can use it to implement free shipping. On checkout, offer customers this and a superior alternative like same-day shipping. Here, customers will lean toward the free option, which will cost you less and still have the same impact.

Unconditional free shipping

Here, the glaring word is "free," and customers prefer it over meeting a condition.

However, it’s a challenging model since the only way to cover the costs is by increasing the product price or simply absorbing the costs into your margin. Even the gold standard of free shipping, Amazon, isn't without conditions. But set at only $25 (or nothing with a Prime membership), the juggernaut of ecommerce retailers offers unconditional free shipping on millions of items.

Free shipping will work for your business if you find the right way to pay for it. There's no perfect way to do it as no two industries are exactly alike. Additionally, different products have varying margins and shipping costs.

Don't implement a strategy in isolation. Look at what the competition is doing and position yourself accordingly. The trick is to be better than them to gain some competitive advantage.

One smart way to go about it is using flat-rate shipping. It encourages customers to shop for more in order to take advantage of this perk.

Think about your specific goals and which free shipping policy will help you achieve that.

Main goals for offering free shipping in Ecommerce

You should also look at your competitors’ policies. You don't want to be the only one offering conditional free shipping in a competitive industry.

Don't forget to review your shipping costs regularly. Today, shipping options are aplenty, and sticking to a costly one won't allow you to implement a reliable free shipping strategy. Finding an affordable shipping partner or working with a fulfillment program will give you enough headroom to implement most of the shipping models mentioned above.

Common mistakes to avoid with free shipping

Free shipping is a great way to get customers to buy more, but it could do your business more harm than good if not implemented well.

Smart businesses explore common mistakes to watch out for when implementing this strategy, as they can counter its effectiveness.

Failing to understand the costs

Don't do it without understanding the cost implications. Conduct a detailed analysis, and have a clear plan for covering costs, depending on which model works best for you. It's good practice to simulate some of the different models to see how much money they'll cost.

Money is what determines whether it’s right or not. You could make customers happy and get many of them buying from you, but still take losses. Costs are vital here. You have to understand them clearly before going live.

Failing to communicate the offer

Don't leave anything to chance. You shouldn't just hope that your customers will discover your free shipping promotion. Be proactive with how you communicate it and let customers know about the offer. Leverage your marketing tools and channels (like social media) to get the word out on available offers.

Once they are shopping, make it clear how much they’re saving, as it shows them the value they’re getting from your business.

Assuming free shipping is the only promotional tool

A free shipping offer is great, but it’s not the only promotional tool available in the ecommerce world. Other offers might give you better value.

Always remain agile and responsive to what your customers say as they might prefer something else. What works best depends on your products, industry, and target market.

Test out a few other promotional offers, like providing a discount or giving an item away for free. Promotional coupons can also help you reach new potential customers. 92% of consumers searched for coupons before purchasing a product in 2020.

Your big break might not be all-encompassing free shipping. It could be targeted promotions. You just have to discover what works for you.

Conclusion

Free shipping can be challenging to implement. However, it isn't impossible. With the right plan, free shipping could take your business to a new level. The key is understanding what you are signing up for and the impact it'll have on your business.

Take time, craft it carefully, and go for it if the numbers make sense. Always learn from previous and existing campaigns and use these lessons as pointers to optimize future campaigns. By continually improving, you'll find the sweet spot and set up a perfect free shipping campaign that will increase sales for your business.

about the author

Marc Mezzacca
Marc Mezzacca is CEO of CouponFollow, a consumer savings engine that surfaces popular coupons. He has been in the coupon and deals industry for over a decade with a deep interest in evolving e-commerce technologies.