How to Navigate the eCommerce Free Shipping Paradox to Stay Profitable

Free Shipping has dominated a lot of mindshare in eCommerce for a very long time, and for very good reason. Amazon has also historically been the one to drive much of this conversation (for fun, go search for “free shipping minimum” and you’ll see Amazon headlines).

If you’re a merchant, free shipping can suck

…and by suck I’m referring to the vacuum like sound coming from the free shipping dollars your business is going to eat if you don’t do this properly.

The reality is that most merchants that aren’t Amazon or Walmart so you have to figure out what minimum order threshold you’re willing to accept in order to digest / absorb the cost of that free shipping.

That’s the bad (reality) news.

Profitability or Bumping Conversion Rate?

The good news is that Free Shipping, even with thresholds, typically has a very strong positive effect on your conversion rate.

What I’m often talking to merchants about is finding the balance between that conversion rate bump and running a profitable business. If you don’t care about profit in your direct eCommerce channels then you can pretty much ignore this entire article and just give shipping away on every order.

I have run a lot of tests on free shipping thresholds on many different sites in many different verticals. Nothing is the same and everything is the same.

I’ve distilled all of those tests over all of those years into a handful of guidelines for merchants to use at their own discretion when determining their own free shipping minimums/thresholds.

My Guide to Setting Your eCommerce Store’s Free Shipping Threshold (Minimum):

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1 – You will likely get it wrong the first time.

Go into this knowing that you are going to have to test a bunch of different thresholds to find your sweet spot because shipping is where many businesses are actually different.

There are a lot of variables that might need to be factored into your shipping model, most of which depend greatly on the specifics of your business.

2 – You absolutely need to be thinking about your contribution margins by category of product.

Some categories of product are much more profitable than others. I like to pay particular attention to contribution margin in businesses with bigger catalogs mainly because extremely high margins in some categories can skew your averages and set you up for failure before you even begin.

Sometimes the mathematical function of AVERAGE() is really more harmful than not. Go a little deeper than surface level when determine what you business can actually digest in a free shipping world.

3 – Understand your shipping costs / model intimately.

This is particularly important for companies that sell a wide variety of sized and weighted products where your cost of shipping can be all over the damn map.

I have seen businesses where their variety of sizes and weights actually drive a much higher free shipping threshold for their AOV compared to other businesses with similar AOV but more consistent shipping costs across their categories.

The geography you are shipping to can also really impact how you set free shipping minimums. If you are constrained to a particularly tight geographical area for shipping destinations, then that will work in your favour on outbound shipping costs and return logistics costs. Conversely, the larger your geography the more complex your shipping model becomes.

4 – Free Returns are even more scary.

Some businesses have really high return rates (i.e. – shoes), many do not. If you aren’t actually aware of what your return rates are, then I’d strongly recommend you do not offer free returns.

If you do know your return rates as a % of total online sales, then you can safely use this as a variable to determine if you should do free returns. Most companies do not put a threshold/minimum on returns, as that was already met on the outbound order. However, you need to know what impact returns will have on your business to help determine what the free shipping minimum should be.

Get Started on Setting Free Shipping Minimums

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I get that this isn’t everything. This is just a start, but it should be a good enough start to lay the foundation for how to calculate free shipping minimums in your business.

If I had to pick only one thing to emphasize, it would be to go into this knowing you’ll have to test different thresholds and policies for yourself. What works for one company doesn’t always work for the next.

Summary
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How to Navigate the eCommerce Free Shipping Paradox to Stay Profitable
Description
Free Shipping has dominated a lot of mindshare in eCommerce for a very long time, and for very good reason. Amazon has also historically been the one to drive much of this conversation (for fun, go search for “free shipping minimum” and you’ll see Amazon headlines).
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Demac Media
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