If you’re starting an eCommerce business, the question of whether or not to offer free shipping is inevitable. You’ll need to set your shipping rates at some point, and more often than not, a lot of businesses opt to make shipping free for their customers. There are quite a few solid arguments for offering free shipping. However, depending on the price points of your products, it may or may not be the smartest move. In this article, we go into the major pros and cons of this common practice.
“Free Shipping” Isn’t Actually Free
The biggest thing to remember when considering to offer free shipping is that it is not in fact free. Someone has to pay for shipping costs…and when it’s free for your customers, that means you’re on the hook for paying for it.
The Main Benefit of Offering Free Shipping is the “Value Add”
Now that we’ve got that out of the away, the biggest argument for offering free shipping is the “value add” your customers will feel when buying your products. If they know that they’re going to be shelling out money for only the cost of the product, then they’re going to feel like they’re getting a really good deal when they place an order. As a result, this “value add” may create a higher conversion rate, which means you’ve successfully turned a higher amount of visitors to your website into paying customers. Making more sales is the name of the game, after all!
The Biggest Drawback is the Impact on Margins
Everything has a “yin and yang” side, and the practice of offering free shipping is no different. While your customers may see it as a nice added-value that incentivizes them to make a purchase, you will undoubtedly feel the impact on your margins. So, that in a nutshell means: more value for them, and less money for you.
For example, let’s say you sell T-shirts that get printed on demand, for $20 each. Each shirt costs $10 to produce, creating a net margin of 50%, or $10 of profit going back to you. However, if you pay for shipping costs that come out to $5, then you only walk away with $5 in profit off a $20 sale, since you’ve got to pay out a total of $15 ($10 to make the shirt, plus $5 to ship it). All of a sudden, your profit margin has halved from 50% to 25%.
Potential Solutions: Find the Happy Medium
One solution to maximize your margins and still offer free shipping is to build the cost of shipping into your products. To use the above example again, instead of charging $20 for your T-shirts, maybe you can charge $25. That way, you still walk away from a sale of each unit with a $10 profit. At the end of the day, this is a much better return than $5.
A second solution is to only offer free shipping for orders of a certain value or higher. For instance, you could offer free shipping for T-shirt orders of $40 or more. This way, your customers will be responsible for the shipping costs for low-value orders, such as the sale of only one shirt, which keeps your margins intact. Also, this may incentivize your customers to purchase more items in order to reach the free shipping threshold (we’ll chalk this up it basic consumer psychology). As a result, your average order value (or “AOV”) increases…and so do your margins.