07 Apr 09 The Cost of Free Shipping
Free Shipping is a common incentive used by online retailers to entice their shoppers to buy from them vs a competitor or simply to increase the value of the transaction. But is is worth it?
For example, let’s offer free shipping for orders over $50 to someone who has $40 worth of product in their cart. The shopper then purchases another item worth $20. The perceived value of free shipping is sufficient to push the user over the $50 threshold.
In reality, shipping only costs $5, but we have convinced our shopper to part with an additional $20. How devious we are!
If we had not dangled a carrot in front of our shopper, then we would have ended up with a total sale valued of only $45. Instead we succeeded in securing an order worth over $60. But was it worth it? Let’s assume a gross margin of 25% on all sales and that shipping costs us $3 per package
- $40 sale: $10 GM + $2 shipping = $12
- $60 sale: $15 GM – $3 shipping = $12
In this example we did not make any more money. In fact, the transaction costs us extra in handling costs due to the extra item, so we actually lost money on this one!
If the $20 item is bought the following week and we clip the ticket on shipping again, we make another $7 for a total gross profit on the two sales of $19 versus only $12 if the two items were sold together with free shipping. So from a purely economic standpoint there is no sense in offering free shipping. But here’s why you should do it anyway:
- Free Shipping is an effective customer acquisition tool.
- Customers who remember seeing a free delivery offer are more satisfied with the website, which makes them more committed to the brand, more likely to return, and more likely to purchase.
- Almost one-fifth of all shoppers said that when they choose to buy something from a retailer’s store instead of website, avoiding shipping costs is the main reason they choose to go to the store. (Source)
As an alternative to free shipping, which is so commonplace in the world of e-commerce, you might try offering an incentive courtesy of a 3rd party, non-competing, yet complementary retailer. Read more about this here. I have also come across a similar offering in New Zealand.
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