Should I Offer Free Shipping on Our Site?

Should I Offer Free Shipping and If So What Should I Set the Threshold To?

At some point in everyone's ecommerce career they contemplate these questions when it comes to their ecommerce pricing strategies; should I offer free shipping, what should I set the shipping threshold to, how can I offer free shipping without losing money?

I've done a lot of testing on this topic using some pretty extensive A/B tests with completely different cart/checkout pathways (not just simple UI stuff). One e-commerce company I've worked with tested free shipping on all orders versus free shipping over $100. Their AOV was about $300 at the time and as we conducted the test if the profitability gap was significant, we'd be able to tell quickly, and turn off the test, so we went for it. The conversion rate gain was worth more than the lost margin by giving up either the collected shipping.

This did have an affect on the company's ability to be price competitive on low-ticket items. While Google Shopping does an okay job showing the "total price", not all competitors are feeding accurate shipping prices (especially if they also have a "handling fee"), and not all shoppers are looking at the "total price". This meant they would do well throughout the bulk of the catalog with great cross-sells to low-ticket items, but possibly draw less traffic to them.

Whether a higher or lower threshold makes sense for your site will depend on your margins, your conversion rates, and how those discounts (or up-charges, if you're going the other way) affect both. I recommend measuring success across the test and control group in terms of gross margin dollars. If, given the same number of visitors, one generates a statistically significant increase in margin dollars, then there's likely an improved strategy to be derived from that outcome.

If you generate a large amount of your profit from low-ticket, high-margin items, you probably won't go for universal free shipping, so you can keep your product prices competitive at that end. If they're just a contributor, but not a margin leader, then it might make sense to push the threshold lower, or off, and make it up on the big ticket items.

Once you set the threshold, however, be sure to look at your pricing logic right around that dollar amount. You'll want to be sure you're taking the threshold into account when you're setting prices just under it. But don't forget--a $70 item might have an AOV of $122 per conversion, if you average more than one item per cart, or your cross-sells are strong, so don't assume it's a $70 conversion average, just because that's the item's price.

To get around that, we turned the problem inside out, and generated something we called "Shaded Shipping"--that was a per-unit cost of shipping, averaged across all of the shipments that contained that item, including multiple units or multiple products. With the Shaded Shipping amount being updated weekly or so, we could use that to establish pricing that preserved profitability, but also allowed us to take advantage of multi-item purchase behavior through those averages.

This is a piece of a larger pricing strategy conversation, of course.  Hopefully this will help you working on answering the question, should I offer free shipping?  If it doesn't set you on the right path, drop me a line via the Contact form--I love to talk shop.

Up and to the right!