How to add free shipping to your e-commerce and not go bankrupt?

Luis Manjarrez
Nov 9, 2018 · 4 min read

According to the Baymard Institute, a web usability research institute, the biggest reason for people abandoning a cart is due to the extra costs that come with online shopping, costs such as shipping, fees and taxes.

There’s nothing you can do about taxes, fees can be added to the advertised price, so that leaves shipping. Shipping is actually a funny subject because for some reason we just don’t like paying for it, we want things to arrive to our doorstep magically and for $0. It’s funny because brick-and-mortar stores don’t reimburse you for gas, the bus ticket, your time in traffic or parking. So why do we expect shipping to very low or free? I don’t know.

The best we can do to mitigate that friction is to offer a reduced or free shipping option. It’s quite obvious that even if it’s free for the customer, it’s not the case for the business, so careful consideration should be done before offering this.

Now, before you continue reading this post I should say a few things:

  • It’s a lot easier to make a decision if you have data, so new businesses might not find much value in this article. There are a some exceptions, for instance, if your margin profit is big and free shipping would represent only a small percentage of the costs.
  • An agreement with a shipping company to get reduced pricing is crucial to make this work.

Shipping agreements

If you have been in business for a while I’m sure you already have one. These are contractual arrangements you make with a courier company that gives you access to lower shipping rates. These discounts will vary and depend on many factors such as shipping volume, geographic location, market saturation, delivery speeds, etc.

If you make a good case you could see rates drop up to 65% or more, but be careful with what is stipulated in the agreement, especially the weekly or monthly quotas which if not met could result in a canceled contract or other penalties.

Even if you already have an agreement, it doesn’t hurt to see what competitors are offering. Here’s a few things you might want to consider when choosing a shipper:

  • Do you deliver everywhere in the world? Or just locally?
  • Do you need tracking, signature on reception, notifications or other special services?
  • Do you need highly trusted brand? Do you ship valuable or very time-sensitive items?
  • Do you need insurance?

What speed should you offer for free?

The customer will always want the item to arrive as fast as possible, but if your product is not time-sensitive, slower delivery times will not deter most people from completing a purchase.

You want to offer the fastest, least expensive option. The shipping service frequency will help you discover how important shipping speed is for your customers. You want to please the majority of the customers.

Cost analysis

This is the most important part of the process, you need to crunch some numbers. The more data you have the better, but let’s keep it simple. Open a spreadsheet and gather the next info of each past purchase:

  • Shipping cost
  • Order value
  • Shipping service or speed

I would recommend going back as far as possible and analyze data from the first order onwards. If you have lots of orders you can calculate a sample size and work with that.

With the above you can determine:

  • Average shipping cost
  • Total cost of shipping per month
  • Shipping cost to order value ratio
  • Order value mean
  • Shipping service frequency

Your offer

With this newfound info you can start to build your free shipping offer. You can now determine first and foremost if you can afford it.

  • If you have a few products with similar cost structures, you can add the average shipping cost to the other average costs. Can you afford this new cost?
  • If you have many products with different costs you need to do the exercise for them all and determine a per product strategy.

Naturally by absorbing the cost of shipping the profit margin will decrease, so the key is to know how much less you can accept and how much free shipping can bring in.

Is it worth it?

Predicting the future is very hard, so it’s best to look to the past. There are a few indicators of how you will do in the future, I would recommend using the year-over-year (YOY) growth rate.

The big question is to know whether the average cost increase per order is bigger than your YOY?

In our case it turned out it wasn’t, so we did a live test. We set out to give it a try during our slowest months, from mid-June to mid-August. This made sense because we would minimize losses in case of the experiment not working and maximize returns in case it did. And it worked, big time, 51.1% more sales than last year in the same period!

Last words

I hope this quick guide can help you decide if free shipping can be a helpful weapon in your arsenal. I’ve been working on developing strategies to grow Conference Badge for 22 months and this has been by far the most effective and fastest to show results. I hope it can be the same case for you too.

If you decide to give it go, share your results with me privately by sending an email to luis@conferencebadge.com or post them in the comments.

Thanks for reading.

Conference Badge

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