Fast & Free: How to Price (or “Unprice”) E-Commerce Shipping to Perfection
According to the zero price effect, traditional cost-benefit models cannot account for the psychological effect of getting something for free. “Free goods have extra pulling power.” ( source)
A store could be offering a free ice cream cone or even a free sticker worth less than a penny. Regardless, there we are waiting patiently, grinning ear-to-ear for the opportunity to get something for nothing.
There’s no better example in e-commerce than “free shipping.”
Let’s discuss the arguments for and against providing free shipping from an e-commerce merchant’s perspective.
Shoppers hate add-on fees, and speed matters
According to recent research by The Baymard Institute and shared by Shopify, the #1 reason why shoppers abandon checkout is because “extra costs [like shipping and taxes] were too high,” accounting for 55% of total cart abandonment.
A 2021 global consumer insights survey conducted by PWC showed “fast/reliable delivery” as consumers’ #1 overall consideration when shopping online (ranked top three by 41% of respondents), beating out eleven others, including “in-stock availability of items I want (35%),” “ability to quickly and conveniently navigate the website to find products I’m interested in (30%),” “availability of online customer reviews (26%),” and “a good return policy (31%).”
Want to reduce cart abandonment (and increase conversions) for your online shop? The research is clear: offer your customers fast order fulfillment, and don’t charge them for it.
Despite the body of evidence, many e-tailers remain skeptical about the merits of offering “fast and free” delivery, with “erosion to profit margins” being among the most common reasons given.
There’s a cost to “free” shipping
While free shipping is a proven way to get customers to buy from you, providing it isn’t exactly “free” for retailers.
E-commerce shipping can sometimes be a very significant expense for retailers, particularly when it comes to expedited deliveries ( learn how Ohi keeps fulfillment costs low for sub 2-hour, same-day, and next-day delivery) or heavier/bulkier goods.
But what if you can generate ROI from offering “fast and free” delivery? Might there be a scenario where you’d want to eat free shipping costs in order to reduce cart abandonment (or increase conversions) and even increase customer satisfaction (i.e. through a better and faster delivery experience), leading to improved customer lifetime value?
To understand that scenario better, we need to first establish the ROI of fast shipping (or what Ohi calls “instant delivery”).
The ROI of instant delivery
Previous research from Ohi (based on actual anonymized client data) demonstrated a substantial boost to repeat purchase rates and customer lifetime value (CLV) for customers whose orders were delivered in less than two hours (via Ohi 2-hour instant delivery) versus those whose orders were fulfilled with standard UPS/FedEx 3–5 day ground.
Because immediacy and convenience are so valuable, instant delivery helps merchants grow in a major way.
BUT (and this is a big “BUT”) — it can only do that if customers select instant delivery at checkout. And therein lies the rub.
Brands that charge for instant delivery consequently have fewer customers choose instant delivery at checkout-thereby forgoing the retention/growth boosts they would have otherwise enjoyed.
Does it make sense to charge for instant delivery?
New research from Ohi shows that Ohi-enabled merchants that price instant delivery either (1) free, (2) free above an order amount threshold, or (3) in line with their standard shipping, have instant delivery picked five times more often than when instant delivery is priced higher than standard shipping (e.g. 3–5 day ground).
What’s more, merchants that (1), priced instant delivery this way (i.e. free, free above a threshold, or in line with standard shipping), and (2), had been optimized* on the Ohi platform, saw on average a 26% increase to repeat purchase rate (when orders shipped via Ohi 2-hour/same-day/next-day instant delivery vs. standard delivery), while those that priced instant delivery higher than standard shipping saw no improvement in repeat purchase rate.
When you consider how cost-effective instant delivery can be for many brands (e.g. learn how Greater Than saves 20% with instant delivery versus standard ground shipping), it’s not hard to see that charging more for instant delivery is counterproductive to increasing profits.
If this loss in potential ROI from not getting selected in checkout and the cart abandonment mentioned earlier aren’t enough to dissuade you from marking up e-commerce delivery, consider this piece of research: when retailers charge a high shipping fee relative to product price, shoppers believed retailers did so to earn additional profit (rather than simply to pass shipping costs on to the customer). It’s not a great look for any brand that aspires to be customer-first.
The overall implication here is that brands should strongly consider offering “fast and free” e-commerce delivery, allowing more customers to enjoy the best customer experience and setting the stage for increased retention and business growth.
How to offer free shipping
Now that we’ve established that “fast and free” shipping is great for conversions, amazing for customer retention, and can more than pay for itself, here are some pointers on how to make free shipping work for your brand.
- Streamline the number of shipping options you offer in checkout to prevent choice paralysis and to ensure your customers easily find the option that’s best for them
- If margin is a concern, consider including your average shipping cost as part of the product price, especially if you primarily sell DTC or if you are selling hard-to-find or highly unique products. This allows you to benefit from the “zero price effect” with free shipping and avoid preventable cart abandonment. Plus, your customers may not “feel” the additional dollars as much when they’re baked into the product pricing.
- Free shipping with order minimums: If you’re concerned about losing money by giving away free shipping for low-value orders, you can simply set an order minimum for free shipping. Free shipping above a basket threshold can serve as a powerful incentive for customers to buy more from you, while protecting your bottom line.
- Promote free shipping. (“If a tree falls in the forest…”, etc.) If the goal is to maximize sales, you need to be committed to letting shoppers know you offer free/”fast and free” delivery. A few common places to highlight this: website ticker (a horizontal announcement bar at the top or bottom of the screen), homepage leaderboard or box banner, product page (near add-to-cart button), in checkout, marketing emails/SMS, on social posts, and in paid advertisements.
At Ohi, we’ve flipped the script for e-commerce fulfillment, transforming it from what is traditionally seen as a cost center into a growth engine. Brands join the Ohi platform to deliver powerfully fast, brand-focused, and memorable post-purchase experiences that enable them to grow. Want to learn more about how Ohi enables instant commerce? Get in touch today.
*Merchants “optimized on the Ohi platform” are those with at least 200 orders shipped via Ohi instant delivery in the last 30 days and an efficiency rate greater than 30%. Efficiency rate is the percentage of Ohi clients’ orders within Ohi’s serviceable zips that Ohi does fulfill.
Originally published at https://ohi.com on August 30, 2022.
