Free shipping is a common practice that, for many e-commerce businesses, is almost there just as a default. "It should be like that" or "We need to have that to be attractive." However, offering free shipping without a threshold can significantly impact a business's profitability. This is likely to happen for companies with a lot of variation in basket size between customers, even more so if the e-commerce company offers worldwide shipping.
To maintain profitability while offering free shipping you need to find the sweet spot for your threshold that balances your profit with customer expectations. In this blog, we’ll explore how to set a free shipping threshold that maximizes profitability.
Determine your profit margins
Before making any changes, you need to know your different average cost structure and profit contribution (Net Gross Profit 3) for your different types of orders. Differences to look for here are mainly between shipping providers and countries/regions since that's where you will be able to offer different free shipping thresholds. Of course, you could do this on a customer-by-customer basis, but first things first: Get the basics right.
The Order Cost formula
- COGS (your purchase price for the products based on the Net Sales, ie, excluding the orders that are returned)
- All logistics and fulfillment costs (transaction cost, packaging, picking, shipping, customs, and the cost of the returns)
- Average marketing cost per order
When you've done this, you know the average cost of an order and the minimum Average Order Value you need, as well as the minimum basket size required to break even for your different shipping providers and countries/regions.
Analyze your customer data
Knowing your customer data helps you set an appropriate threshold for free shipping. Analyze your customer data to identify the average order value. This will help you determine the minimum order value required for free shipping without decreasing your average order value. You can analyze your customer data using an analytics tool or consulting with your marketing team.
Test different thresholds
Testing different threshold values is essential for finding the perfect balance between profit margins and customer expectations. Start with a low threshold and gradually increase it while monitoring how it impacts your conversion rates, average order value, and profitability. This approach allows you to find the right balance for your business.
Communicate your threshold clearly
Once you’ve determined your threshold, communicate it clearly on your website. This ensures that customers know the free shipping policy and encourages them to take advantage of the offer. Make the threshold value visible on the shopping cart page and include it in your marketing campaigns.
Continuously monitor and adjust
Your free shipping threshold is not set in stone and can be adjusted based on customer behavior and business needs. Continuously monitor your sales data, conversion rates, and average order value to ensure your threshold is still relevant. Adjust the threshold as needed to maintain profitability while offering an attractive deal to your customers.
Conclusion
Setting a free shipping threshold is a delicate balance between profit margins and customer expectations. Determining the best threshold requires analyzing your profit margins and customer data and testing different thresholds. Clear communication of the threshold ensures that customers understand the offer and encourages them to take advantage of it. Continuously monitoring sales data and adjusting the threshold as needed helps maintain profitability while offering a valuable deal to customers. Following these steps, you can set a free shipping threshold that boosts profitability while improving the customer experience.