How to Offer Free Shipping without Going Broke

Is there really a way to offer customers free shipping without going broke?

The short answer is: it depends. There is no one-size-fits-all approach when it comes to free shipping. What works for one merchant may completely destroy the profit margins of another, and in some cases, offering your customers free shipping is simply not viable.

In this article, we're going to discuss the different aspects involved with shipping discounts, and review some of your different options.

Should You Offer Free Shipping?

Let's start with an obvious question: Should I Offer Free Shipping? A question that's just as important is: Can you offer free shipping? We'll get to that, but assuming it does in fact work for your business, let's first talk about whether or not you should offer free shipping.

It's hard to argue the significance that shipping discounts can have on e-commerce sales. Study after study has shown that higher than expected shipping and handling fees is one of the top reasons that consumers abandon shopping carts.

In December 2011, comScore released the results of a holiday survey that reported 36% of online shoppers do not make a purchase online unless free shipping is offered. Another 42% of online shoppers said that free shipping was "somewhat important," and actively sought out free shipping deals.

For years online shoppers have voiced concern over shipping costs, and retailers have been taking notice. According to the same comScore study, over half of all online holiday transactions last year included free shipping, up roughly 10% over 2010. But this increase in free shipping transactions is not just happening during the holidays. Consumers have come to expect shipping bargains year round, and retailers both large and small are beginning to meet those expectations.

You may already offer free shipping. Or you may be debating whether or not free or discounted shipping is something you can afford to offer. Simply put, free shipping doesn't work for all businesses, at least when it's truly free shipping across the board, meaning that merchants absorb 100% of the shipping and handling costs for all online purchases. But, while all-inclusive free shipping may not be an option for you, there may be ways to offer meaningful shipping deals that do work for your business.

The Benefits of Free Shipping

If you're a consumer, the benefits of free shipping are obvious. But for merchants, there are a couple of ways to look at it.

Short-Term Gains. A common rationale for offering free shipping is that it will immediately boost online sales, leading to more orders and more profits. Free shipping can also lead to larger orders, particularly when retailers set minimum thresholds.

Increased profitability, however, is not experienced by all. According to the comScore survey, while 46% of online sellers say that free shipping did increase profits, nearly one third said that it did not. With this survey, however, there was no indication of the time period respondents were looking at when drawing their conclusions. Merchants are often forced to look beyond the short-term in order to justify free shipping.

Long-Term Gains. A large chunk of online shoppers will only buy from merchants that offer free shipping, so, when it's offered, merchants should reasonably expect to acquire new customers. Beyond any profit gained in the short-term, it's important to consider repeat purchases and the overall lifetime value of those customers that you wouldn't have otherwise had if it weren't for free or discounted shipping.

Staying Competitive. Free shipping may be necessary to simply remain competitive in today's marketplace. Unfortunately for many online sellers, the sacrifices made in order to offer free shipping don't seem to result in a competitive advantage, nor do they lead to increased sales. In this business climate, free shipping merely a vehicle to level the playing field and maintain existing sales levels in the wake of more aggressive competition.

The Costs of Free Shipping

Profit margin. The biggest and most obvious cost for merchants is the loss of profit margin due to absorbed shipping expenses. The cost of shipping parcels his risen significantly over the past five years. But there are also more options that retailers have to get products into the hands of their customers, including economy shipping options which can significantly reduce delivery costs. The downsides to many of these options, however, is slower delivery times, and in some cases, a loss of order tracking.

Programming and marketing. Other costs involved with free shipping include programming and marketing expenses. Depending on your shipping offer, it may require a substantial amount of programming time by your IT team in order to make it function properly on your website. Additionally, while marketing your free shipping offer can lead to more sales, the costs involved with generating awareness of your offer should be considered, including design and advertising expenses.

Unneeded incentive. You might also consider the losses on orders from customers who would have bought from you anyway, even if you hadn't offered free shipping. This can be difficult to measure, but the more widespread the offer, the more likely it is that retailers will be unnecessarily discounting shipping and handling in certain cases.

How to Evaluate Your Shipping

In early 2011, Zappos and L.L. Bean upped the ante for retailers when they began offering no-strings-attached free shipping for all online orders. This "all free, all the time" approach to free shipping is nice for buyers, but not always an option for sellers, especially small and mid-sized retailers that may not have the negotiating power that big box stores do with wholesalers and manufacturers, and thus have slimmer margins on the products they sell.

Don't fret. You don't necessarily have to offer free shipping on everything in order to increase sales or become more competitive. Before we discuss some alternative options, here are a few important considerations:

1. Consider Your Margins. Your profit margins will be an important consideration when it comes to the type and level of discounted shipping you can offer your customers. In all likelihood, your margins vary by product, which can also play a role.
2. Consider Your Products. Beyond margin, consider the size and weight of your products. Larger, heavier items are more expensive to ship, which is the reason many retailers have certain restrictions with their free shipping offers.
3. Consider Your Orders. A common goal among sellers is to increase average order value by offering free shipping with certain thresholds. For example, if your average order value is $50, you may decide to test free shipping on orders that are a bit higher, such as $60.
4. Consider Your Customers. Where are your customers located? Do you ship internationally, or have customers in Alaska or Hawaii? If so, you'll have to absorb more costs with shipping to these locations, which is why many retailers will exclude all areas outside of the contiguous United States with their free shipping.

10 Ways You Can Offer Free Shipping

Here are 10 commonly-used ways to offer your customer free shipping.

1. Free Shipping on Everything. Some retailers offer free shipping on all orders, regardless of the items included or the order value. This is generally more viable for retailers with smaller, lighter weight products. In this case, it is still common for retailers to have stipulations relative to delivery method and destination. For instance, ground delivery might be required, and only within the contiguous U.S.
2. Free Shipping with Minimum Thresholds. Compared to free shipping on everything, this is a much more common and realistic tactic for retailers. Setting minimum order value thresholds is a way to encourage larger orders and reduce risk.
3. Free Shipping on Certain Items. It's common for retailers to offer free shipping only on certain items, those for which their margin is greater, and they're able to more easily absorb the shipping cost. Rather than only choosing high-margin items, which may include a range of SKUs from a variety of product categories, you may want to make some exceptions for lower-margin items so that your offer can be more easily communicated to your customers.
4. Free Shipping at Certain Times of the Year. Many retailers choose to offer free shipping periodically, rather than all year round, and some will only offer it during the holidays when their competition is more aggressive and when consumer expectations for free shipping are at a peak. Depending on your products, it is also a good idea to test free shipping offers at other times of the year, such as Valentine's Day and Mother's Day.
5. Free Shipping to Certain Locations. As mentioned, many sellers offer free shipping only to buyers in the contiguous U.S. Taking it a step further, many larger retailers are now offering "free ship to store," where consumers can pick up merchandise at their local brick and mortar store, a tactic that can lead to in-store purchases as well.
6. Member Programs. An increasingly popular method among retailers is to offer a fee-based member program, in which merchants charge customers an annual fee in exchange for free shipping on some or all items.
7. Loyalty Programs. Some retailers provide extra incentive to encourage repeat purchases, such as offering free shipping to their most loyal customers. This can be a great way to experience the longer-term gains of free shipping by increasing the lifetime value of your customers.
8. Bake Shipping Fees into Product Price. Okay, so this isn't really free shipping. Nevertheless, many online sellers will add the cost of shipping into the product price so that can promote a "free shipping" offer. While some shoppers will catch on, this can be an effective way to, at a minimum, generate more traffic to your website, and likely get some increased sales from it as well.
9. Free Shipping on Returns. If you're an apparel or footwear retailer, this one is particularly appealing for buyers. And if you have a high rate of returns, offering free shipping on those returns should be considered and tested, as it's very common and expected for many items.
10. Flat-Rate Shipping. This is another one that really isn't free, but by offering flat-rate shipping, you will encourage larger orders, and in many cases your customers will pay less for shipping than they would have otherwise. A downside, however, is that it can discourage small orders and become a barrier to those that simply want to buy small items or quantities.

Testing different offers is key to finding the most profitable free shipping strategy for your business. It is also important to first look at areas where expenses can be cut. For example, if you currently handle fulfillment in house, you may try to get a better negotiated rate from shipping carriers. You may also consider outsourced fulfillment as a way to reduce shipping costs and get closer to your customers.

These 10 methods are not the only ones to consider or test. Do your homework. Research the competition, comparison shop just as your customers would. Get creative. In an online retail world where customers have an abundance of similar choices, the right offer could make all the difference.

Stephen Bulger
http://www.wilsonweb.com/