The bigwigs at Amazon play by different rules than you or any other small online business does. As a matter of fact, forget the little guy. Conglomerates and corporations alike have difficulty keeping pace with customer expectations.
Here’s the thing: Amazon can go all out on the sort of e-commerce shipping strategies that see prices drop too low for the conventional math to apply. It’s a dangerous line to walk, especially for smaller e-commerce businesses.
One way that they’ve set the bar very high and the prices low is with its shipping costs and delivery speed. In the real world, the company’s deep-pocketed approach isn’t sustainable, though. It’s held in place by world-beating client acquisition. Put simply, they get customers because their shipping platform is more attractive to online shoppers than the competition’s.
For most business owners, it’s scarcely profitable to offer free shipping. It’s also not easy to make the math work on an operation like that. Making money on free shipping isn’t impossible, though, as this blog post will show.
If you think of free shipping as the product you’re offering to entice customers but find that it’s too expensive to implement, you can offer only some aspects of a free shipping policy. Here are examples of how some online businesses offset the cost of shipping:
I’ll be honest. This one isn’t going to net you any glowing customer satisfaction reports because it’s not very enticing on its own. Still, it’s a way to trim some of the fat from transactions. Plus, it's an easy place to start.
By offering free shipping on returns only, customers receive assurance that any mistakes or misunderstandings won’t happen on their dime. This shipping strategy will win some folks over. Plus, combined with other means of tightening things up, it’s a good way to offer a comprehensive returns policy.
That said, it might be an easier way to make your eCommerce shipping options more attractive, but fewer retailers are using this strategy. According to the State of Shipping Report 2024, less than 20% of retailers now offer free return shipping.
And, it's not just because they don't want to carry the costs of shipping. While it's a generous offer, it's not one of the most sustainable shipping practices. A study completed by Optoro, a reverse logistics company, reveals that returns can add over 8 billion pounds of extra waste to the landfill each year.
If you want to go ahead and offer free returns, you can check out Lulus for an example of how to incorporate this strategy. It promotes its shipping strategy at the top of the home page. Placing such key info above the fold is a great idea as shoppers will know what to expect as soon as they enter the website.
This one is ancient. If an item costs $10 and a shipping carrier charges $5, it’s possible to offer free shipping on that item by selling it for $15. This is a dangerous game to play, though.
Packing shipping costs into the product prices makes an online store less attractive at a glance. Online shoppers who like to shop around for deals and competitive rates probably won’t bite.
Another way to incentivize modern customers to convert is by offering free shipping to members only. This approach ensures buyers with high expectations can get what they need from a platform, which is ideal for client acquisition and retention. It also ensures you have some friendlier margins elsewhere on the balance sheet because most customers will still cover the carrier rates in full.
For example, Target successfully uses this approach by offering the Target Circle™ Card. In addition to exclusive offers and discounts, cardholders also receive free shipping.
There’s a behind-the-scenes calculation on whether or not money is still in the pipeline on an order with free shipping. If there is, the service is offered.
If charging the full price is the only way to avoid getting beat up on the balance sheet, free shipping is off the table. With this policy, you’re only offering free shipping on items you can afford to ship for free. It’s as close to a zero-sum game as you can play on the margins.
A shipping threshold is, at first glance, a business ploy that should’ve been doomed to obscurity the moment it was coined. Like a commercial for a sports car featuring zero information or imagery about the car that somehow gets viewers thinking about the brand, a shipping threshold is counterintuitive.
It seems like it couldn’t possibly work. However, it does, making it one of the most popular and effective shipping strategies. Who hasn't added an extra item to their cart to meet one in the past?
To better understand it, take your mind to the brick-and-mortar world for a second and consider small-time groceries and corner stores. With so many low-cost items for sale, their margins aren’t always great.
Gasoline is a good business to be in. However, for the sake of this example, let's narrow the focus to countertop purchases like chewing gum or, say, an air freshener for the rearview mirror.
As a cash purchase, things even out. Some folks use their credit cards for everything, though, and there are extra costs involved when you accept credit cards. In other words, you may lose money ringing up that stick of gum and charging it to a customer’s card.
Enter thresholds.
The solution our corner store clerk needs is a purchase threshold for credit cards. In order to use their cards, customers have to spend a set amount of money that makes the transaction worth it for the store.
For an eCommerce business, this takes the form of restricting free shipping to orders where customers spend enough money to guarantee a profit.
You’ll be amazed how a message prompting a customer to meet a shipping quota is effective. A call to action as simple as, “Spend an additional $63 to qualify for free shipping on your entire order” works well.
Over the years, the thresholds for free shipping have changed significantly. The State of Shipping Report 2024 shares that the average spend required to quality for free shipping has risen by 20%. So, if you're going this route, remember to do some research and adjust your threshold regularly.
Flat-rate shipping can be the break that online sellers (and shoppers) need. In fact, the number of retailers that offer flat-rate standard shipping have increased by a whopping 1,571%!
Major freight carriers like UPS, FedEx, USPS, and Canada Post offer flat rates based on package weight and dimensional weight. Under this umbrella, you can easily calculate the shipping threshold and save heaps on inventory management and avoid having to work with logistics companies.
Using this model, you convert your variable costs into static ones allowing you to better plan and execute changes. It’s easy to draw a line in the sand regarding which items can ship for free.
Moving to a flat-rate shipping system can be beneficial as long as you’re eyeing costs and packing your boxes tight and flat.
Elise Dopson recommends in her Shopify blog post that the best strategy for deciding what to charge customers is to calculate your average cost for shipping. Then, to make it user-friendly, round up the number. For instance, if it works out to $10.57, it will be $11.
As you'll be using this average, it means that in some instances the actual shipping fee could be higher in which case you'll have to swallow a slight loss. In other cases, the shipping expenses will be less in which case you'll even turn a small profit on shipping prices. At the end of the day, if you've done your cost calculations correctly it will basically cancel out and you'll make enough money to cover the basic shipping cost.
It's worth noting here that it's also a good time to re-evaluate your packaging materials. Sure, you need to get the products to customers in one piece. That's always the first priority.
However, excessive packaging can have a huge negative environmental impact and hurt your profit margins too. Use special packaging for breakable items, but for low-value items that aren't fragile look for more affordable options.
Then, like with thresholds, remember to adjust them regularly. The most expensive flat-rate options have increased by 200%.
Also, even when you're charging a standard rate there are still ways that you can set yourself apart from your competitors. The State of Shipping Report highlights that increasingly more retailers are throwing in benefits like free shipping insurance and guaranteed delivery times. After all, impressive shipping speeds fly out the window if customers are regularly receiving alerts about delivery problems.
While the speed of delivery is one of the main criteria used to rank the effectiveness of shipping, determining if your eCommerce shipping strategy is cost-effective takes time. It can’t really be expedited. You won’t see your returns the same day.
Turning a profit on free shipping is a balancing act that requires time, patience, and practice to master. Often, businesses don’t practice enough.
I know it’s cliched, but when it comes to setting margins on shipping, practice indeed makes perfect.
Too often online businesses try free shipping. Then, when they see no immediate returns, they ship the idea.
There’s no one-size-fits-all business model when it comes to offering free shipping. The truth is that everyone does it a little bit differently and that’s by design.
It’s not an inherently friendly or easy business model to implement. It’s not a snap-on tool meant to transform businesses overnight.
Free shipping takes a tremendous amount of gumption to pull off. This includes testing.
One of the best ways to get the ball rolling here would be to take a look at fulfillment partners. The more of them there are, and the more spread out they are, the closer your network is to your customers, and the more streamlined the entire shipping process becomes.
Prospective buyers in the South can enjoy free or low-cost shipping if there’s a fulfillment center open in Dallas. New Yorkers can expect the same luxury if your shipping network includes a facility tucked away upstate. This optimism isn’t feasible without spreading the business out and establishing touchpoints as geographically close as possible to your customers.
Not only does network optimization knock the math of free shipping into considerably less insane territory, it’s also essential for establishing the quality of service required to compete.
