Can You Afford to Offer Free Shipping With a Threshold?

Tuesday, January 29th, 2013
3 Flares 3 Flares ×

It’s no secret that consumers love free shipping. Numerous recent studies * have reported that customers cite free shipping as the top incentive that motivates them to make a purchase.  While most merchants would love to offer free shipping as well, the fact is free shipping isn’t truly free!  One of the ways to try free shipping in your store is to offer free ground shipping with an order upon meeting a dollar threshold.  This type of incentive is particularly attractive because it typically also increases the average amount spent per order, which is the easiest way to increase your overall sales.  But where do you set your threshold?  Here’s a super simple formula to help guide you in creating your store’s threshold wisely. CartMessageImage (2)

Take the following example:
Average order amount (without shipping) = $108

Average ground shipping cost = $8

Profit margin = 35% (profit $37.80 – customer pays $8 shipping – their total amount paid is $116)

We need to figure out the dollar amount by which your average transactions need to increase in order to cover the cost you would pay for shipping.

(X) * (.35) = $8

X = $8 / .35

$8 /.35 = $22.86
$108 + $22.86 = $130.86 (profit $45.80 – you pay the $8, your profit is still $37.80)

Thus, by setting the threshold at $130.86, customers will need to increase revenue by $22.86 per order over your average order in order to reach the free ground shipping incentive. This yields an increase in profits just sufficient to cover the free shipping offer.

However, note that this is just your break-even point, in which your profits are unaffected by the promotion.  Since free shipping is such a powerful incentive, it’s likely that both your order volume and average transaction amount will increase.
Other important tips to making your free shipping promotion a success:

  1. Use a whole number. In the above example, round up and maybe choose $135 or $140 to cover the cost of the other items in the cart and raise profits.
  2. Exclude items and locations that would kill your margins. For example, you might exclude heavy or large items which are more expensive to ship than your average items, and certain international shipping locations.
  3. Share your promotion. Spread the news on social media channels, send emails to your customer database, add eye-catching graphics to your category header, top menu banner, or above the fold in your side bars. Remember that customers don’t always enter your site at your homepage or storefront, so the promotional message needs to be carried out throughout your website.
  4. Add a dynamic, attention grabbing message in their shopping cart. Let customers who are in a shopping session know when they are approaching threshold. Nexternal clients can use the built in dynamic cart messaging feature in Settings / Policies, Addenda, and Disclaimers / Cart Addendum. Replacement Keywords are available for use with the Cart Addendum, causing the term to be replaced with its corresponding value as appropriate.

Keep in mind when using the formulas in this article that you need to replace the parameters with values derived from your business.  Free shipping is a great motivator and order thresholds will increase your average order size.

Lanette Willis is a Senior Account Manager at Nexternal. Before joining Nexternal she spent nearly a decade working in market research and professional services marketing, before running her own successful eCommerce apparel business. Lanette is passionate about helping people and businesses thrive.