2.10.2021

Should Your Store Offer Free Shipping?

Written by Austin Chegini

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Picture this: You’ve finally found the best deal for that much-needed product. After spending hours reading product reviews and comparing prices on various websites, you add it to your cart and checkout. But all of a sudden, you see an additional shipping fee. 

What do you do? Do you finish the transaction? Do you feel like the company misled you? 

No matter where you shop online these days, free shipping is often expected. However, does it ever make sense not to offer free shipping?

When did free shipping become the norm? 

Over 20 years ago, Amazon was taking the internet by storm and quickly growing in popularity. During the holiday shopping seasons of 2000 and 2001, the company offered free shipping on purchases over $99.

However, they found this model to be too restrictive and slowly began offering free shipping to smaller cart values throughout 2002. Eventually, $25 was all one needed to spend to get Amazon’s “Free Super Saver Shipping.”

As the hype of Amazon began to build, other online retailers began following suit. They had to offer free or low-cost shipping to stay competitive.

In 2008, internet entrepreneur Luke Knowles started the national holiday “Free Shipping Day.” By 2009, some media outlets stated free shipping was becoming the norm since so many stores had adopted the model.

Despite all this, many companies still charge for shipping to this day. 

How does the free delivery model work?

First, a store can only offer free shipping if it leads to increased revenue or profit. 

This often occurs through one of two approaches:

  • Revenue per item: A retailer can markup an item high enough to cover the individual shipping costs of that product.
  • Revenue by volume: A retailer can apply a low or no markup in return for increased sales as a whole. The increased sales volume will generate enough revenue to cover the shipping costs.

Additionally, a store will typically offer free shipping via one of these methods.

In-store fulfillment

Employees package and ship all goods from the store or warehouse. Often, this form of shipping is the easiest to offer, but it can come at higher costs. Businesses must pay for labor, packaging, and postage, which can quickly add up. 

Also, in-store fulfillment can take up a large amount of space. First, employees need an area to store supplies, such as boxes, tape, and labels. Next, they need a workspace to prepare items. Lastly, there needs to be a storeroom for ready to ship products.

On a good note, platforms like Shopify and BigCommerce make this model easy. The services will automatically collect customer data and can integrate with applications to generate postage labels.

Third-party fulfillment

Some retailers have such a high volume of online sales that they cannot handle packing and shipping on their own. Likewise, some other stores do not have the space to prepare their orders.

In cases like these, companies can ship products in bulk to a third-party fulfillment center. These warehouses will store their goods until an item is sold online. Then, the third-party will add the shipping label and handle delivery on behalf of the store. 

This service often comes at a higher cost, but the improvement in efficiency and reduced labor demands can increase the overall profit potential of the store. 

Dropshipping

Many online retailers never handle the actual product. Thanks to dropshipping, an online store can list any product on behalf of a manufacturer or distributor. The supplier might charge $10 for an item, but the store could mark it up as high as they please.

Once a customer pays for the product, the store purchases it from the supplier. The supplier is then responsible for shipping the product. 

Reasons to offer free shipping

Aside from being expected from customers, free shipping has some benefits that can improve your bottom line. Let’s see some of the advantages of providing free shipping.

Open new revenue streams

Many retailers sell predominantly through their brick and mortar locations, but this model is proving to be risky. Online shopping has already stolen considerable market share from these stores, and unexpected issues like the Coronavirus pandemic have completely shut down many of these businesses. 

Offering free shipping is an excellent way to grow an e-commerce brand and generate sales quickly. Your store might see reduced profit because of the shipping cost, but you will be building up your customer base. 

As more people learn about and buy from your online store, you can remarket to them and generate recurring revenue. Over time, this will result in a booming website with steady order volume. 

Boosting customer loyalty

Shoppers have endless options online, but they still enjoy returning to their favorite sites for routine purchases. Why is that?

Aside from convenience, customers tend to be loyal to stores that value them and reward their shopping. Free shipping is an excellent perk that customers interpret as a small perk to shopping with you. This is especially true if you use a model that requires the customer to purchase a certain amount to get free shipping. 

Likewise, you can implement a loyalty program and only offer free shipping to members. This program can be free to join, so you will still foot the bill for postage. However, you can then continue marketing to customers and increase their lifetime value.

Raise Average Order Value

When customers know they get free shipping, they will not be worried about sticker shock at checkout. They know the prices they see are pretty much the total before taxes. This peace of mind may encourage them to shop more. 

Even better, by fixing free delivery to a set cart value, you can encourage shoppers to increase their order size. Imagine a customer only wants one items, but they are $10 short of qualifying for free shipping. In this scenario, they will buy another item to qualify for the perk.

Reduce shopping cart abandonment

Nobody wants to spend a long time choosing all their products only to see a hefty shipping fee at checkout. A survey by ClutchCo found that even adding a $2.99 shipping fee to a $10 item decreased shopper interest by 34%.

When a shopper sees an additional shipping fee, they are likely to exit your website altogether. Instances of cart abandonment like this can severely impact your bottom line, so it’s essential to prevent lost sales.

Free shipping gives customers that extra confidence to finish their order. Even if you are not offering rapid delivery, a RetailMeNot survey found that customers are happier to get free shipping than pay extra for expedited delivery.

Reasons not to offer free shipping

Okay, we get it. Free shipping is all the rave and is what everyone wants, but are their downsides to this perk? 

Increases product prices

The internet lets shoppers quickly compare prices across dozes of websites. There are even browser extensions that point out which stores have the current price for a specific product. With such competition, getting the lowest possible price is often advantageous. 

You will need to factor shipping costs into your margins. This can dissuade some shoppers. However, people want peace of mind when they shop. If you make it clear that shipping is included, they will likely see the value. 

As we stated earlier, you do not want to advertise an incredibly low price only to charge the customer more at checkout.

Lowers profit margins

Eating delivery costs doesn’t work for all stores. Massive retailers like Amazon have the volume to absorb these expenses, but small businesses with low margins do not. 

Each sales needs to generate revenue (and hopefully profit) for your business. Retail profit margins are already quite low for many stores, and factoring in another expense will drop them even more. 

If you do not have the sales volume to adjust to these lower margins, you can see yourself in the red for quite some time. Before offering free shipping, crunch the numbers to see what your expected return will be. It may be wiser to only offer the perk when a customer spends a set amount of money.

Could increase return requests

Shoppers will likely buy more since shipping is included. They know they can an item back if it doesn’t fit, look right, or they simply have buyer’s remorse.

While you are not likely to see a massive increase in returns, you should prepare for some small uptick. However, this is not always a bad thing since it goes hand in hand with increased order volume. Customers will be buying more as a whole, which will bump up your bottom line. 

Likewise, your customers will have a better shopping experience if you accept returns. They will see your store as trustworthy and shopper-focused. The improvement in customer experience can lead to better long-term prospects.

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