How to offer free shipping: A guide for online sellers

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So, you’ve got your ecommerce business rolling—but now your customers are all asking you the same question: “Do you offer free shipping?”  

Well, currently—your answer might be no. Because how on earth would you even afford it? Is there a way to ship for free without putting yourself out of business? What does everyone else do? 

The good news is that there are lots of ways to set up free shipping, without giving away your entire profit margin. But before we get into that, we should probably look at the main question—do you even want to offer free shipping? It’s popular, for sure—but it doesn’t make sense for every business. 

So, let’s start by figuring out whether or not free shipping is a good idea for your specific online business.  

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Should you offer free shipping?  

A quick Google about free shipping might leave you with the impression that it’s the only possible option, regardless of what you’re selling or where you’re shipping to. Take this article by Practical Ecommerce, for instance: 

“Should you offer free shipping? The answer is yes. Consumers have come to expect free shipping for any online purchase. Merchants who don’t offer it are at a disadvantage.” 

But actually, it’s a bit more nuanced than that. For starters, research shows that free shipping encourages shoppers to “make riskier purchases” — meaning, buying things they aren’t sure they really want— and so leads to more product returns. In the field experiment, the ecommerce business that offered free shipping increased its sales volume but didn’t actually make any more money, once they factored in the returns (plus paying for shipping). 

So, this is one of those annoying “It depends” situations. Here are a few quick questions to ask yourself to help you make the decision: 

1. Are you mainly competing on price? 

There’s no such thing as a free lunch—or free shipping. Someone’s paying for it! And the rule of thumb is that, if you want to offer free shipping, you put your prices up to cover the cost. That can make sense if your market isn’t especially price-sensitive. 

If, for instance, you’re selling luxury goods—say, high-quality leather jackets, like our pals over at Barneys Originals—then your market will probably be up for paying a slightly higher price and getting “free shipping” as a nice perk. 

On the other hand, if you’re selling high-volume, low-cost products, then adding the cost of shipping into your pricing may make you look prohibitively expensive.

2. How expensive is your shipping?  

If you’re selling bulky products (or shipping internationally) it might be hard to justify free shipping. 

Shipping costs come down to:

  • The size and weight of the package
  • How far you’re sending it 
  • If you need shipping insurance (for expensive items like jewelry, for instance) 
  • How quickly customers expect to get the product. 

So, when you’re making the decision to offer free shipping, you need to start by working out your average shipping costs. It might be that only some of your inventory can be shipped for free. 

💡 Not sure how much your shipping costs are for any given product? We might be able to help you with that. Linnworks comes with a Shipping Quotes tool that can help you compare available shipping services from a range of carriers to find the cheapest option. 

Just tell us how much your packet weighs and we’ll find a quote for you from our network of major shipping carriers. No more wondering how expensive your shipping is. 

3. What is your profit margin? 

Amazon might be able to afford to lose money on free shipping, but the rest of us would quite like to make a profit on our sales, thank you very much. 

(In fact, even Amazon is dialing back its commitment to free shipping, raising the minimum threshold for free Prime shipping in its online grocery business and putting up the cost of Prime early last year.) 

So, to decide whether or not to offer free shipping, consider your average profit margin. If you’re mostly selling low-margin products (especially if they’re bulky or hard to ship, such as large electronics) then free shipping is probably not your best bet. If you’re selling high-margin products (especially if they’re easy to ship)  then it could make good sense for your business. 

Here’s our handy guide to calculating your profit percentage, if you need any help with that.

4. What are your return rates? 

As we saw earlier, there’s a good chance that offering free shipping will increase your return rates. So, if they’re already high (if you sell clothes or shoes, for example), then you’ll have to run some numbers to see what an increase will do to your profits. 

On the other hand, if your return rates are pretty low, then you don’t need to worry as much. 

How can you afford to offer free shipping? 

Let’s say you’ve decided that you do want to go ahead and offer free shipping: 

  • You’re in a market where your customers expect it. 
  • Your products aren’t too bulky or expensive to ship. 
  • You’ve got a decent profit margin and think you can afford it. 
  • Your current return rates are fairly low.

You still need to work out a way to make it worth your while. Here are some ideas for making free shipping more affordable:  

Bake it into your prices 

Free shipping is, after all, a marketing gimmick. It draws on a funny little cognitive trap that we human beings tend to fall into—the zero price effect.  

Basically, the zero price effect means that things which are free are disproportionately appealing to us. So, a price of $15 and free shipping is more appealing than a price of $10 plus $5 shipping, because we give extra weight to something being completely free. 

It’s the same principle which explains why many people will stand in line for an hour to get a free ice cream (worth $1 tops.) 

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That’s why the typical approach to free shipping is to put up your prices, to accommodate the shipping costs. 

However, that only works if your new price still makes sense. If you’re selling products for $5 that cost $6 to ship, your new price of $11 might make your products look too expensive, thus working against the main goal of free shipping—to increase the number and value of your orders. 

If that’s the case, then you could try one of the following alternatives. 

Set a minimum threshold for free shipping  

You don’t have to offer free shipping on everything. Instead, you can use it as a tool to get people to spend more on each order, by setting a minimum order value to qualify for free shipping. 

⚠️ Bear in mind here that, if you do decide to offer free shipping for a minimum order value, it could mean that people order more products at any given time—meaning that your average shipping costs will also go up. 

How to calculate your minimum threshold for free shipping 

Some quick back-of-the-envelope calculations for you to play around with: 

  1. Find out your average order value (AOV). That’s just your revenue divide by your number of orders. Let’s say most people spend $50 when they buy from you.  
  2. Find out your average shipping costs. You can use a shipping calculator to do this. (Here’s UPS’s, for example.) Let’s say that it works out at an average of $8 on shipping. 
  3. Find your gross profit margin ((Total sales – total production cost)/Total sales). So, if your total sales are $50,000 and it costs you $20,000 to make your products, then your gross profit margin is (50,000-20,000/50,000=0.6, or 60% gross profit margin.) 
  4. Give your best guess for a Minimum Cart Value (for example, $40). 
  5. Subtract your proposed Minimum Cart Value from your AOV ($50-$40=$10). 
  6. Multiply that number by your gross profit margin ($10*0.6=$6). 
  7. Deduct that number from your average shipping cost ($8-6=$2) 
  8. That’s the number that you’ll end up paying for shipping on qualifying orders. See if it makes sense and that will help you confirm if you’ve found the right threshold. If it doesn’t, repeat the process with a different minimum cart value. 

Set other restrictions 

Instead of using a minimum order value as a qualifier for free shipping, you can also offer it:

  • Only on certain items 
  • Only to specific locations 
  • Only on returns 

Use it to increase your order value or frequency 

Set up your free shipping offer as a bonus to incentivize more purchases. Some techniques here: 

  • Offer free shipping to first-time customers 
  • Offer limited-time-only free shipping 
  • Offer in exchange for signing up to a marketing newsletter 

Reduce your shipping costs 

Of course, the less you pay for shipping, the lower the impact of forking out for it. Here are some ways to bring those costs down: 

  • Shop around. For instance, if you use Linnworks, you get access to our shipping network of 70+ providers, including UPS, DHL, FedEx and many more. That way, you can compare services with just a few clicks to find the cheapest real-time rate for your orders. 
  • Make friends. If you treat your shipping carrier as a partner and then demonstrate your reliable payment history and shipping volumes, they may be open to negotiating a better rate for you. 
  • Get help. A third-party logistics (3PL) provider can use their market knowledge to negotiate better rates for you. Plus, you can connect Linnworks with your 3PL to manage your orders, inventory, shipping and returns on the same platform. 

Want more tips on cutting shipping costs? Check out our comprehensive guide to better shipping rates

Split the cost with your customers 

If free shipping isn’t the right fit, you might want to consider splitting the cost of shipping with your customers instead. 

For example, instead of offering flat free shipping for all purchases, researchers in Taiwan experimented with offering free shipping past a minimum threshold, coupled with partially-subsidized shipping fees for orders that didn’t meet the minimum value. In their experiment, the ecommerce platform increased sales by roughly 9%. 

Need to get your shipping under control? Linnworks can help 

Linnworks is an inventory management platform. By which we mean that you can manage everything from your sales channels to your product listings to your stock to your shipping in the same place. 

When it comes to shipping management, we’ll help you: 

  • Save time and avoid shipping errors with automated shipping workflows
  • Get your orders shipped quicker, so your customers will love you
  • Create routing rules, so your orders always ship from the nearest warehouse or 3PL
  • Compare shipping services so you can find the cheapest carrier  

Book a demo and see how much easier your shipping could be.

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