Offering free shipping was once considered a differentiator and added benefit for customers shopping online. However, times have changed.
According to Canada Post’s 2020 Canadian E-Commerce Report, "What used to differentiate retailers from their competitors, like free shipping or fast checkout, are now necessities."
Customers are now used to free shipping and, in fact, expect it. According to the E-Commerce Report, more than three in four purchases made online by Canadians in 2018 offered free shipping.
So, if you’re not offering it to your customers already, why offer free shipping now? What are the benefits? And how can you incorporate it into your business without losing revenue?
In this article, we’ll explore:
- Three concrete benefits of free shipping;
- Seven different ways you can offer free shipping; and
- How to take advantage of each type.
Three Benefits of Free Shipping
Free shipping is used as a marketing tactic by online retailers to attract customers and convert browsers into buyers.
Here are three ways offering free shipping can help increase online sales, create customer loyalty, and increase conversion rates.
Benefit 1: Customers will choose you over another business
Keep in mind that your competitors are only a few keystrokes away. This is unlike traditional retail, where your customer has to get in their car (or other mode of transporation) and go from store to store to find the best deal.
With e-commerce, it only takes a few moments for your potential customer to find a better offer elsewhere. And nobody wants that.
Simply put, customers like free things. They often weigh free shipping as the most important criteria for whether or not they’ll shop with any given online retailer.
From a survey of more than 5,000 Canadian shoppers in the Canada 2020 E-Commerce Report, shoppers reported that free shipping is their top influencer driving their choice of online retailer, making them 80% more likely to shop. This is nearly twice the likelihood of other factors such as free returns/exchanges or same/next-day shipping.
Benefit 2: Customers won’t abandon their carts as often
Nobody likes hidden costs. And a lack of transparency can cause customers to lose trust in a business. High shipping costs can be a nasty surprise for shoppers at checkout and may cause them to abandon their cart completely.
So, if you’re trying to convert customers, look no further than offering free shipping.
In fact, a lack of free shipping is the top reason why consumers abandon their carts. 67% of participants from the 2020 E-Commerce Report survey said they’d abandon their cart if a retailer doesn’t offer free shipping.
That doesn't mean you'll eliminate shopping cart abandonment completely, but offering free shipping has been shown to reduce it dramatically.
Tip: To be transparent and build trust with customers, even if you don’t offer free shipping on all or most orders, make your shipping policy clear from the outset. Consider adding a discreet banner at the top of your homepage like, "$5.95 flat-rate ground shipping on all orders" or "Free shipping on orders of $75+."
Benefit 3: Customers will buy more from you
By offering free shipping and eating the costs, you’ll increase revenue in the long run rather than losing customers, particularly if you add a spending threshold before offering free shipping (e.g. Spend $50 and earn free shipping).
A survey from HubSpot found that 24% of customers are ready to spend more to qualify for free shipping. They would rather spend money on an additional item, something else tangible they can have, than on the hidden costs of shipping that they often get for free on other websites.
On top of that, 86% of online shoppers from the E-Commerce Report survey said they will shop more often with retailers who offer free shipping.
You can create a loyal customer base solely by offering free shipping.
Tip: Despite getting a free service, customers still expect prompt delivery. The E-Commerce Report survey showed that Canadian consumers expect free deliveries to arrive in five days or less. If this delivery window isn’t something you can currently offer, consider finding ways to reduce your shipping lead time.
Seven Types of Free Shipping (And How to Offer Them)
Now that you know the benefits of free shipping, here are 7 different ways you can offer free shipping, when it might be most appropriate, and how to make it work for you.
Offer 1: Free shipping on every purchase
One of the simplest and most hands-off ways of offering free shipping is by offering it on all purchases year-round, regardless of the order total.
If the items you sell online are small and light and your shipping costs are low, this may be a good option for you.
However, while free shipping on every order is an attractive option for customers, this could quickly affect your bottom line if you’re not careful. You could offset the shipping expenses by factoring the costs into your prices, while making sure this doesn’t raise your prices well above those of your competitors.
One other factor to consider is if offering free shipping improves the conversion rate on your paid advertising campaigns enough to create enough of a marketing savings to cover the shipping.
For example, if your cost to acquire a new customer is $200 and you normally charge an average of $20 for shipping, a 10% improvement in your campaign performance would equate to $20 per order savings in marketing spend. That would - basically - pay for the free shipping you are providing. The actual calculations are a bit more complex than that, but it's something to consider.
You could also test this method by offering free shipping on all orders for a certain period of time, like for a month or a few weeks. Then, track how key metrics such as conversion rate and AOV (average order value) compare to previous months or weeks to make a data-driven decision moving forward.
Offer 2: Free shipping on certain items only
If you sell a wide variety of products on your e-commerce site, offering free shipping on certain items could provide incentive for your customers to buy without incurring too much in the way of additional shipping costs for your business.
For example, if you’re a clothing retailer who sells items like jewelry or other accessories, you could offer free shipping on these low-cost items to ship.
Or you could look at your product margins and offer free shipping in the places where you can afford to absorb that expense but charge for shipping on products where your margins are too tight.
Offer 3: Free shipping over a spending threshold
One of the most popular ways of offering free shipping is by offering it once the customer reaches a certain spending threshold before taxes. As we learned earlier, a good number of customers are willing to buy more if it means qualifying for free shipping.
But what threshold should you set? $50? $100? The amount to guarantee a certain investment from the consumer will depend on your business, your products and your customers.
A simple formula that you can use to calculate your initial free shipping threshold is to take your current average order value, your average shipping cost, as well as your product margin and combine them to create your free shipping threshold.
For example, if your current AOV is $60, your average shipping cost is $7.50, and your margin is 50% your formula would look like this:
AOV + (Average Shipping Cost/Margin)
In the example above, $75.00 would become your target threshold. That way, the cost of shipping is absorbed by the additional revenue generated because of that threshold.
You will have some customers who will quality for free shipping on purchases they were going to make anyway, some customers who won’t qualify, and some customers who will add more to their cart in order to achieve free shipping.
And, more often than not, the process of increasing the cart to go above the free shipping threshold takes them WELL above the free shipping threshold.
If you’re unsure of where to set your threshold with the metrics that you have, you could try an A/B test. This would involve offering different customers different free shipping thresholds through a form of advertising like a website banner or email coupon.
You can then see which threshold performs best. If you use a platform like Shopify, you could use a Shopify app to conduct these tests.
If your average order value increases to $75, then these additional items sold pay for the free shipping you offer, and the increased conversion rate, customer lifetime value, and more turn into additional profits.
Offer 4: Free shipping at certain times of year only
Free shipping alone may not be enough to convert a customer if they’re not ready to buy. Therefore, if you can’t afford to offer free shipping year-round, capturing customers by offering free shipping when they’re already in a buying mode may be your best bet.
For example, most consumers are in buying mode at Christmastime—it’s not a matter of if, but where and when they’ll buy. Offering free shipping during the holiday season when competition is high can ensure customers pick you over another business.
Or, let’s say your business sells flowers online. With peak sales likely occurring during holidays such as Valentine’s Day or Mother’s Day, offering free shipping in the days or weeks leading up to these holidays may be the perfect time to up your conversion rate.
Offer 5: Free shipping for members only
If your customers purchase from you frequently, you may wish to offer a premium membership program with different perks to your loyal customers at a flat monthly or annual rate. Perks could include free shipping or other upgraded shipping shipping options.
Consider Amazon Prime—according to a survey by RBC Capital Markets, nearly 80% of respondents reported signing up for the service because of its free two-day shipping.
Adding a paid membership program to your e-commerce business could not only offset the costs of offering free shipping, but it could help generate additional sales and develop a loyal customer base.
Offer 6: Free shipping on returns
Customers don’t like to assume any risks when purchasing products online, so knowing they’ll have to pay extra just to return a product and get their money back is a turn-off.
Offering customers free shipping on returns, advertising this at checkout and including a prepaid return label in their package can give them peace of mind when placing their orders with you.
Offer 7: Free shipping to a store location
It’s possible that, even after considering all these different methods of incorporating free shipping, it’s completely off the table for you in the current stage of your business.
If this is the case, allowing customers the option to order online and pick their items up at a brick-and-mortar store location instead could be a good stopgap measure until you’re able to establish free shipping to customers’ homes.
This could also generate business in your brick-and-mortar location, too! This gives you an opportunity to meet your online customer and build a stronger relationship with them.
Start Offering Free Shipping
Based on the market research, it’s clear that offering free shipping is something you shouldn’t delay on offering.
Now that you’ve learned about the different types of free shipping you can offer your customers and how to incorporate it into your business without incurring too many costs, you may already have an idea of what might work best for your business.
If you’re still unsure of which option might work best for you or how to incorporate it into your e-commerce business, contact us at Marketplace Solutions on how we can help you best incorporate free shipping into your Shopify platform.