Should You Offer Free Shipping?

by | May 19, 2020

3 min read

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There’s a lot that goes into your pricing strategy, and many shippers don’t take the true cost of shipping into account. It’s important to understand it clearly, however, to help you choose the best shipping options to offer your customers.

(Hint: It starts by knowing your shipping data inside and out.)

Shocker: We all like free shipping!

These days, consumers expect free shipping. In 2019, the National Retail Federation found that 75 percent of consumers surveyed expect delivery to be free even on orders under $50, up from 68 percent the year before.

Many studies have tried to understand why shoppers value free shipping so much, and the consensus seems to be that paying for shipping just doesn’t sit right with consumers — it makes them feel nickeled-and-dimed.

All that being said, you won’t be in business for long if you’re losing money on every sale because of your free shipping policy. You need to get your prices right.

How do I know if I can offer free shipping?

You likely know that your Cost of Goods Sold (COGS) should include your shipping costs, along with many other factors. A good place to start figuring things out is by calculating your average shipping cost per package.

But take care that you’ve calculated your true average shipping cost per package — it’s easy to get wrong. We worked with a customer that was using their average base cost to calculate their COGS because it was so difficult to find the total cost among all their invoices and statements. They swore they were maybe off by just pennies.

But after a closer look at their data, they weren’t accounting for surcharges and fuel costs. They were actually paying an average cost per package that was 44% higher than they thought.

As you can imagine, the impact of that miscalculation on their profit margin was huge. Take steps to avoid the same fate.

  • Examine your shipping data and identify surcharges like residential delivery, delivery area, and additional handling that affect your costs. Don’t rely on base package costs.
  • Once you’ve got a good handle on your true average shipping cost per package, determine if your retail cost supports it. If not, consider cutting costs from other areas that contribute to retail prices.
  • If there’s nowhere else to cut, determine the tipping point at which it makes financial sense — typically an order total or the number of products purchased — depending on the average price point of your products.

A word of caution, however: Studies have shown that offering free shipping can lead to increased returns. In one study, a leading online retailer periodically offered free shipping promotions over a three-year period, increasing order volumes by an average of 7.4% during those times. However, the allure of free shipping also bumped up product returns, decreasing profits by .7%.

What about free returns?

As we’ve discussed in a previous post, there’s a lot that goes into the cost of your returns and they clog the shipping network, slowing down outgoing shipments. Though it is valued by customers, only the largest retailers are likely to offer this service. Most SMBs can’t support this cost and remain profitable — at least without a deep understanding of shipping costs and how they factor into COGS.

The answers are in your shipping data

We’ve seen it time and time again — businesses that underestimate the cost of shipping and don’t charge what’s required to drive profits. Knowing exactly what your shipping costs are — and why — allows you to make better decisions across many aspects of your business, especially your pricing.

Are your shipping invoices giving you sticker shock? Surcharges could be the culprit! Find out which ones are most likely to bust your budget in our new eBook — and how to fix them. Check it out!