Determining shipping fees can sometimes be disconcerting for e-commerce merchants. These fees have a direct impact on their revenues and their customer’s shopping cart.
Actually, this aspect not only relates to e-commerce. Mass merchants now offer delivery when customers purchase in-store or if a product is unavailable and must be ordered and delivered to the customer at a later date. As it pertains to e-commerce though, shipping fees can have a major impact on the primary objective: closing the deal.
High shipping fees are often cited as a reason for abandoning the cart. What is more, if your competitors offer free shipping, but you aren’t, you have a serious competitive disadvantage to overcome.
Offering free shipping can have real financial benefits since it will allow you to 1) complete more sales, 2) build customer loyalty, and 3) increase your average order value.
This article will help you determine the order value from which you can reasonably offer free shipping for your online store.
KEEP AN EYE ON YOUR COMPETITORS
It is essential you be familiar with the shipping policies of your competitors so as to understand where the market is at and for you to see how you are faring – good or bad. Customers are always comparing deals and for the same item, they are highly likely to go with the merchant with the best offer.
For example, if, for the same products, your main competitor offers free shipping starting at $80 in purchases whereas you offer it starting at $150, you might have to rethink your strategy to draw in customers.
- First, you need to know your average order value. This corresponds to the average amount customers purchase in your store.
To calculate the average order value, you must divide your revenues by the number of orders fulfilled over a determined period of time.
AVERAGE ORDER VALUE = REVENUE / NUMBER OF ORDERS
- Next, to calculate your average gross margin, you must compile your costs: wages, business costs, production costs, warehousing and packing costs, and so on.
AVERAGE GROSS MARGIN
REVENUE – COSTS / NUMBER OF ORDERS
For example, if your average order value is $70 and your average gross margin is $7, you are not in a position to absorb the shipping costs by yourself. You cannot offer free shipping at that amount.
What is the solution? Increase the free shipping threshold to $100. Your margin will then be $10 and this will have the following impact:
- Your customer will be inclined to buy more in order to benefit from free shipping, and so your average order value should increase.
- You will be in a better position to amortize the shipping costs.
I personally applied this method to my e-commerce a few years back and simply by increasing the free shipping threshold from $70 to $80 our average order value increased.
Yes, customers will rather spend $10 more on additional products than pay for shipping costs. Most people hate shipping fees – they feel they’re wasting money! So, offering free shipping becomes a decisive factor for many to click on the BUY NOW button.
Of course, you need to adapt these calculations to your line of business and you may need to test many different options before settling on the right solution for your business.
To learn more about different strategies to set your shipping rates, read this in-depth analysis to complement your research (in French only).
The objective is that the money you spend in offering free shipping pays off in the long run. See it as an investment!
Now that you’ve set the free shipping threshold and the average margin lets you cover the costs, your customers need to know about it!
Keep it simple! Advertise your shipping policies clearly and honestly. If free shipping is offered starting at $100, write it down so there is no ambiguity. Transparency always benefits customer relations.
I would even recommend you go further by putting your free shipping threshold at the forefront of the buying process so as to encourage your customers to increase the value of their cart.
Remind them in real-time how much they need to add to the cart in order to reach the free shipping threshold. When the customer adds an item to his cart, have a small window pop up telling him that if he continues to add to his cart, he will get free shipping. A simple message such as “$18 more to get free shipping!” will do much to prompt your customer to continue shopping.
But don’t stop there! Suggest products that he could be interested in to complete his order – articles at moderate prices to help him reach the threshold.
If you would like more tips to increase your conversion rate, read this article on our blog!
Lastly, I want to remind you that with Buster Fetcher’s assistance, you can enjoy refunds that will help you generate profits, which you can use in turn to offer free shipping, and ultimately increase your average order value!