How to set your free shipping threshold [ + free calculation template]
[Updated post from September 30, 2021]
It's no secret that today's online shoppers want free shipping. The question is: What is the best way for merchants to offset this financial burden?
Because unless you're a behemoth like Amazon or Target, absorbing shipping costs on every order just isn't realistic for many e-commerce stores.
Fortunately, there's a range of strategies that e-commerce merchants can use to afford free shipping. You can:
- Bake the cost of shipping into product prices.
- Use free shipping as a loyalty program perk.
- Offer free shipping as a limited-time offer to drive buyer urgency.
But there's another, more sustainable strategy that's open to you: Implementing a free shipping threshold.
So, how can your business implement a free shipping threshold that maximizes profits and entices prospective customers?
If you're asking this question, don't panic; this is the guide for you.
Stats about free shipping
Choosing to offer free shipping isn't about gaining a competitive edge; it's about making sure that your business doesn't fall behind.
These statistics highlight how free shipping is no longer a perk for online shoppers; it's simply an expectation:
- 66% of consumers expect retailers to offer free shipping on all orders, while 80% expect retailers to have a free shipping threshold.
- Over 50% of orders from the 30 biggest e-commerce merchants involve free shipping.
- 94% of customers say that free shipping is the offer they want most during the 2021 holiday season, followed by fast shipping (60%).
- 68% of online shoppers surveyed said they didn't make a purchase at least half of the time when a retailer didn't offer free shipping.
Merchants selling products online need to think carefully about how to offer free shipping in a way that works for their needs. A free shipping threshold is a strong tactic to help offset shipping costs and increase gross profits at your business.
The benefits of having a free shipping threshold
As we demonstrated above, most consumers expect merchants to offer free shipping. By only having standard or flat-rate shipping available, you're missing out on a valuable opportunity to reward your most valuable customers. This is especially important during the holiday season, when consumers are more likely to experiment with new brands.
Protect your profit margins. In the age of Amazon, smaller merchants are faced with a choice: To follow suit with a generous free shipping policy and make a loss, or to lose customers. A proposed minimum cart gives you the best of both worlds by ensuring that free shipping is only given to orders with strong profit margins.
Boost average order value (AOV). A free shipping threshold is a clever marketing tool that entices customers to add an extra item or two to their shopping cart to reach the minimum purchase, thus increasing average order value. A study by Shippo found that 93% of consumers will take action to receive free shipping when they shop online, with buying additional items as the most common strategy.
What happens when your free shipping threshold is too low or too high
If you're going to implement a free shipping threshold, you need to do it right. Free shipping thresholds need to hit that sweet spot between protecting your profit margins and persuading online shoppers to put a little more on their credit cards.
It's tempting for retailers to pick a proposed minimum cart value like $25 or $50 and be done with it. But if your free shipping minimum is either too low or too high for your Average Order Value (AOV), this results in the following:
Your AOV will take a hit
If your free shipping minimum is too low or too high, your customers have little incentive to spend more money at your store.
With a low threshold, you'll have too many customers who easily qualify for free shipping. This means they have no motivation to add additional items to their cart.
A high free shipping threshold that's out of whack with your AOV is just as discouraging. If customers have to spend more than the standard shipping price to qualify, they're obviously not going to.
Either way, inaccurate free shipping thresholds will likely cause your Average Order Value to drop.
Your cart abandonment rate will increase
Cart abandonment is a major issue for e-commerce stores, as it will usually take multiple site visits for a customer to commit to a purchase. However, the biggest reason for cart abandonment is unexpected costs.
According to Baymard, nearly half (49%) of consumers list ‘extra costs' such as shipping and taxes as causing them to abandon a shopping cart.
In sum, a too-high free shipping threshold will put many consumers off from going through with a purchase.
This is unlikely to happen in the case that your free shipping threshold is too low. Instead, it will have the opposite effect; if free shipping is accessible, your conversion rates are likely to go up, while cart abandonment drops.
While this might seem like a good thing, it's a serious problem if low order values are eroding your profit margins. When this happens, your business could end up making a loss.
How to calculate the right free shipping threshold for your business
So, how do you find the optimum free shipping threshold that works for your business?
Check out our calculation template below:
Step 1: Find your averages
To offer free shipping via a threshold, you need to arrive at the perfect price point. Examine your order data to understand how much your customers are spending with each purchase. This will help form the basis of what shoppers need to spend to receive free shipping.
To get an accurate overview, we recommend using a 12-month window to account for seasonal fluctuations. Note: It's important to exclude periods where your brand offers free shipping for a limited time, as this will distort your data.
The metrics you need:
- Median Order Value
- Average Shipping Cost (this should include all associated costs, including labels, packaging, etc.)
Step 2: Calculate your Gross Profit Margin
If your Total Sales were $80K and the Cost of Producing Product was $30K, your Gross Profit Margin would be 62%:
$80,000 – $30,000 / $80,000 = 0.62
Step 3: Test your Minimum Cart Value
Now that you know your Gross Profit Margin, it's time to experiment with a proposed minimum cart value to see how they affect your business.
Imagine that your Average Order Value is $50, while your Average Shipping Cost is $7. Let's experiment with a Proposed Minimum Cart Value of $55 to qualify for free shipping.
First, you need to find the difference between your Minimum Cart Value and your Average Order Value:
$55 – $50 = $5
Next, multiply this amount by your Gross Profit Margin (which in this example is 62%):
$5 x 0.62 = $3.10
Subtract this from your Average Shipping Cost ($7):
$7 – $3.10 = $3.9
This means that for every order that reaches a free shipping threshold of $55, your business will have to pay $3.10. If you multiply this by hundreds of orders, your profit margins will quickly vanish.
Let's try the same calculation with a Proposed Minimum Cart Value of $60:
- Difference between Minimum Cart Value and AOV = $60 – $50 = $10
- Multiply by Gross Profit Margin = $10 x 0.62 = $6.20
- Subtract from your Average Shipping Cost = $7 – $6.20 = $0.80
In this scenario, your business only needs to pay $0.80 per order which reaches a free shipping threshold of $60. By upping your minimum order value by just $5, your business will be in a much healthier financial position while still incentivizing customers to spend a little extra.
By using the calculations outlined above, your business can experiment until you find that sweet spot for your free shipping threshold.
Here are a few other things your business should bear in mind when working out your threshold:
Be aware of how bulky/heavy items will affect your threshold
If you're a retailer with a small number of large, heavy items in your product catalog, you need to take this into account when calculating free shipping thresholds.
Oversized items have a much higher DIM weight, meaning their average shipping cost will be much higher than small, lightweight items. It's a good idea to exclude these items from your free shipping offer and other shipping promotions, as you may have to use specialist couriers and/or pay for a different service level.
Decide if you're going to offer free returns shipping
The average customer loves free return shipping just as much as outbound shipping. In fact, 71% of consumers say that restocking or return shipping fees would prevent them from purchasing from a retailer.
While covering return shipping may boost conversions from first-time customers, you need to consider how this impacts your profit margins. Paying for return shipping costs in all incidences is a big financial drain, so you'll need to factor this into your free shipping threshold calculations to avoid making a loss.
However, return behaviors such as ‘bracketing' (also known as ‘try before you buy') can result in your business losing profitability - even with a higher threshold. This is because shoppers may add additional items to their cart to reach the minimum order threshold, with the intention of returning them later.
There isn't much that retailers can do to prevent this, meaning you have no choice but to absorb the cost. An alternative is to offer free shipping on exchanged items only, a powerful exchange optimization strategy to encourage customers to adopt positive return behaviors.
Have a separate threshold for international orders
If you're shipping online orders internationally, you'll need to consider how this affects your free shipping threshold. International shipping is much more costly, and also involves additional handling and customs requirements. If you want to offer free shipping to your international customers, consider calculating a separate free shipping threshold for international orders that reflects these extra costs.
3 Ways of offering free shipping more effectively
Now that you've calculated your free shipping threshold, it's a good idea to think about other ways to make free shipping policies more appealing to customers:
Make sure your free shipping threshold is clearly communicated
If customers are going to take up your free shipping offer, they have to know it exists. This is why you need to promote your free shipping threshold effectively.
When offering free shipping, you want customers to be aware of your policy from the moment they enter your website. This means they'll keep it in mind as they browse your website - and be tempted to add additional items to boost cart value.
If a customer hasn't yet reached your free shipping threshold, consider adding a pop-up at the checkout reminding them that they only have to spend $X to reach the order minimum dollar amount. You should a/b test different messages to see which provokes the best response.
Offer multiple shipping options
One of the weaknesses of a free shipping policy is that most retailers need to use a slow domestic shipping method to keep costs down. While this is sufficient for some customers, others will get frustrated if there's no option to get their goods faster.
In a time when consumers are growing accustomed to next-day and even same-day delivery capabilities, you may find that even free shipping isn't enough to secure a conversion. In the free vs. fast shipping debate, it's flexibility and choice that wins.
Offering expedited paid shipping options alongside a free shipping promotion will help to address your customer's ever-changing online shopping needs. with 70% of consumers willing to pay extra for expedited delivery options, you can provide another big motivator for customers to choose your brand.
Consider a shipping membership program
The success of programs including Amazon Prime and Sephora Flash has proven that ‘free shipping' is something of a misnomer. Many consumers are happy to pay upfront to secure ‘free' shipping – if it removes the friction of negotiating limited-time shipping deals. Having a paid membership available in conjunction with a free shipping threshold is an excellent way to offer customers an alternative to reaching the threshold every time they shop.
How can I keep my shipping costs as low as possible?
The cost of offering free shipping can place a significant burden on your business. When shipping costs are high this inflates the gap between your average order value and your free shipping threshold, which may be off-putting for potential customers.
By partnering with Ryder, you'll gain access to favorable wholesale shipping rates with major carriers like USPS and FedEx. Using our SmartRate Selection Tool, brands can compare shipping in real-time between carriers and shipping zones, enabling you to create a more enticing free shipping threshold that boosts conversion rates while reducing the impact on your bottom line.
Paired with a state-of-the-art national fulfillment network that lowers transit times via multi-node fulfillment, Ryder can help you transform offering free shipping into a powerful marketing tool and acquisition strategy. Contact us today to find out how Ryder can coordinate the optimum shipping strategy for your needs.
