What should online retailers keep in mind when considering offering free shipping?
Free shipping is the third step in this transportation pricing progression. The first was package specific rates and the second was flat rates. Free shipping is one of the most popular tactics being employed by online retailers and it’s very popular with consumers.
There are two varieties: free shipping with no strings attached and free shipping if you reach a certain purchase threshold ($25, $50, $75, or $100). Your primary consideration in offering free shipping is profit margin. If you’re selling a line of products that afford you a sizeable margin you may be able to lower your margins by eating the shipping cost with the hope of gaining enough additional business to end up with more total profit. If your operating margin doesn’t afford you this option you might still be able to offer it at a certain purchase threshold. The answer will be different depending on your product line and price points but overall from a marketing perspective free shipping has been shown to greatly improve conversion rates.
Of course, if you lose money per item by offering free shipping, then improved conversion rates will just mean you lose more money faster! But as a last thought on this topic let me leave you with a real online retailer story that you’ll want to consider whether you’re considering free shipping or already offering it. An eTailer was offering free shipping and decided to see what would happen if he implemented a $1.99 flat rate. He was surprised to find that his conversion rate was unchanged. He continued to increase the rate until he saw his conversion rate begin to fall which was in the $4 to $5 dollar range. The lesson learned; that customers are looking for a great deal not exactly the best deal. In this case they felt that a flat $3 rate was just as good as free shipping. That was $3 that went directly to his bottom line on each and every order.