Free Shipping: How Does it Really Impact Your Bottom Line?

By Thursday Bram |

January 12, 2012

If you sell a product online, you've probably spent time considering whether to offer free shipping to buyers. It's not a universal perk that ecommerce stores offer, but it's not uncommon, either. There are many shoppers who seek out free shipping, even paying a premium or a subscription fee (such as Amazon Prime) to get it. Even if you aren't sure that free shipping is a perfect fit for your business, you need to look at the pros and cons before deciding definitively.

It's certainly true that free shipping can be an expensive proposition: if you were to avoid putting any limitations on your offer, the worst case scenario is that you could wind up paying a small fortune to deliver a giant package to Antarctica. But that really is the worst case scenario. Most sellers find that with some research, they can find a cost effective shipping option that can be covered by a small increase in product prices. You may not be able to deliver anywhere in the world for free, but you likely can find a cost effective situation at least within your own country.

You're likely to find that the real impact to your bottom line, at least when it comes to free shipping, is not the expense you're facing. It's the number of new buyers that come to your site and purchase, pushing your income in the right direction.

Free Shipping Can Be Crucial

Tony Ellison, the founder and CEO of Shoplet.com, views free shipping as a cornerstone of his company: "We would not survive without offering free shipping on shopping carts over a certain limit. Online shoppers have an expectation of e-retailers to offer this service in order to garner their business. Although it eats into our gross margins, it is one of the most influential promotions we make on our customers. Therefore, it is a necessary business expense just like maintaining our website. If free shipping is enough of an incentive to push shoppers online, then I am happy to offer it to them."

It's a technique that has certainly done well by the company: Shoplet.com was founded in 1994 and became profitable in three years. The online office supply retailer continues to grow — 40 percent from 2008 to 2009. More and more retailers are finding that buyers will make purchasing decisions based on free shipping. Especially if it isn't clear how much shipping will be otherwise, many buyers will choose a more expensive product that includes free shipping over a cheaper product that will require an additional payment for shipping. If free shipping isn't an option for your business, you're immediately facing that mindset and will need to come up with a way to over come it.

The main option in such cases is to set a certain price for shipping across the board and announce it alongside the actual price for the product, rather than calculating shipping based on location. That level of transparency makes it easier for customers to understand what they're paying for — though, at that point, you may as well raise your prices by that amount and call your shipping 'free.'

Setting a Minimum for Shipping

For many businesses, universally offering free shipping is not always an option. There are certain low price products that become a lot harder to sell if you mark them up enough to provide free shipping. The next best option can be setting a minimum order size to get free shipping, as Shoplet.com does.

Ellison notes, "When we chose the $45 dollar minimum for free shipping, we had a couple things in mind. The first was that we wanted to offer customers value. At this time, free shipping was less prevalent in the ecommerce arena, but we wanted to change this by offer it to as many shoppers as was financially viable. This was the second factor. How low can we go before offering free shipping makes our business no longer viable? In the end we were able to pressure even the biggest giants in our industry, for example Staples, into lowering their free shipping floor."

The Bottom Line

You have to make the right choice for your business when it comes to free shipping. Every business is different: a company shipping large equipment will face a very different financial decision than a company shipping lightweight jewelry, after all. But more and more customers are coming to see free shipping as an easy way to differentiate between sellers, if not an absolute requirement. If the numbers can be made to work, free shipping can be a valuable proposition for your business.