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Is it worth it to offer free shipping this holiday season?

Published November 07, 2011 Share

Actually, a better question is, “Can I afford not to offer free shipping this holiday season?”

With more and more retailers offering free shipping—driven by competition from Amazon, Walmart and other big online retailers—it’s now becoming an “expectation” for online shoppers.

 In fact, Shop.org’s recent eHoliday study found 9 out of 10 online retailers (92.5%) plan to offer free shipping during some portion of the 2011 holiday shopping season, up 8 percentage points from the same survey in 2010.

But what does this mean to your online store?

It means that more shoppers will abandon your store in search of free shipping if you are not willing or able to offer it.  But if you are able to offer free shipping, it means more sales.

Why?

Because online shoppers hate shipping costs…

In a 2010 survey by Forrester Research cited by Internet Retailer, 44% of consumer respondents said high shipping/handling costs were the reason they abandoned their online shopping carts. In the same article, Internet Retailer cites the example of online restaurant supply retailer, ReStockIt.com, who found free shipping offers were key to doubling their conversion rate from below 2% to over 3.75% in two years.

In our extensive conversion testing here at Shopatron, we have seen up to a 30% lift in sales conversions for some of our eCommerce clients when free shipping is offered on their website. And this number is much higher when free shipping is advertised off of the website (on search engines or in banner ads) as a traffic generator.

Plus, some retailers are even reporting higher average order values resulting from free shipping offers. According to comScore, in the week ending December 5, 2010, cart totals for orders offering free shipping were 45% higher than those with paid shipping ($125.20 vs. $86.58).

Simply put, free shipping promotions drive more traffic, convert more of that traffic into sales and can convince shoppers to put money saved into additional product purchases.

So why don’t we all run out and offer free shipping?

Well, it’s clear. Free shipping affects margins. And an ill-conceived free shipping offer, let’s say, for example, free shipping on a $25, 50lb. bag of dog food, can easily turn your eCommerce program into a money loser. But if free shipping was causing everyone to lose money, no one would be offering it, and that’s not the case. As quoted above, more retailers offer free shipping every year.  So the key to a successful program is creating a profitable free shipping strategy.

“More Margin Dollars” 

When we think logically about sales, it is easy to answer the following question—Is it better to sell two $10 items with a $4 profit or three $9 items with a $3 profit? The three items, right?

Well, when you translate the same reasoning into a discussion on free shipping it is often misunderstood. Here at Shopatron we see that quite often, and as an eCommerce provider that generates sales on over 1,000 branded websites and passes those sales to over 18,000 retailers for fulfillment, we have a pretty good finger on the pulse of retail eCommerce. We often hear complaints from retailers when they have to reduce their margins by 10% to cover the costs of free shipping offered by their brand partners, when they should actually be celebrating the fact that overall sales volume increased by 30%.

Let’s look at the following example:

Strategy 1: Standard Shipping

  • Product price: $100
  • Margin: 50% ($50)
  • Sales volume: 100 units
  • Supplier shipping cost: $0 ($6 paid by customer)
  • Total Margin Dollars: $5,000

Strategy 2: Free Shipping

  • Product price: $100
  • Margin: 50% ($50)
  • Sales volume: 130 units
  • Supplier shipping cost: $6 (free to customer)
  • Total Margin Dollars: $5,720 (subtracting $780 for shipping costs)

Given the choice, wouldn’t you pursue strategy #2 because it produces more overall profit?  In test after test, and example after example, we see these results, so it’s no wonder why smart retailers like Amazon, L.L. Bean and Walmart are offering free shipping.

The key to success is…

The key to any free shipping program is determining how to minimize the costs of shipping in order to maximize profits. It is making sure your money-losing exceptions are handled—e.g. don’t free ship that 50-pound bag of dog food—and that your free shipping promotion is appropriately structured.

If you can’t profitably commit to free shipping across the board, you can often find similar success by limiting the timeframe that free shipping is offered (assuring more incremental sales), limiting the offer to particular products, switching to flat rate shipping, and/or tying the offer to an order value threshold (free shipping on orders over $49).

As with any program, it is critical to test strategies BEFORE your peak shopping season so that when the shopping season arrives, you have the strategy that maximizes your total margin dollars

In summary

To be competitive, especially during this holiday season, you are going to need to take a good, hard look at offering free shipping. Online shoppers are being taught to expect it, and ignoring consumer expectations this day in age will ultimately lead to failure (do we need to make fun of MySpace again?).

So, while you may feel a little pinch at first, experience shows that you will find free shipping was well worth it when counting your total margin dollars at the end of the season.

Did you like this discussion?  Then you'll also like this FREE Shopatron webinar: 2011 Holiday Sales Advice for Brands