Free Shipping: How To Absorb the Cost and Still Make a Profit (2024) - Shopify UK (2024)

Shipping is one of customers’ biggest considerations when buying online. “How much is shipping?” and “When will my order arrive?” are make-or-break questions that determine whether a buyer completes their purchase.

Customers expect free shipping and super fast delivery. And if they’re not offered, shoppers are happy to walk away. Shipping fees are frequently cited as one of the main reasons shoppers abandon their carts, with an average overall abandonment rate of 70%.

So, does free shipping increase sales? And how can you make it accessible to your customers? In this article, you’ll learn about using a free shipping strategy, so you know when and how it can increase conversions.

Reasons to offer free shipping

The age-old question of whether free shipping increases sales is best answered by looking at the data:

• Extra costs, including shipping, cause 48% of online shoppers to abandon their carts.
• According to 2022 data, 62% of shoppers won’t buy from a retailer if it doesn’t offer free shipping. This is up from 52% the year prior.
• Free return shipping is important to 45% of online shoppers.

It increases sales

Free shipping can help boost sales. Shoppers believe they’re getting a better deal when they don’t have to pay for shipping costs.

Customers will buy more to get it and will take their business elsewhere if they can’t. Plus, offering free shipping can help create a sense of trust and loyalty between the customer and the business.

It increases average order value

A free shipping threshold can boost your average order value (AOV) from $35 to $50, or $85 to $100, depending on the amount you set. This will boost sales overall by increasing the average amount customers spend.

Why do customers love free shipping? And why would someone put a $10 product in their cart simply to avoid paying $7.99 to ship their original order?

As many as 47% of customers say they’ll spend the minimum amount to get free shipping. And if they want to spend $10 to receive an additional physical product rather than $7.99 simply to get their initial purchase delivered to them, they’re going to do it. That’s because they feel like they’re getting more value by purchasing an additional item than paying for shipping.

It reduces cart abandonment

If a potential customer hits checkout and then gets a look at your standard shipping rates, they’re likely to exit your website right then. However, if you offer free shipping, your shoppers are much more likely to finalize their purchase without hesitation.

How to cover the cost of free shipping

1. Calculate profit margins
2. Set a minimum order value
3. Increase product prices
4. Limit free shipping to selected products
5. Offer free shipping within a certain radius
6. Negotiate discounts with shipping carriers
7. Reserve free shipping for loyalty programs
8. Launch a free shipping promotion
9. Consider free local pickup

If you want to try offering free shipping, there are a number of ways. Each has its benefits, depending on your business goals, what type of shopper you’re targeting, and those shoppers’ expectations.

Free shipping across the board might not work for your business. After all, you only want to offer it as an incentive if it won’t put you in the red.

1. Calculate profit margins

One of the easiest ways to offer free shipping is to include the shipping costs in your price. This way, you’re offering free shipping on every single item you sell, increasing the chance customers shop with you and complete their purchases.

To make this work, you need to calculate your profit margin to ensure free shipping won’t cut into your profits. Remember to include not only the cost of goods sold (COGS) but also additional operating expenses like running your online store, holding costs, marketing, and other necessary costs to keep your business moving. You can then use the Shopify profit margin calculator to calculate.

For example, if an item costs $20 and you charge $30 for it, your markup is 50%.

This means you profit $10 per product, with a gross product margin of 33.33%. To offer free shipping, you’d need to take a slight cut in your profits or mark up the products so the shipping costs are included. You could do a bit of both.

Even if your products are slightly more expensive than your competitors’ products, if they’re free to ship, you have an advantage.

2. Set a minimum order value

Another option is to offer free shipping if your customers spend a certain amount. This can be incredibly effective, considering 47% of consumers will spend a minimum amount to get free shipping.

Many brands use this strategy, like Jeffree Star Cosmetics, which offers free domestic shipping on orders over $50 on its website.

There are a few ways to go about calculating the threshold number that’s right for you. One important metric is your AOV.

Let’s say your most recent orders are for the following amounts:

• $86
• $112
• $71
• $65
• $105

If you add them all up and divide them by the total number of transactions (five in this case), you’ll get your AOV of $87.90.

You could also use the median order value (MOV) to calculate a free shipping threshold. The median is the midpoint in a set of values that has an equal number below and above it. In other words, the median order value means half of all your orders are more than the median value and half are less than.

Using the example orders above, you’ll get a MOV of $86, which is right in the middle. The MOV has an advantage in some cases when the average order value may be skewed due to orders that are either super high or super low.

Once you’ve done the math, you could choose to offer free shipping on orders slightly above your MOV or AOV. In this example, you could offer free shipping on all orders over $100. This could incentivize your customers to buy more to get free shipping, while increasing your average order, and help cover your shipping costs.

Ideally, the free shipping threshold is set just high enough above your MOV or AOV to nudge customers to add extra items to their cart, which they might not have done otherwise.

3. Increase product prices

One way to ensure a higher profit margin while simultaneously offering free shipping is to adjust your product prices. You can increase them ever so slightly to account for free shipping expenses.

For example, you could calculate the average shipping cost for each product and add that to the price. So, if you pay about $5 per shipment per product, you might price it $5 higher.

The key here is to strike a balance between competitive pricing and healthy profit margins. Don’t be afraid to test different pricing strategies to find what works best for your business.

4. Limit free shipping to selected products

Shipping fees for larger products can be pretty hefty, so at some point, it would not make sense financially to offer free shipping. For example, it could be difficult for a furniture brand to provide free shipping to all of its customers.

However, if you sell a mixture of products, you might be able to swing free shipping on some of the smaller ones. That furniture brand could offer free shipping for things like bedding or small tables.

5. Offer free shipping within a certain radius

If shipping far away gets too expensive, consider only offering free shipping in certain states, provinces, territories, or countries. Location-based free shipping can be one way to appeal to a large segment of your audience, even if you can’t offer it to everyone.

You can also try to store your inventory close to where data shows your customers are buying. Storing your products closer to your customers helps you reduce carrier costs, offers free shipping, and speeds up shipping speeds.

Keep in mind that relocating your inventory will incur new storage costs that will impact your profit margins. Speak to a third-party logistics provider to better understand the costs of outsourcing the pick, pack, and shipping process.

6. Negotiate discounts with shipping carriers

No one has more control over your shipping costs than the carriers themselves. Carriers are companies like USPS, DHL, and UPS that deliver your customers’ orders. Sometimes they hold the key to offering free shipping while remaining profitable in your business.

You have the ability to connect your account to use your own rates, or let Shopify handle it for you. With Shopify Shipping, you have access to the best discounts available through our partnerships with the carriers.

7. Reserve free shipping for loyalty programs

You can also incentivize free shipping through other actions that help your business.

You might want to limit free shipping offers to customers who have opted into your loyalty and rewards program, for example. As many as 42% of consumers will sign up for a store’s loyalty or membership program in order to qualify for free shipping.

Free shipping is a powerful motivator. You can even use it to your advantage by enticing customers to create accounts, sign up for your newsletter, or follow your social media accounts.

8. Launch a free shipping promotion

You can also offer free shipping for just a short period of time to boost sales. Consider creating a promotion for one weekend every month or for major holidays like Christmas, Mother’s Day, or Father’s Day. Or, offer free shipping coupon codes for people who sign up for your email newsletter.

Doing this creates a sense of urgency for your customers—30% of shoppers will actually hold off on making a purchase and wait until it's available during a promo. Create a code that lasts for a few days and promote it on your website and social media.

By offering free shipping for just a few days, you incentivize customers who have been putting off a purchase, potentially boosting sales and increasing revenue.

9. Consider free local delivery or pickup

If you can’t offer free shipping on an ongoing basis, consider adding local delivery or curbside pickup if you also have a storefront.

Customers actively look to support local businesses to help sustain their communities and economy. They’re also interested in local shipping and curbside pickup options because they offer enticing advantages.

Local delivery is quick and also offers a way to create a personalized brand experience. Customers who shop locally are often looking for a personal connection, and local delivery is a great way to do it.

You can leverage this to connect with existing customers and attract new ones. For example, include a personalized packaging insert or a unique message in the delivery notification to thank them for their purchase.

Fast vs. free shipping: what’s more important?

It can be challenging for small businesses to offer both free and fast shipping. Many brands have to choose between the two. While it can seem like a tradeoff, a recent survey found that 85% of customers prefer free shipping to fast shipping when given a choice.

Amazon offers a “fast and free” offer for its customers, with 55% of US online shoppers subscribing to the retail giant’s Amazon Prime plan. With Prime, certain products are available for free two-day shipping—and even one-day or same-day shipping in some cases.

Often, your best bet is offering standard shipping first, then faster shipping.

Should you offer free shipping?

Free shipping is becoming increasingly necessary in customers' eyes. You can experiment with different types of free shipping to see which one leads to the highest profit margins.

Keep in mind your free shipping threshold is not a “set and forget” number—your strategy will, and should, change as your business grows. Revisit your shipping policies at key selling periods and growth milestones.