I would give a resounding yes. Free shipping has been slowly turning from a perk into a requirement. 75% of customers expect it and 61% of online shoppers say they’re somewhat likely to cancel a purchase if free shipping isn’t offered.
Over 90% of people say free shipping motivates them to shop online more than any other incentive. Free shipping has been shown to be a greater motivator than many discounts. 60% of people have bought additional items just to qualify for free shipping.
Extra costs at checkout, usually shipping fees, are the leading cause of cart abandonment.
Why is free shipping so popular?
Human psychology is the simple answer. People love free things. The pain of paying is a psychological phenomenon that makes people averse to spending money. When a customer pays for a product in your store, they feel like they already own it. Paying more money so you could send it to them might feel a little bit like extortion. It’s ridiculous but that’s just how some people feel.
A lot of this has to do with comparisons to traditional retail. When you buy a pair of sneakers at Foot Locker, you get to take them home right away. They don’t charge you any delivery fees. If someone asks you what you paid for the sneakers, you just say 100 dollars.
You might have spent 20 dollars on an Uber to and from the store but people almost never factor in things like fare, gas consumption, or opportunity costs (if you missed a few hours of work for example) into their shopping totals.
The fare you spend travelling to and from a store counts towards the total cost of the product but since that money was paid to separate parties, it doesn’t feel like related spending. Shipping fees on online stores make it painfully clear that taking goods from a store to your house costs money and that makes people very uncomfortable.
The same person who wouldn’t think twice about burning 30 dollars worth of gas in his truck to get a 25 dollar hammer from Home Depot for his DIY project would balk at paying 10 dollars to ship the same hammer to his doorstep. It may sound insane to you but it makes perfect sense to him. That’s because Home Depot doesn’t bill him for the gas.
Consequently, the cost of gas never even registers a contributor towards the cost of the hammer in his mind. The gas cost is completely hidden. As far as he’s concerned, the total cost of acquiring that hammer is $25, not $55. The cost of gas isn’t the only hidden cost. There are other incidental costs like the opportunity cost of sitting in traffic for an hour or two and the wear and tear on the truck.
Some pioneers of online retail noticed this and implemented free shipping. They figured out that if people thought getting goods from the store to their homes cost nothing, they might as well maintain that illusion. This has worked out spectacularly so far with free shipping approaching ubiquity. The more stores offer free shipping, the more people will come to expect it so you might as well get ahead of the curve.
The case for free shipping
- Competitive edge – This is probably the biggest advantage of free shipping. With free shipping you aren’t just competing with other online retailers. You can also compete with main street retailers now. You can get products straight to a customer’s doorstep without any additional effort on the customer’s part. They can’t. They have to pay rent in prime locations with high foot traffic. You don’t.
- It’s a stronger purchasing incentive – Free shipping outperforms other sales promotions like discounts when it comes to driving purchases. Discounts are everywhere. Almost everybody offers them so they aren’t that unique. Free shipping is still a little novel at this time while also simultaneously solving the common pain point of additional costs which turn customers off.
- Higher conversion rates – High extra costs at checkout are responsible for 49% of cart abandonments and eliminating them greatly boosts your conversion rate. Higher conversion rates have a spiraling effect since you sell more and if your products are decent enough you reap the goodwill of customers which forms a self-reinforcing loop of referrals and return business. Amazon’s Prime program is a great example of how offering free shipping can drive sales. Amazon Prime members spend $1,400 a year while non-Prime members spend a comparatively measly $600. The average order value is also higher because your customers will often buy more products in order to meet the threshold for free shipping.
- Easier product comparison – Customers can compare prices without worrying about how shipping affects the final total. Free shipping can encourage customers to buy a product that they wouldn’t have bought otherwise.
- Higher visibility on third party platforms – If you sell on third party sites like Amazon, Etsy, and eBay, lacking free shipping can actually hamstring you. This is because the sites have free shipping as a filter and their algorithms tend to favor products available for free shipping. If you don’t offer it you might end up becoming invisible.
The case against free shipping
Free shipping is a beautiful idea that customers absolutely love. But nothing is really free.
- Cost – The greatest shortcoming of free shipping is that someone always has to pay for it. If your markup is healthy and your customers aren’t particularly price sensitive, you can always factor the shipping cost into the product price and declare that shipping is free. No harm no foul. But that isn’t always the case. More often than not, margins are slim and competition is stiff, so you can’t just raise your prices whenever you feel like it. If your customers are highly price sensitive, they might be turned off by higher display prices. This would force you to at least eat some of the extra cost.
- Reduced profitability – Slimmer margins might be justified by the expectation that free shipping will induce more purchases which would in turn main your profits or even raise them. This gamble has high odds of success, but it’s not guaranteed to pay off. While this is bad, it has the benefit of showing you that your business has problems that go deeper than just shipping costs.
- Variation in shipping charges – This makes free shipping quite challenging. Shipping costs usually depend on the weight of the package, the volume it occupies, and the distance. Distance is the most significant variable here. Your customers will always be spread out across a country or region. It will consequently be cheaper to ship to someone who lives a few miles away compared to someone who lives on the other end of the country. Shipping to major metropolitan areas is also cheaper compared to remote sparsely populated areas. When customers cover their own shipping, the costs are their problem. When you’re footing the bill, that’s your problem. You might remain profitable shipping to the neighboring city but lose money on a sale to someone living high up in the mountains of Colorado or in some remote corner of Wyoming. The general solution to this usually involves calculating the shipping costs as an average. Increasing prices by that average figure usually eliminates the variability for you but results in higher costs for customers living closest to your fulfillment centers because they are forced to subsidize those who live farther away.
- Changing customer habits – Instead of buying most of the items they want at once to minimize shipping costs, they might buy items one at a time because shipping is a factor they don’t have to consider anymore. A customer might buy toothpaste in the morning, a toothbrush in the evening, and dental floss the following day. Since these are light and small products, they could be shipped more cost effectively in a single package but by the time you receive a second order, the first one may already have been dispatched. You can discourage this kind of purchasing behavior by setting a minimum threshold for free shipping.
Nonetheless, free shipping is here to stay. Whether to implement it or not is a moot point. The only thing that matters is implementing it without losing money.
What about returns?
Returns are an expected part of the business cycle and whether or not to pay for return shipping is a dicey proposition. If you give the customer a full refund you will have effectively paid twice to ship a product without making a sale.
From the buyer’s perspective, free returns make perfect sense. They took a risk purchasing a product from you and it was entirely unsatisfactory. They don’t feel like paying to send it back is a little scammy considering the whole debacle is your fault as far as they’re concerned. A poor experience with the returns also puts a damper on any future business so it’s best to just offer hassle free returns and keep an eye out for abuse of your policies by serial returners.
Offering free returns improves customer satisfaction. Customers who receive free shipping on returns increase their purchases by 58% to 357% over a two-year period.
For products with low rates of return like sports equipment or camping gear, covering return shipping wouldn’t be a big deal in the wider scope of things. It’s the products with high rates of return like clothing that are a real head scratcher. You will have to factor return shipping costs into your pricing. You’ll have to know that 21% of all orders will be returned and pad your margins accordingly. You can also limit your costs by promoting in-store returns.
How to implement free shipping
Implementing free shipping requires a considered approach. It may not make economic sense to eliminate all paid shipping options and offer free shipping on everything from candy to refrigerators. A 95-cent bag of candy would cost you about the same amount in shipping that 50-dollar satin lingerie would, yet you’ll be making a lot more money on the lingerie and definitely losing money shipping the bag of candy.
The simplest approach usually involves offering free shipping above a certain threshold, say 30 dollars. The threshold is determined by your markup, average order value, your brand positioning (budget, premium, or luxury), and your competitors.
The markup needs to be high enough to ensure you don’t lose money on shipping but not so high that nobody can realistically reach it. You can’t have a free shipping threshold of $200 if no one ever spends $200 in your store. The actual figure should be slightly higher than your average order value to spur more sales without straining customer wallets or driving them away. 30% is just about right. If your average customer spends $30 per visit you can set your free shipping threshold at $40.
Another approach is limiting free shipping to selected products, usually the bestsellers and ones that allow you to turn a profit after covering shipping. Free shipping can also be limited to certain holidays that see a significant rise in shopping like Thanksgiving, Black Friday, and Christmas.
You can also bundle products and offer free shipping on the bundle. Instead of shipping each 15-dollar t-shirt individually, you bundle three of them together at $44.99 and offer free shipping on the bundle.
You can also start a loyalty program along the lines of Amazon Prime and offer free shipping as one of the perks. Your subscription charge should include enough perks to justify its cost. Prime has free two day shipping, free access to Prime Video, exclusive deals, and Amazon Kindle privileges among its perks for $119 a year. You should aim at charging less than that.
You don’t need to limit yourself to one approach. You should use a combination of approaches in order for your free shipping offers to be more cost effective. You can have a membership program coupled with a set threshold for free shipping on qualified items.
Other things to keep in mind
- Avoid the temptation to go for economy shipping options. While shoppers are willing to wait a little longer for free shipping, the industry standard is still two to three days. A shipping option that takes five days is not the way to go.
- Mention your free shipping loudly and often. In the site header, on the product page, and in the cart at checkout.
Great article Matt. Very comprehensive.
Thank you Robert! Coming from you it means a lot!! Cheers.