Free Shipping – The Real Facts Every Small Business Needs to Know

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If you run an ecommerce business, chances are you’ve at least toyed with the idea of offering free shipping to your customers. Large companies like Amazon have made it necessary for everyone to thoughtfully consider their shipping options, even though in the end you may decide free shipping is not for you. The truth is, there is no one-size-fits-all solution for small business shipping. The success of your ecommerce business requires a careful calculation of your shipping choices. Here are some real facts that every small business needs to know if it is considering free shipping.

Know Your Shipping Costs, Sales and Competition

One big mistake small businesses make is to jump into free shipping just because it seems like “everyone” is doing it. There are actually three crucial areas you must research before you can make that decision.

Know Your Shipping Costs. It’s imperative that you know exactly how much it is costing you to ship packages. Once you know, start comparing costs across vendors to see who can offer you the best rate. Small business shipping can be more expensive than that of large businesses, but remember that you can, and should, negotiate to get the lowest price possible.

These considerations were especially important for Sonja Hoffman who runs two kitchenware websites: MoreThanKitchen.com and RacletteCorner.com. More Than Kitchen utilizes drop shipping, which sometimes includes a drop ship fee. Her Raclette Corner site uses warehouse shipping, which can be more cost-effective. Since the goal is to make a profit on every order, knowing her shipping costs allowed Sonja to set a $99 minimum purchase amount for More Than Kitchen, while offering a lower threshold ($59) at Raclette Corner.

Know Your Products and Sales. Now it’s time to look closely at your own ecommerce business, the products you are selling and the amount of each product’s sales. Since shipping is determined by weight, lightweight items will be inexpensive to ship, thus making free shipping an appealing option. If you ship items in a range of sizes, calculate the average weight per order and decide if you can afford free shipping and still make a profit. Also, if the price of your items includes a high profit margin, free shipping may be doable if you can maintain an acceptable gross profit percentage (GP%).

This was a crucial consideration for Buck and Jennie Smolow who own Just Poppin, a gourmet popcorn website. Buck analyzed sales and found that most were in the category of “kernels, seasonings and oils.” Looking at the cost-to-weight ratio and shipping charges, he understood that free shipping was just not feasible for his business. For example, shipping a 3-pound bag of Mushroom Popcorn Kernels (retail $9.75) would cost him $5.70, making the shipping charges 55 percent of the retail price. In the end, to offer free shipping, the shipping cost must be absorbed into the retail price, upping the cost to $15.45. In order to be fair to customers, Buck has decided to skip free shipping, keep prices at an honest level, and be upfront with the cost of shipping.

Know Your Competition. If your main competitors offer free shipping, then you may have to do the same to compete, especially if the items being sold are comparable and similarly priced. On the other hand, if your competitors are not offering free shipping, your ecommerce business has the opportunity to win new customers with a free shipping offer. Knowing what your competition is doing will help you to make better, informed decisions on how to move forward.

Free Shipping Options

If you’ve decided that you want to offer free shipping, here are a couple options to choose from that offer lots of room for creativity and customization.

Free Shipping at “XX” Dollars. One option when offering free shipping is to offer it when an order reaches a certain price point — for example, free shipping on all orders over $50. To determine the right price point, take your average store order value and choose a price point that is slightly higher, perhaps 10-20 percent. This is how Amy Rodell, from the costume jewelry website Swell Caroline, developed her free shipping strategy. She tested many shipping options to find out what would work best for her business. After analyzing sales, she found the company would lose money if it offered free shipping on orders under $50. However, when requiring a $50 minimum for free shipping, she found that the average order amount increased by about $3, as people added items to the cart in order to qualify for free shipping.

Promotional Free Shipping. Another option is to offer promotional free shipping, or shipping that is free only for a limited time. Whether you do it with a coupon, as an offer to “First-time Buyers” or as part of a loyalty program, promotional free shipping is the perfect way to “test” whether free shipping can work for your ecommerce business. Measure the results of your limited-time free shipping campaign to decide on a strategy going forward.

Deciding whether or not to offer free shipping can be a tough decision since the perfect solution for your ecommerce business depends on a number of very different factors. Once you “know” the real facts of your business, it will be easier to make the decision. And if you do go down the free shipping path, make sure you are continually measuring your results in terms of sales, average store order, new customers, repeat customers and other factors to determine shipping options that work best for both you and your customers.

Whether or not you decide to offer free shipping, it’s important to make sure you have your basics covered. Check out this video to learn how you can streamline and automate your shipping process.

For more insight, check out our ecommerce tips and trends page.

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