Calculate Free Shipping Threshold

How to Calculate Free Shipping Threshold?

Wow, Free Shipping!! This sounds like music to my ears. I am sure, same is the case with any online shopper. Free shipping is one of the biggest alluring factors for 90% of online customers. Believe it or not, most customers before adding any product to the cart, would check if it is entitled to free shipping.The free shipping threshold value shouldn’t be too high or too low

As an e-commerce entrepreneur, you can never neglect the goodness of free shipping. Especially with the amount of traction you can achieve your sales with just free shipping. What’s more? 3 out of 4 customers admit that they add extra items to their cart to qualify for a free shipping. Isn’t that great? A customer who would have most likely purchased only 2 items would end up buying more.

Also Read: How to make an effective Ecommerce shipping strategy: step by step guide

Unexpected costs, additional fees are something that scares most of us. There are multiple reasons why a customer could drop off. Few of these reasons are as described below-

Reasons why a customer could drop off

With no doubts, Free Shipping is a guaranteed way to improve your conversion. Not only do customers like free shipping, but they also expect so. Simple Math reveals that as an entrepreneur this is going to be a trade-off between how much you sell and how much you gain against how much you need to spend for that free shipping.

The free threshold value shouldn’t be too high or too low. A too high threshold would not motivate customers to make a purchase, while too low threshold will not have a much positive impact on your sales.

Top Reasons Why Free Shipping Matters in E-commerce

Below stats indicate how many online shoppers prefer free shipping.

Reasons Why Free Shipping Matters in E-commerce

Not having free shipping can cost you a huge loss. Almost 57% of shoppers cancel orders on not seeing a high shipping cost. To add on, almost 46% of shoppers abandon the cart, on not seeing a free shipping.

Shoppers cancel orders on not seeing a high shipping cost

In most cases, irrespective of the geographical region, shoppers believe free shipping is paramount and should be available by default for their shopping.

A free shipping threshold becomes crucial when almost 46% of customers add additional items to the cart to be eligible for free shipping. So, threshold value plays a vital role in determining the value to which a customer can be motivated to add items to the shopping cart.

While we have seen how important can free shipping to be to your business as well as the threshold value of free shipping. It’s important to find that sweet spot for your e-commerce business.

Pros of Free shipping

  • Potential to increase sales and generate more orders
  • Better conversion rates
  • Removes any sales roadblocks related to shipping
  • Retains customers
  • Adds product and brand value
  • Higher average order volume
  • Let’s you top the competition
  • Creates brand loyalty

Cons of Free shipping

  • Profit Margin decreases
  • Programming cost to evaluate suitable free shipping threshold
  • Risk of potential losses due to the wrong computation of threshold value
  • Time limit for free shipping as there would be more sales

How to calculate free shipping threshold

Getting the threshold point is something that you should be aware of while running an e-commerce business. Before starting, let me introduce a few basic jargons.

Median is the midpoint of a frequency distribution over which there can be an equal probability of being above or below the value. Commonly in e-commerce, Median order value (MOV) is computed.

Average order value (AOV) tracks the average dollar amount spent each time a customer places an order on a website or mobile app. To calculate your company’s average order value, simply divide total revenue by the number of orders.

MOV or AOV based

In most cases, free shipping is set just high above your MOV or AOV so that it tempts customers to add a couple of more items. One such example is as shown below-

MOV or AOV based

As soon as you add an item to the cart, it prompts the eligibility of free shipping. Thereby compelling most customers to make another shopping from within the website.

It’s best to experiment with different threshold values above MOV or AOV till you find the most suitable threshold value.

Consider product Type

Before setting up a threshold, it is important to consider the product type. You can narrow your approach by categorizing your products. The products can be broadly classified as-

  • Low Margin Products–In case you sell inexpensive products then free shipping needs to be evaluated carefully. The worth per order would be more expensive as compared to the extra earnings by way of free shipping. It is best to enable free shipping only beyond a certain threshold value.
  • Unique Products – If you sell something unique which is hard to be found online, then you can very well monetize on free shipping. You can offer free shipping by adding the average shipping cost to your product. You’re hiding the price of shipping within your prices but still reaping the “special benefits” of free shipping because your products are somewhat difficult to find or non-competitive.
  • High Margin Products–If you are selling expensive products, then providing a free shipping makes logical sense. This would be a small share of your profit. Of course, this would also depend on the kind of high margin products. However, the extra conversions justify the extra expenditure.

Grossly the type of product you sell can impact your shipping expenses. While free shipping sounds good, you also need to consider factors such as the type of product, market value, and geographical restrictions.

Know your competitor

Spying is always helpful, especially when you are in the e-commerce business. It’s best to understand what your competitors are up to especially when it comes to free shipping. There is no specific way you can do this. However, it’s best to be alert and keep track of where your competitors are heading towards.

As a thumb rule, if it does not hurt your profit, keep a shipping threshold lower than your competitor. This helps customers to first consider you as the first choice before getting onto a competitor website.

Visualizations

To get a better perspective of the shipping threshold against order value, you can use charts and visualization of data. Google Spread Sheet templates is another intuitive tool which helps decipher your data statistics.

Plot a graph of Order Value against Number of Orders. This gives a distribution of the median value and can help you determine the average free shipping threshold. Below scenario has just the right free shipping threshold.

Average free shipping threshold

A below scenario represents that your free shipping threshold is too low for customers to be motivated to make any further purchases.

Free shipping threshold is too low for customers

Similarly, a too high value would also not enable good conversion. Below is a scenario where the threshold is just too high for customers to be motivated to make a purchase.

Too high value would also not enable good conversion

Image Courtesy: RJ Metrics

Visualization provides several quick data insights and can help you determine the just about right value.

Testing

If you consider you have found the right value, do not stick to it forever. Markets change, trends change. So, it’s best to evaluate your threshold value time and again. This should be done at least in a quarterly time frame.

Once you have set a free shipping value, test it across for a limited time period to see how it performs. Either way, if it’s not motivating more customers to make that additional purchase, then it is of no relevance to offer a free shipping.

Do an A/B test where half of your visitors get the free shipping offer, and half don’t. If you want to test out the effects of raising your shipping threshold, you could simply eliminate your current threshold, and do an A/B test where half of your visitors get the higher threshold (as a seeming “promotion”), and others get no threshold. This also helps you understand customer behavior based on your free threshold value.

You can also try running a free shipping promotion where you significantly lower your free shipping threshold on certain orders. Before you arrive at any conclusive threshold value run different values of the threshold for different months and get the best performing threshold value.

Shipping Policy

Ensure you make your shipping policies loud and clear. No one likes last minute surprises. Customers in most cases would abandon carts the moment they find some hidden cost being added. This would be a loss of a customer. Most customers would not return in case they find hidden fees.

Most top e-commerce brands display their shipping policies as a separate section on their website. One such example is as shown below-

Shipping Policy

So here is how Amazon gives details about its Shipping charges and free shipping eligibility.

Amazon gives details about its Shipping charges

Another example which shows exactly the free shipping threshold is as shown below-

Another example which shows exactly the free shipping threshold

Geo-targeting

Free shipping may not be a viable option always. Especially the further you need to ship, the more cost you would need to incur. This is something that needs to be considered.

Another aspect is in case you are not directly manufacturing the product, then you would also need to check the distance between the buyer and the goods provider.

Geo-targeting while focuses on geographical location, also consider other aspects such as age, interest etc. Use Google Analytics to understand the performance of your product market based on geographical location.

The study reveals that certain places which are hard to be reached, customers would still show without a free shipping or with a relatively more shipping price. Similarly places such as cities, most people expect free shipping with a reasonable threshold.

Knowing where your customers belong and the performance around that region helps. Especially if you are making an international business, then not only does free delivery matter but also additional taxes should be considered.

Tools

MarketBrain and Shopify provide ready to use apps specially designed to compute free shipping threshold. The app requires you to provide inputs based on sales and other numbers.

Tools

Once you provide these details, it will calculate and compute your profit and the net shipping expenses.

Net shipping expenses

It will show you exactly on how much increase in sales, would you result in a profit. For instance, the below example shows a 15% improvement in sales, however, with free shipping, it shows a loss.

Below example shows a 15% improvement in sales

Next, the below example shows with 25% increase in sales, you would result in profit with free shipping.

Example shows with 25% increase in sales

Loyal Customers

So, this is something that is available in certain e-commerce businesses. If a customer shops with you constantly, then it makes perfect sense to offer a free shipping. So, what exactly is constantly? This is something that you need to define.

If a customer is a huge contributor to your sale, then the customer should be eligible for a free shipping. Similarly, if a customer has a subscription then this again makes a great candidate for free shipping.

A lot of e-commerce ventures allow customers to chat and eventually provide free shipping in case they are not able to offer the desired discount on the product. However, this is a secret recipe only for loyal customers. In the simplest way, this is choice based free shipping which would be available only to a certain set of the customer base.

CONCLUSION

To conclude we have spoken about the need for free shipping. There are few scenarios where free shipping can make wonders and there are few where it can be equally disastrous.

Free shipping is a guaranteed way to increase your sales. However, care should be taken to focus on your market profits. The free threshold should be defined in a way where it does not hamper your overall profit.

Multiple techniques, tools, and analysis play a key role in defining the threshold for free shipping. While you get that exact threshold, it is important to re-iterate the process time and again.

Related Article: Drop Shipping 101: The Definitive Guide to Building a Drop Shipping Business in 2018

 

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