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I am not located in the U.S., but 85% of my sales are from the U.S. Currently my shipping charges is about 22% of my revenue. Our raw profit margin is about 100% to 200%. So in theory, we can afford to try "free shipping", but it will cost us as much as 60% of our profit margin.
There are many objections from my coworkers to my "free shipping" idea. Most claimed that free shipping will contribute to an even bigger problem in the future. However, the way I see it is if offering free shipping can boost our conversion by another 0.3%, we will be making more than we are now, and plus, we will be able to boost our volumn that will eventually lead us to an even higher overall profit margin.
One of my colleage also suggested that we can consider offering a very low fixed shipping charge. I am not particularly fond with this idea. It does not give as much of an incentive as the word "FREE".
I would love to hear your experience in this. Please share.
Personally, I've sometimes added a cheap item at Amazon if I was close.
Some companies use price-range schemes for shipping charges. I've seen people add items once they had hit a threshold because "the extra items ship for free".
One other thought is to offer free shipping with an expiration date - that can be a powerful call to action, too.
You should perform an A/B test. Give a random sampling of 50% of your visitors the option of free shipping and the other 50% keep the same as what you are currently doing. Track the percentage of purchases/visitors, the amounts of their purchases, your profits, etc.
If your results give you conclusive evidence outside of a reasonable margin of error, you know you should keep it and give everyone the option of free shipping. If it hurts you more than it helps, don't do it.
That's my belief as well.
When I discontinued free shipping in a previous business, I made more money.
However, my products were 1) rather heavy, and 2) not expensive (average ticket around $60) so shipping was a higher than average percentage of total costs.
I don't understand some of the stats you were throwing out. What is a 100% to 200% profit margin? How do you have a profit margin over 100%? If you sell something for $100 and it only cost you $5, it's a 95% profit margin.
There's a lot to consider in determining how to structure your free shipping. Is your shipping cost proportional to the price of your items? If not, you might need to adjust some costs so you don't lose your shirt on big and/or heavy items. Would free shipping produce a loss on small orders? If so, you'll probably want to set a minimum order size to qualify for free shipping. Is there a cheaper method of shipping you can use for the free shipping option (like Amazon.com does)?
You mention that most of your orders come from the US, but it sounds like you're shipping from somewhere else. Could you set up a distribution center in the US? That would decrease your shipping costs and improve delivery time. Could you justify the cost? Even if it's a small volume of orders, you could probably find someone to do it out of their house rather than a full-blown distribution center.
You bring up a good point re: the sheer number of variables that need to be considered before a merchant determines if free shipping is right for them. Each of us has to make that decision.
But despite the number of variables that must influence our decision there is the universal affect that free shipping has on the customer base. This cannot be discounted no matter what the product or where it is shipped to. Everyone likes to get something for free even if they know that they're paying for it.
The underlying crux of what we're discussing is two-fold. One part deals with our business model and it's costs/profit margins. The other part deals with the appeal we have to the customer and our ability to make a sale. The old spend a buck to make ten comes to mind.
So what are we left with? Well, I think it's safe to say that we can assume the customer will like free shipping. So, what we have left is how to determine whether or not our own business models can sustain/benefit from free shipping.
So the question becomes what metrics can we use to determine if free shipping can work for our particular situation?
joined:May 28, 2001
Assume an item has a retail value of $100. You buy it from a vendor for $50. You received a 50% discount. You sell if for $100. You realized a 100% markup - what some people call gross profit or profit margin.
If you have true competition (others selling the exact same item), my experience is that free shipping give you an advantage even if you add the shipping price to the item (not sure if you can do that in your case).
I've sold things at higher prices than the competition (5 - 10% higher) but included free shipping. Even if our total price was the same (my price versus the competition), my sales increased with this approach.
My guess is that consumers are attracted to the "free" portion of the offer. They can tell their friends - "Yeah, I ordered it online and even got FREE shipping!"
I also conducted an experiment with two site, both offering the same items, my net was exactly the same in both situations but one offered free shipping. I advertised using adwords, same bids. People loved to click on the free shipping ad and the conversions were higher too.
I was toying with the idea of chnaging it to free second class delivery, and maybe charging 50p for first class.
I was also thinking of rewording it and sdaying 'Free First Class Delivery until Christmas' or something, and seeing if this would bump up pre-christmas orders? Has anyone else tried this.
btw, the shiiping isnt really 'free' as such, because I always take it into account when working prices out.
When we started out, there were almost no other stores on the web selling our main product, so we could ask retail and get it easily. The alternative for customers was to try to find the product in their local craft stores, who all sell at MSRP and charge sales tax. We had the same prices with no extra charges, plus a better selection. It was heaven.
But now, 2 years later, there are several much larger sites ("mega warehouse sites" relative to the niche I sell products in) - and they're selling at about 25% off retail, but all charge for shipping as that's their general business model.
So far, it doesn't appear that the other sites are hurting us - November was a record month and we weren't offering any significant discounts on the main product line, just a few big-ticket items discounted.
But as time passes and the other guys make their way up the search results, I can't help but think that it'll be harder for us to compete with just our free shipping offer. Seems we'll be forced into either cutting prices and adding a shipping charge for small orders, or we'll have to run some kind of perpetual "20% off" discount. I'm not looking forward to that day.
First free shipping on every item bought.
The widgets are going to have to be full price to accomodate this so itll be interesting to see what happens.
The Widgets have a UK license only so USA buyers (biggest market) cant get them over the counter there so I have limited competition.
Ill let you all know.
"So the question becomes what metrics can we use to determine if free shipping can work for our particular situation?"
The criteria we use and the point I was trying to make was, if you are ACTUALLY able to offer free shipping than it will probably work well for you. If you're simply offering free shipping by adding it into the price of your product, it most likely won't do you a lot of good and could hurt in some cases.
I try to break things down to their simplest form.:)