This is the third and final piece to our three part series on how to optimize your free shipping offers.
In the previous two articles of this series, I’ve been banging the drum that free shipping offers are a very simple and effective way to compete in your market and even see a lift in your average order value (AOV).
This is still true.
But a word of caution: it is also very important that you understand the numbers enough to know how offering free delivery is affecting your profits.
I’ll be spending the rest of this article going over a basic approach to evaluating that for your own business so that you can investigate for yourself whether eating the cost of delivery is ultimately helping or hurting your profits.
The only way to accurately do this is to test, test, test
We can make assumptions all day long about how much we think overall orders and AOV will go up by offering free shipping. But assumptions are often wrong, and being misinformed about your margins is treacherous ground for a retailer.
The best way to find the effect of free shipping is to test it out for a set period of time and compare the results.
Here are my recommended steps to go about doing that:
Designate (at least) a 1 month period that you don’t offer free shipping and a 1 month period that you do (preferably with an order minimum to qualify). This will give you a comparison to see how your sales metrics change based on whether you offer it or not.
Note: make sure these two time periods are evenly matched in terms of promotions and shopping trends. Don’t evaluate between December and January, because the holiday spending in December will skew the results too much. Consider your market and your customers and find a stretch of time that does not usually have a lot of hills and valleys for sales.
Calculate the important metrics for each month that will show how profitable your free shipping offer was. This includes:
- gross margin
- total orders
- orders over your minimum threshold
- overall conversion rate
- average order value
- shipping fees charged to the retailer
- shipping fees paid by the customer
If you’re not a numbers person, feel free to download and plug in your numbers to our Sample Shipping Discount Impact Report.
Now you want to evaluate these metrics in order to know with some certainty how your free shipping offer affects your profits.
Note: the reports you need to find these numbers are Google Analytics (traffic), monthly sales reports (often provided by your eCommerce platform), and your shipping reports (cost of delivery fees).
If we look at the above example, you can see that by offering free shipping, the sales metrics (conversion rate, orders, AOV, and total revenue) all went up significantly.
As expected, the margins went down some because you’re now on the hook for more of the delivery fees. But ultimately, profits increased by ~35%.
Looks like the free shipping offer pays off well!
But wouldn’t free shipping always increase profits?
No, not necessarily. The biggest factor that works against you when offering free shipping is having to sacrifice some of your margins to cover the delivery fees.
If that’s a significant cost for your business and you’re not getting enough of a bump in sales from your free shipping offer, then you could ultimately cut your margins down to a percentage that is unsustainable over the long haul.
In that situation, it would be better to consider charging a lower flat rate that’s more palatable to your customers and helps you keep your margins healthy.
The only way to know for sure is to…
Say it with me… Test!
Follow this approach, and you will be able to know with a lot more certainty whether offering free shipping is a smart move for your store or not.
Yes, it takes time (at least two full months) to see confident results, but the testing will pay off in making sure you stay profitable over the long haul and don’t end up chipping away at your margins.
If you decide to give this a try, I would love to hear how things go for you. My inbox is always open, so just shoot me an email.
We are often working with retailers to determine important metrics like these. Please get in touch with one of our experts if you are looking to improve profits on your site.