Merchant Spotlight:
The Case for Free Shipping: Is it Profitable?

April 26th, 2011 by Dani

Free shipping has been around for ages (at least the eCommerce age).  You would think it’s been fully studied and every online merchandiser knows the quantitative impact on their business.  But it hasn’t, and they don’t.  They know a lot about it, but not always whether it’s profitable!

Summary Conclusions

  • Our Case Study on TheFind’s new Quick Promotion tool shows a 23% traffic uplift for retailers running Free Shipping promotions on TheFind.
  • Industry research suggests that free shipping on reasonably-sized products could be a profitable way to grow traffic, sales and loyalty.
  • The trend among most retailers it to offer some form of free shipping during key selling periods (like Holidays and Mothers’ Day).
  • The trend for more and more influential retailers is to offer unconditional free standard shipping (but that may be more strategic than profitable).
  • Free shipping clubs is a great way for smaller retailers to reap some of the shipping economies large retailers enjoy, and make Free Shipping (with a minimum order size) profitable.

Case Study on TheFind

We started by understanding the impact of Free Shipping on driving traffic to your site – from TheFind. On March 20th, we launched a “Quick Promotions” tool in our Merchant Center.  With this tool, merchants can quickly set up an across-the-board Free Shipping promotion for every product that meets a specified price range.  A key feature of the tool is that Free Shipping is boldly displayed in the product tile on our search results pages.  

Since March 20th, 113 Merchants have initiated Free Shipping promotions on TheFind using this tool.  We measured both clicks and impressions for a 2-week period just prior and just after starting the Free Shipping promotion.  We analyzed Click-Through Rates to normalize for changes in demand during this period.  What we found was an average uplift of 23.1% in CTR from offering Free Shipping on our search results pages.  Our conclusion is that “You can significantly increase traffic with Free Shipping, taking share directly from your competitors”.  Makes sense in general. 

Tipping Point – Commit or Lose Share

You’ve probably noticed more articles and blog postings about Free Shipping in the last 6 months.  That’s because there’s significant momentum with Free Shipping promotions – in aggregate and with notable eCommerce trend-setters.  It’s hard to determine realtime when tipping points occur, but the indications look very strong that for Free Shipping promotions, the tipping point is happening now!

In aggregate during the 2010 Holidays 

  • comScore reported the percentage of U.S. eCommerce transactions that included free shipping rose to 55.1% the week of Nov 11/28/10, up from 45.6% the same week in 2009. Given the need to promote heavily during the 2009 recession, the increase in 2010 is quite significant.
  • 57.5% of merchants offered free shipping without conditions at some point during the 2010 Holiday period, perhaps even more surprising than overall adoption percentages.
  • 7% of the leading 100 online retailers offered Free Shipping on all orders, according to Lauren Freedman’s etailing group annual mystery shopping survey.

Trend-setting individual merchants

  • Amazon – offers free shipping on qualified orders over $25; plus, Amazon Prime – free 2-day shipping for all Prime members.
  • Walmart – for the Holidays, offered free shipping on nearly 60,000 online items, including most electronics, jewelry and toys — with no minimum purchase requirement.
  • Zappos – a true pioneer in this area, offers free shipping as part of its deep-seated customer service commitment that includes free shipping BOTH ways plus 365-day return policy and 24/7 customer service.
  • Ebay – big push with its sellers to offer Free Shipping promotions – products sold using Free Shipping rose dramatically – from 5% in Q1/08 to 33% in Q4/10.
  • Macy’s – offers free shipping for all products $99 or more.
  • Overstock.com – offers free shipping for new customers on their first order.
  • LL Bean – offers free shipping with “no minimum purchase, no end date and no conditionsguaranteed”.

Free Shipping membership clubs

  • Amazon Prime – free unlimited two-day shipping, no minimum order size.
  • Williams Sonoma Reserve – free standard shipping on most items.
  • Sears’ ShopVantage –  free standard shipping.
  • Overstock’s Club O – free shipping on every order, plus 5% discount on most items
  • ShopRunner – free unlimited two-day shipping, no minimum purchase; plus all ShopRunner returns ship free (equivalent to Zappos).
  • MasterCard Marketplace – free shipping is a prominent feature with participating merchants.

Of all these trends, in my opinion the combined moves of Walmart and Amazon have impacted online retailers the most, given the breadth of their combined product coverage.  Next most impactful are the “all-in” commitments of Zappos and L.L. Bean.  Did we say “Tipping Point”?

The Economics

The domino effect of these competitive moves will likely drive Free Shipping to become a “cost of doing business”.   You may need to ante up to maintain share.  I think we’re a year or 18 months from that point, but proactive merchants may want to take the plunge now, and be fully and permanently committed by the Holidays.  In fact, you may want to purposely make this move well before the Holidays.  Undoubtedly, it was very deliberate timing of L.L. Bean to commit in a non-Holiday period to make the case that it’s part of their founding commitment to customer service, not just a Holiday promotion.

That said, I’m sure you still want to know the economic impact of making a permanent move to Free Shipping.  Here’s what we discovered in our research and analysis:

  1. Increase in Average Order Value – comScore measured the correlation between Free Shipping and AOV over the 2010 Holiday period, and found a whopping 45% higher AOV on average with products sold with Free Shipping.  (See chart to right)  This factor clearly helps in delivering “profit contribution” to the equation, though it may not fully compensate for the added shipping cost.  The key question is, of course, “that’s the average, but how much will your AOV increase with Free Shipping?” 
  2. Increase in OrdersReason #1Reduction in Shopping Cart Abandonment As you know, the Shopping Cart is where most shoppers first discover the cost of shipping.  The surprise of discovering high shipping costs at that pivotal point in the shopping process is the #1 reason shoppers abandon their cart.  Which is a key reason why Amazon, L.L. Bean and others state Free Shipping on their key landing pages.  Perhaps our case study results, above, might shed some light on the impact free shipping on cart abandonment – 23% increase in click-through on TheFind might translate to the same ballpark drop in cart abandonment.  
  3. Increase in OrdersReason #2 - Bringing Shoppers Off the Sidelines – a recent consumer survey found that 23% of consumers use the reason “high shipping costs” to avoid buying online.  In other words, free shipping actually increases the overall size of the online shopping market.  It may well cannibalize some offline sales for multichannel retailers, but I believe it’s a net increase for multichannel merchants, as cannibalization will probably pull from competitors’ channels, as well.
  4. Increase in Lifetime Value –with Free Shipping membership clubs, like Amazon’s Prime and Williams-Sonoma Reserve, there appears to be strong evidence that loyalty increases significantly, causing members to “think twice” before buying elsewhere.  The net benefit is more frequent shopping occasions and higher revenue-per-member per year, drawing share directly from competitors.  
  5. Decrease in Acquisition Cost – We hear more and more from merchants registered on TheFind that their primary marketing challenge is new customer acquisition.  Even if the contribution margin of a new customer’s first shopping occasion is negative, the use of Free Shipping as a purchase motivator for first-time customers could significantly increase the open and click-through rates of email marketing and display advertising campaigns, significantly reducing their CPA.  (Here again, our case study results of 23% click-through lift might be a starting point guess for CPA decline.)   This is probably why Overstock has aggressively pursued the use of Free Shipping in new customer acquisition.
  6.  The Offset: The Actual Cost of Shipping – as with most of the profitability drivers above, the cost of shipping varies by product.  Product size and weight.  Product value.  Shipping distance.  Guaranteed delivery timing.  So any effort to determine the profitability of Free Shipping must be modeled for each product category (or macro-grouping of products by size-weight-value).  Most merchants who offer Free Shipping do so using “standard” (or ground) shipping (4-5 day shipping), bringing shipping costs down significantly.  The few articles that have been published about the net profitability of Free Shipping suggest that even then, without significant AOV increases, Free Shipping is not profitable at the order level.  Clearly, a full profitability model needs to be developed to really know.  But the most sensitive variable in this model is the actual shipping costs.  And economies of scale do exist in shipping.  A recent New York Times article cites the Distribution Management Group who reported that air shipping prices for big merchants are about 70% less than for small merchants.  Luckily, the rise in clubs like ShopRunner – a branded Free Shipping buying club for participating merchants – aggregates hundreds of merchants to bring much of the scale benefits enjoyed by the very large merchants to all merchants. 

So, in answer to the question “Free Shipping:  Is It Profitable?” – it depends… on the factors mentioned above, and it needs to be modeled for each product category in your business.  I will go out on a limb and say that using best practices in how you employ Free Shipping and fully leveraging the scale economies of your company, or participating in aggregation clubs like ShopRunner or marketplaces like Amazon’s Marketplace, will likely enable you to make Free Shipping both profitable and strategic to your company, for most reasonably-sized products.  (The version of Free Shipping that drives the most likely AOV uplift tends to be Free Shipping for all customers who reach a minimum order threshold.) And the sooner you do it, the more your early returns will include share increase instead of share maintenance.

22 Responses to “Merchant Spotlight: The Case for Free Shipping: Is it Profitable?”

  1. One fact we must all remember, there is no such thing as “Free Shipping”. When UPS, USPS, etc offer “Free Shipping” then so will we.

    My items sell for $17-$20 dollars each with shipping of $5-$6. There is no way I can absorb the shipping cost into my margin. So to keep margins as they are, we would need a hefty 33% or so price increase on the items. Customers would no longer be encouraged to buy additional items to dilute the shipping cost. Combining shipping on E-Bay items is another complication when the shipping cost is not separated.

  2. Sure if you are selling iPhones or iPods – there is no free shipping even the CEO of UPS has to pay to ship a box so it is all smoke and mirrors. You are hiding the cost of shipping in the price or paying for it out of your profit or over charging frank so paul can get a deal.

    Example: One 20 cubic foot bag of packing peanuts costs $13.00 but the cheapest shipping rate from Milwaukee to Milwaukee is over $120.00. Explain free shipping again? lol

  3. Very well written and informative article. It was very timely as I was just in the middle of doing some number crunching to include shipping (free shipping) in the cost of some of my products. Thank you! Julie

  4. Well written article with many statements to ponder. Obviously, free shipping will not work for everyone; it really depends on the business model and the items being sold. For those selling smaller items with good markup that can be shipped relatively inexpensively, free shipping provides a lever to generate profitable repeat business. Again, not for everybody but…. monitor what competitors are doing. Customers don’t really care what your costs are… same product at lower cost to a customer generally means a sale.

  5. In my market it is almost impossible to offer completely free shipping. There is no doubt in my mind that it would entice customers to buy more, but I don’t want to be that guy earning $2 or $3 per sale. We already have other fee’s such as our private domain registration, hosting, merchant accounts. I am definitely going to take a second look though and see what I can do. Pc Games Controllers

  6. Great article. I use free shipping on my product offers but only when the customer purchases a certain value. In my case I use a $600 purchase price point to trigger the free shipping offer. It adds value to my offer and in return it creates more sales.  Of course, there is no such thing as FREE shipping as the vendor pays for it and it is included in the price of the product.   Because I sell a product that is heavy and often shipped via LTL (Garage Flooring), I figured out that the $600 mark is when I can send the order via LTL and not FedEx or UPS ground.  In other words, when we ship via LTL there is a savings of about $0.15 cents per unit.

    • Darby Williams said

      Great points, Marvin! Similar to those of several other merchants this morning. Clearly the term “Free Shipping” is meant from the consumer’s standpoint, as it’s never free for you the merchant. And it only makes sense if you can make money by doing so (i.e. overall profitability), which is why I researched and wrote the article — there’s virtually no information that I could find to help merchants determine the overall profitability of free shipping.

      If your business is driven by repeat purchase, I would encourage you to look at this from a “Cost of Acquisition” versus the “Lifetime Value” standpoint, and consider offering advantageous shipping terms for a customer’s first purchase. After that it becomes a competitive question and what premium you can charge over your competition , if need be, should they decide to offer free shipping (our consumer research shows shipping terms are considered part of the price).

      Thanks for participating in the discussion!

      Darby

  7. I have read many articles about free shipping and instituted a policy long ago. Especially during the rough economy, we were able to leverage our low free shipping offer to get orders we may have not and created “life-long” customers.

    • Darby Williams said

      Thanks for your perspective, Jonathan. I do think the “lifelong” element (versus extra cost upfront) is a key consideration. As long as during that life, there’s positive profit contribution on their orders.

  8. Very True! Our items are already discounted enough as it is so FREE shipping would be impossible. However as I have seen it, it just depends what your niche is. We have customers call in all the time asking for free shipping on top of their discount and we always remind them when they start to compare that our prices are lower than others, so it just depends on what appeals to your customer base.

  9. In my site I programmed a free shipping code for The Find Customers (coupon code: THEFIND)but can’t make it visible to The Find customers when they see my product on your site. I checked the FAQS & other places but can’t find the info. Perhaps your site doesn’t allow us to show special discounts for The Find customers?

    • Darby Williams said

      Hi Suzanne – what you need to do is re-start the Free Shipping promotion now that we have launched “Quick Promotions” – it will create a Free Shipping call-out on your product tiles and you can input a special coupon code when you set it up. I think I see that you did go ahead and do this today… so you should be good to go!

      - Darby

  10. Indeed retailers are under enormous pressure to offer free shipping these days as many of the superstores have set the precedence and have raised customer expectations. We are advising our merchants within Giftys.com to seriously consider free shipping options or, at the very least, aggressive shipping promotions during peak season.

  11. Hi Darby
    Free shipping is still not visible to The Find customers on your site (you can check it yourself on this link: http://www.thefind.com/query.php?query=amazing+WIZ+kids ). I looked all over my store’s dashboard but didn’t see anything that said “Quick Promotions”. I filled in all the required fields under the Free Shipping heading in the “Sales & Promotions” section on my store’s dashboard and double checked the dates, and everything looks fine. Could you be more specific?

  12. Wow, superb blog layout! How long have you been blogging for? you make blogging look easy. The overall look of your site is great, let alone the content!

    • Darby Williams said

      Thanks! We did take a fair amount of time to figure out the scope of the content that would be relevant and useful for our merchant community.

  13. Book marked, I really like your site! :)

  14. Great article!! We too have been struggling with the question ‘to ship free or not!!’ I found the 23% increase in traffic quite interesting – the question is quite rightly ‘but what traffic increase would your site see with free shipping’ We might split test this out on a few products to see if there is any improvement in orders on our site:

    Wine Delivery

    • Darby Williams said

      Thanks very much for the comment. If you do end up doing a split test, it would be great if you could share your results. Either as a comment on this article, or as a guest blog posting on TheFind.

  15. It is interesting that TheFind allows merchants to advertise free shipping on individual products even when the stores doing so then have conditions for free shipping, e.g. free shipping over $45 or whatever. It would be interesting to see data on whether people clicking through on a $5 item advertised with free shipping abandon the site when they realize that is it free shipping at a certain cutoff?

  16. We found that free shipping at Christmas was a big factor in driving more sales. Off peak times it is not always a guarantee of sales. I do agree that the #1 reason that carts are dumped is the shipping cost, even when the shipping cost is reasonable. As an experiment, I have created a new FREE shipping coupon to go out to all of our brand new “beach club” members, hoping to encourage brand new customers to try us out immediately. We’ve used a 10% coupon in the past, and we do know it works, we will see how many more sales and customers we can possibly capture with this new promotion.

    Thanks for the article, giving me a few things to think about!

    Caron
    PS will also try out your new feature to see how that might work. Will report back with results!