The Secret to Making More Money with Free Shipping

In the world of Amazon Prime, free shipping has become an expected standard for most online shoppers. For most of the bigger retailers, this does not pose any significant threat to their bottom line. But how can the smaller eCommerce owners compete in that environment? Shipping has been a topic that we’ve discussed briefly in the past, but today, we are talking about how you can offer free shipping as a merchant, without absolutely murdering your profitability.

Rebel CEO, Bill D’Alessandro, and I have both used free shipping in our businesses and found different solutions to create cost-efficient ways to ship for free to our clients. There are some impressive statistics behind some of the decisions we have both made.

On average, 58% of people will add more items to their cart to qualify for free shipping. If this minimum for free shipping is above your average order value, you have already found a way to make more from each customer on your site. Tune in to discover our tips and tactics for ensuring your customers’ happiness and increasing your bottom line with free shipping.

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The Full Conversation

(With your hosts Andrew Youderian of eCommerceFuel.com and Bill D’Alessandro, of RebelCEO.com.)

Andrew: Hey, hey guys it’s Andrew here and welcome to the eCommerce Fuel Podcast. Thank you so much for joining me today on the show. And today, we’re going to be talking about free shipping. Specifically how do you offer free shipping as a merchant without absolutely murdering your profitability? And joining me today the man behind RebelCEO.com, a frequent guest on the show, Mr. Bill D’Alessandro. Bill, welcome.

Bill: Thank you very much for having me, good to be here.

Andrew: We were just swapping pictures before we got on. I was showing you shots of the new eCommerce Fuel redesign coming down the pipes and you were showing me some pictures of your warehouse with signage out front and everything.

Bill: Yeah, we’re a growing boy over here at Elvis Brands. We have our own signs out front now and our own office space. It’s pretty nice.

Andrew: Man, you’re making me feel just young and inexperienced and like an amateur here. It looked like a cool place you have, man.

Bill: Well then just send me pictures the next time you’re in China or Bali or where ever it is you are.

Andrew: It’s cool. So you’ve got like the loading dock and the signs out front and a little place where any time you open up a new line, you can just slide the new line into like your big kind of signage, right?

Bill: Yeah, it’s great. We’ve got 5,000 square foot warehouse here with 2 loading docks and a couple of employees shipping orders and a whole room full of shelves and racks and we’ve got pallet jacks. It’s like a legitimate operation over here.

Andrew: That’s crazy. Have you officially gotten your first solicitation call yet? Is that what you…

Bill: Oh yeah, oh yeah. Let’s see what have we had this week. We’ve had the credit card processing guy. A new guy comes by every week. A guy came by trying to sell us cardboard shipping containers. Yeah, shippers like freight forwarders, all kinds of people stop by all the time. We’ve also had the Google Local Specialist, the scam SEO guys.

Andrew: Well that’s cool, man. Congrats. We’re going to also to make sure to get some pictures of that in the show notes. So if you want to check out Bill’s new warehouse digs ecommercefuel.com, we’ll make sure to put them in the show notes. All right lets dive into today’s episode on free shipping.

Elements Brand Warehouse

It’s an Amazon Prime World

Andrew: So Bill, before we talk about all the different strategies and things to be thinking about, I think it’s really important to just talk about kind of the world we live in and I think most people realize this, but I think it bares stating that we live in a post Amazon Prime world, right?

As a store owner, it’s easy to look at shipping, free shipping and say, “I can’t afford to do that because it’s expensive.” But people are trained, thanks to Amazon to expect free shipping, and not just free shipping but a lot of times, free fast shipping. And that’s the worldly environment as independent store owners that we’re operating under.

Bill: Yeah, I mean it’s table stakes now. It’s freaking brutal. I mean it really is. It’s wonderful as a consumer but it’s tough as a eCommerce store owner. You have to figure out, you have to know that your customers are expecting this. And if they’re not getting it, they’re going somewhere else or they’re going to Amazon. So you really have to figure out how does free shipping work into your marketing mix, how does it work into your cost mixing. Because it’s really not something you can afford not to do.

Andrew: And as well, we’ll kind of talk about a little bit later, it’s not necessarily about raw costs. It’s not about people saying, “Oh, you’re charging extra shipping,” or, “This product is more expensive because it ships for free.” It’s more about it’s this binary thing of, “Do they offer free shipping or don’t they offer free shipping?” And we’re going to get into some of the tricks about how to get around that and kind of maybe gain the system a little bit in a totally ethically way, hopefully. But yeah, it’s people just look at that and they make a real quick judgement and that’s what they’re thinking.

Thinking Through Order Minimums

Andrew: So first thing I know that is important to do is thinking through minimum order thresholds. So ideally you want to have if you’re going to offer free shipping, which you probably should be, don’t just offer a carte blanche. Have a threshold people need to meet. And ideally have it be right above your average order value. And to be honest, this is something I know we should do and we’re not doing a very good job of it at Right Channel Radios. Have you done this, Bill? Did you strategically put that above your average order threshold and did you see it make a difference?

Bill: Yeah, well I think this is really the key to free shipping. This is how as a business owner free shipping goes from a cost to a revenue driver for you. So if you just were to offer one day, you just said, “All right, free shipping on everything,” that would be an increase cost you had to absorb. What you want to do is make that cost work for you to increase your revenue. Say your average cart and you should be able to figure out your value from Google Analytics or from Shopify or whatever cart you’re using, that should be a measure you should already know.

Figure out what one more item is. So if you sell $25 widgets and most people buy two, put free shipping at $70 or $69. So your typical consumer who has 50 things in their cart says, “Man, if only I add one more thing, I’m going to get free shipping. I’m not going to waste $5 on shipping. This extra thing is essentially on sale to me.” So now, yeah, you’ve had to eat some shipping, but you’ve gotten an increase in average order value there that’s going to help you net it out. So it’s totally critical.

We do it for Nurture My Body. Our average cart size is about $75. Our average item is about $25. So we have free shipping at $97. And when I did this, it used to be around 70 bucks which was the average cart size, more people were getting free shipping, I bumped it up to $97. And it raised our average cart by about $5, $6, $7 bucks or something which is real money when you talk about what you can pay for a CPA.

Andrew: Yeah, it’s crazy. I think there’s an article link up to from eConsultants. They did a study and they said like 58% of people add something to their cart to qualify for free shipping. I think the strategy, of course, it works. You’ve seen it work. These guys have seen it work. I don’t know if you did this, Bill, but we have our free shipping threshold at $75. And it boggles my mind the number of people that will get a cart at like the $73 mark, $2 away from free shipping, and then they’ll pay like $10 in shipping.

Bill: Yeah.

Andrew: You know they could add a $5 add on, get something free and come out ahead but they just don’t do it.

Bill: Yeah, that happens on my sites too and that’s why you have to do this is a one two punch. You’ve got to set your threshold for free shipping above your average order value but then you got to let people know where that threshold is and how close they are to it. If you go to NurtureMyBody.com, add something to your cart and then view your cart, you’ll see a banner across the top that says, “Wait. Add $40 to your cart, receive free shipping.”

And conversely if you’re over $97, it say, “Hooray, you’re getting free shipping. Don’t you want to add something else while you’re getting free shipping?” So you’ve got to be hitting people at all times to try to get them to play the free shipping game. Make them see the free shipping as a value add and an opportunity for them.

Find The Most Cost Effective Ways to Ship

Andrew: Yeah, I’ve noticed. You guys, you do a really nice job at that on your cart, Bill. So number one, minimum order thresholds, make sure those are in place. It sounds maybe obvious but sometimes, it can slip through the cracks as some kind of, “I’ll tell in a minute.” Number two, understand the most cost effective ways to ship your products. Bill, you’ve got a good example about this.

For me this year with Right Channel, beginning of the year, UPS and FedEx really changed the ways that they shipped. It used to be if you had something super long like an antenna and it was light weight, it wouldn’t cost too much from UPS because they mostly charge based on weight. But after a couple of months after the switch over, I started diving into my invoices and my profitability and the P&L. And I noticed we were getting just killed on shipping charges and we ended up changing almost 90% plus of our orders now to USPS.

Bill: Wow.

Andrew: Because it was so much more economical and it’s the kind of thing that if we hadn’t been really looking at it and paying attention, we could have gotten months and months and maybe even years and lost tons of money.

Bill: So you got really killed on the dimensional weight shipped over?

Andrew: Our shipping cost probably went up by 50%, 60%, 70%. It was crazy.

Bill: Wow. You were the people they were targeting. That was the idea.

Andrew: They were but they drove us into the arms of their competitor.

Bill: True, true.

Andrew: And you had an example on this I think. You mentioned in the past in the podcast but it might bare repeating for the people who didn’t catch our IRC Rep with UPS or USPS and the weights.

Bill: Yes, so I use now Postal Service USPS for probably 95% of our packages. We’re shipping shampoo. We’re shipping face cream, sunscreen and all sorts of things like that. So they’re usually physically small and if you order just one, this sub one pound. And sub one pound is first class package with Postal Service which is like usually under $3 to ship.

So I was at an internet retailer commerce in Chicago with Andrew this year and I swing by the Postal Service booth. And it turns out if you’re shipping decent volume through the Postal Service, you can actually get some negotiated rates with the Postal Service and I didn’t know. So we were able to negotiate typically first class mail that cheap shipping option I just mentioned cuts off at 13 ounces. We were able to negotiate to raise that ceiling to 16 ounces which was huge for us because a lot of our packages actually come in at 14 and 15 ounces. And so those were going over to Priority Mail which is $6 a package. And so it would take a ton of our packages from that $6 a package Priority Mail range to $3 a package First Class Mail range.

So that was a big win just by asking. And also I mean maybe you want to talk about this later as far as selling a shipping service level or selling a specific carrier. So the nice thing about Postal Service’s Priority Mail, it can be two-day in a lot of places in the country. So if you sell someone two-day UPS, they’re going to expect UPS. But if you just sell someone two-day shipping, you can send it Priority Mail, spend six bucks and that’s a huge win for you.

Andrew: Yeah, massive and that’s something we do too. We get real generic about not who we’re shipping but delivery times to give us the flexibility to do that. Because if you have on their UPS Second Day Overnight Air, Air Two-Day Delivery and then it comes UPS Ground, even it it gets there in two days, sometimes people are like, “Hey man, we didn’t pay as much for this.”

Bill: Right.

Andrew: Yeah, it gives you a ton of flexibility. And Priority Mail has gotten a ton better recently. A lot of people on the forum will link up to a discussion on this. It used to be Priority Mail was kind of like two to three days, maybe 80% of the time but it would slip sometimes. It wasn’t that great but it has gotten a ton more reliable recently and they’re also getting better. Just the other day, I did something online where I mapped out, “Hey, how long would it take to get to zip A to zip B?” And it was like, “Two days!” It wasn’t like, “Hey, maybe two days.” They’re getting a lot more firm and reliable with that on USPS side.

Bill: And it has not gotten any more expensive either.

Andrew: Yeah.

Bill: Which is the awesome part. I think it was probably 6 to 12 months ago, they went from Priority Mail being this kind of 2 to 3 day service too. Now it’s guaranteed. It’s one day to some zip codes and they commit to up front based on what zip it is. So you can actually say when you ship that box, “It will be there tomorrow,” not, “Maybe it will be there tomorrow.” And you can do that for six bucks Priority Mail. It’s incredible.

Andrew: It is. Another thing I think people should do, and if you’re a big retailer, you probably already know this, but if you’re not pitting UPS and FedEx against each other to negotiate rates with them, it’s something you need to be doing. They’re definitely negotiable especially if they know if they’re having to work to earn your business. The ins and outs of that are probably something we can save for another discussion, Bill, but we’ll link up to a forum discussion on that. And one more thing to note too is if an order comes in, you don’t necessarily have to ship it all one shipping method.

Sometimes we get orders for radios which are heavy and antennas which are light but they’re overweight, we’ll ship the antenna USPS and then we’ll ship the radio UPS and it actually ends up cheaper sending it two methods versus bundling it into one which is crazy.

Bill: Interesting.

Raise Your Prices

Andrew: Yeah. So number three, raise your prices to pay for free shipping. So free shipping, nothing is free, right?

Bill: Correct.

Andrew: So a lot of times, determining if free shipping is a good profitability move is really complicated. There’s maybe in some cases, just by offering free shipping and eating all those additional shipping costs yourself, maybe there’s a chance that you’ll make up for it overall with additional volume because people will purchase from you but that’s not always going to be a given. So you’ve got to think through how to pay for that if it’s a good business decision.

So Bill, I got kind of a thought process behind this but I’d love to hear your thoughts first. When you’ve offered it in the past, did you raise your prices? Did you just kind of eat it and did you make it up on margin? How did that work?

Bill: So I actually figured this out sort of by accident. It was the very first pricing experiment I ever did when I started my business back in 2010. I was selling skin cream product. I wanted to price it at $30 and shipping was going to be $4.99. And I tested $30 plus $4.99 shipping or $35 with free shipping.

I didn’t do a fancy AB, I just ran it one way for a week and then I changed it around the other way for a week. And even though they were both the equivalent $35 in spend, the $35 plus free shipping a conversion rate was almost double.

Andrew: Wow.

Bill: So I did essentially almost twice the sales and my conversion rate was doubled. Even though it was not effectively more expensive, people were just either put off by having to pay for shipping or enticed by the free shipping. So I ended up and on to this day, I sell for $35 with free shipping.

Andrew: That’s amazing. And so for you, the increase volume definitely made up for the small amount you had to pay for shipping.

Bill: Yeah. Well I was going to pass it through anyway so it wasn’t like I was doing $30 free shipping or $35 free shipping. I was charging for just paying at a lower price or higher price with free shipping. So yeah I just basically baked it in.

Andrew: Yeah, that’s crazy. For me, our margins, I’m always jealous of your margins in the skin care space, our margins are a little lower and our shipping costs are higher so it gets a little trickier for us. And so what we’ve done, I like to try to optimize around profit per visitor because when I look it, I’ve got to account for the margin hit we take.

Because if we just pay for shipping, it’s a huge hit to our margins because our margins are smaller and a lot of our products, they’re not proprietary like yours are. So people are much more price sensitive especially for some of the bigger radios so you…

Bill: Got to convey shop essentially they can buy them lots of places so you’ve got to be in line price wise.

Andrew: Exactly. I mean you don’t have to be but your conversions going to take a hit and so there’s a lot of moving parts. And so when we incorporated free shipping in, we tried to optimize per profit per visitor. So we looked at the overall profit. Every month, we looked at the overall number of visitors that came and we were trying to optimize for that. That was the threshold or the metric we were going for. And so what we did is we raised prices on items above the threshold by the entire shipping amount.

So our $75 free shipping for a radio, kind of like exactly what you did Bill with your skin creams, if a radio costs $100 and shipped for free and we were charging $10 for shipping, we just bumped it up to $110. And then prices below that threshold, we increased them incrementally. So if we were going to offer an item was like $25 and three of those would hit the threshold, we’d have one-third of the shipping price baked into that price. So that’s how we brush but it’s tough.

They’re so many moving parts. Yours is pretty straight forward, Bill. But for our situation, there are a lot of moving parts. We have a lot of skews. And I think if you’re doing this, do your best effort but don’t get too caught up in trying to control for every variable because you’re not going to be able to do it.

Bill: No, there’s too many moving parts. I think the two metrics to watch are conversion rate because a higher conversion rate is more money to your bottom line for every add dollar you spend, right? So all else be equal a higher conversion rate. You can measure how much more money that puts in your pocket. And the same thing on average order values. So how many orders are you getting, conversion rate and what is the average value of each of those orders.

Both of those things put actual real dollars in your pocket and then compare how many additional dollars you’re able to put in your pocket, increase conversion rate, increase ALV with free shipping versus how much free shipping is costing you. I’d say that’s been the easiest way to think about it.

Andrew: Yeah, and maybe add one more to those would be your gross margin. Because if you’re again like me where your low margin, you’ve got high shipping costs for your goods, if you’re not tracking that gross margin then you’re conversion rates staying the same. Your average order values taken off but your gross margin’s taking a nose dive, you’re going to get killed on stuff.

Bill: Yes, good point. You should really be looking at number of dollars and AOD, average cart drops the bottom line.

Andrew: Yeah, one last thing is beware of super cheap items that you charge shipping for. And again this is something where I need to practice where I preach a little bit more because we have some low cost items on our website that probably cost almost as they are to ship. But I was shopping for something a couple of weeks ago and it was like $10 and the shipping on it was like $9. And I would have paid $20 for it, no problem. But just physiologically thinking in my mind thinking, “I’m not going to pay as much to ship this as it’s worth.” There’s something that prevents people from purchasing. So when you’re thinking about increasing your pricing, think through that and make sure you’re not charging people as much to ship it as you are for the product.

People Pay for Expedited Deliveries

Andrew: Number four, make people pay for expedited delivery. I don’t know about you, Bill, but a lot of times for us, our standard shipping that doesn’t meet the threshold is pretty slow and then people can upgrade to it. And in the past, we’ve had a lot of success with having that anchoring. Because a lot of times, people just want free shipping. And it’s that binary issue, “Do they offer free shipping, do they not offer it? Okay they offer it, I’ll continue to shop here.” And it’s much easier to get people to go from a slow free shipping option to pay for upgraded shipping than it is to go from no shipping to pay for free shipping.

Bill: Yeah, and so we structure ours, on Nurture My Body, it’s free shipping over $97. Below $97, it’s $3.99 flat shipping, flat free economy shipping. And we say on economy shipping, it’s five to seven days. And that gives us the flexibility to since we ship it however we want to ship it. We can ship it Postal Service, UPS, FedEx, whatever it might be, whatever the cheapest is for us because we haven’t promised an exact carrier. We just promised economy shipping, five to seven days. And then in the cart, you have the opportunity to upgrade to $5.99 for standard shipping, three to five days, or second day which varies from $14.99 to $19.99.

The funny thing is that usually I said earlier in the podcast, I ship 95% of my boxes First Class Mail and Postal Service. So really regardless of what they pick, almost every time, it ends up going Postal Service anyway because Postal Service has such a great service level. If you can pay nothing for economy shipping, most of the times, it’s going to reach you in three days anyway because you’re getting First Class Shipping or Priority Mail and that was the cheapest option.

But sometimes people will pay up and if they pay up, we make sure they get Priority Mail instead of First Class or we make sure they get a Three-Day Ground UPS or something like that. So if you don’t promise a specific method, just promise a service level.

Ship from Multiple Locations

Andrew: Yeah, and that ties in with number five which is ship from multiple geographic locations. And this isn’t always possible especially if you have a lot of skews but it can do a couple of things. It can one lower your cost of just shipping to various people throughout. Say for us, the United States. Your Ground Shipping just gets cheaper because you’re shipping at shorter distance. But it allows you to deliver faster times at the significantly lower rate. So Bill, you were talking about delivering, only delivering a service level.

And so what we do is a lot of times, when people buy on our site and lets say they select two-day delivery or three-day delivery for something that doesn’t qualify for free. Like right now we’ve got it set up where anything $75 and over qualifies for free three-day delivery and that’s kind of one of our unique selling propositions on the site. But even if they come in on below that threshold, let’s say they want to expedite and item and they pay extra for it, well the number of geographic locations we have makes it much more likely that we can get it there on a non-expedited method for a lower cost. And so we definitely guarantee it will get there. They pay more for it to ensure it’s there but more or less the warehouse distribution and the increased number of warehouses allows us to really look at shipping as a profit center in some areas while still being able to deliver the service level.

Bill: So you are able to do that because you selectively drop ship from different suppliers or they have different warehouses?

Andrew: Exactly. We have different multiple drop ship suppliers on the west coast and on the east coast than in the west and then we go ahead and ship. And there’s sometimes definitely that availability isn’t there. So if somebody selects three-day shipping on an item in New York and it’s over in our Oregon warehouse, well we’re going to have to, you know, we’re going to pay up and make sure it gets there in time. But if they select three-day shipping and it’s in New York City and comes out of our mid west or east cost warehouse, well because we’ve invested in those relationships there, we can still definitely get it to them within three days and it doesn’t cost us nearly as much because can ship it ground.

Bill: Interesting. So do you put human eyes on every order to make that decision intelligently or are you able to automate it?

Andrew: We do. We haven’t been able to automate in the past. I’d love to use Dual Play [SP]. We found out about using Dual Play because I believe Dual Play does do geo-routing to be able to route your order to the closest warehouse to the customer. But right now we’re doing it manually.

Bill: Interesting. Yeah, it’s a hard problem to solve.

Andrew: It is. It is but if you can do it, you can definitely make some money from it and keep your customers happy so yeah. So Bill, a handful of quick forum discussions for people to check out on the topic. One, how to negotiate shipping rates with UPS if that’s something that if you’ve got UPS or FedEx, it talks about both of them, how to really get in there and get better rates from them. We’ve got a great discussion in the forums about that.

How free shipping affects conversion? A lot of our members weigh in on what its done to their conversion rate in the forum. And then finally a thought process for optimizing for profit per visitor, that metric I mentioned that I used to try to test my pricing experiments, the free shipping experience, all those kinds of things. It gets a little complicated but there’s a few things that you want to make sure you’re controlling for not perfectly but to think through link ups for that discussion as well. So Bill, any closing thoughts on this?

Bill: Overall just do free shipping. You have to do it but don’t view it as a cost center. Try to figure out a way to make it a marketing expense, way of having to drive more revenue for you.

Andrew: One thing that I didn’t touch on quickly is FBA. You use FBA, of course, to ship a ton of stuff and you pretty much get a piggy back off of Amazon for two second day delivery, don’t you?

Bill: Yeah, absolutely. FBA, they get you a little bit on fulfillment fees and also you can’t use FBA to do economical two-day for non Amazon orders in the same way. Remember also, when you’re on Amazon, you’re not buying UPS 2 Day or whatever it is. They just sell you two-day shipping and they pick the carrier so they’re doing it too. But if somebody orders on Amazon, yeah, you don’t pay a dime for that free shipping. Amazon just eats it.

Andrew: Bill, well thanks, man. It’s been good. Hopefully we keep the margin half way decent and get things to customers quickly.

Bill: Yeah.

Andrew: Bill D’Alessandro from rebelceo.com. Thanks so much, man.

Bill: Sure thing. Talk to you later.

Andrew: That’s going to do it for this week. If you’ve enjoyed the episode, make sure to check the eCommerce Fuel Private Forum. A vetted community exclusively for six and seven figure store owners. With over 600 experienced members and thousands of monthly comments, it’s the best place online to connect with and learn from other successful store owners to help you grow your business. To learn more and apply, visit ecommercefuel.com/forum. Thanks so much for listening and I’m looking forward to seeing you again next Friday.

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Post tagged in: Operations, Podcast

7 Comments

  1. Andrew

    Been catching up with your podcast for a couple of months. I’m now up to date. This one was extremely interesting, as one of the sites I look after includes free shipping (built-in to the price of each item), but this makes each item expensive when bought more than one at a time. I like the idea of having a threshold for free shipping, but never consider it be a revenue stream instead of a cost before. Thanks!!

  2. We are struggling with this at the moment and this podcast really gave me some ammo to convince my team we need to make this happen.
    I would love to see address the different vendors. We were adamant UPS customers and we got a very nice price break but they’ve introduced a “service” called Access Point that our customers hate. After one attempt at home delivery, they take it to a local business and the customer has to pick it up. Our high end food customer wasn’t happy going to a dog grooming business to pick up his food. And UPS has been less than honest about making delivery attempts. We switched to Fedex and so far, they’ve been great and receptive. USPS is ok and the price can make sense but if something goes wrong (which is rare but when it does, it’s a doozy) there’s no real customer service.
    I think you could do a great show on all of this!
    thanks for your continued good work.

    1. Hey Steve! Fantastic suggestion, thank you. I’m adding this to my list of topics for a future episode. We’ve had some similar experiences. In terms of USPS, they’re definitely cheaper but their customer service if something goes amiss / a package is lost can be frustrating to say the least. Would love to do a UPS vs. USPS vs. FedEx showdown. Thanks!

  3. Thanks Andrew for the blog post and the podcast, very interesting! I work for a deliveries startup and I’d love to know what you think about our decision to offer a wide variety of shipping options to the customer, betting more on time windows, appointments and communication of ETAs than on free-shipping per se.
    To learn more and take a look at our blog just visit our website: http://www.milkman.it.