Free shipping for online purchases is practically a necessity in today’s world, where brand competition is fierce. In fact, a Retail TouchPoints survey found that 85% of surveyed U.S. internet users cited free shipping as the most important element of the shopping experience.
Small business owners in particular will probably want to use free shipping incentives to boost sales. But if the investment doesn’t pay off, businesses can hurt their bottom lines by diminishing net margins.
It can be tricky to establish a balance between increasing sales volume and maintaining profit margins. One way to do this is to set a minimum order value for the free shipping incentive.
This value needs to be carefully determined—when chosen wisely, a minimum order value for free shipping could be a huge boost for sales. But if a business is unrealistic about how much customers are willing to spend, it can detrimentally drive away potential sales.
Here’s what business owners need to keep in mind when it comes to leveraging free shipping incentives:
How to determine minimum order value
Businesses that decide to implement free shipping after an order meets a certain dollar amount often struggle to determine exactly what that minimum threshold will be. If it’s too high, businesses might not see much of an increase in sales volume and may potentially lose sales. If it’s too low, it can put their profit margins at risk.
One way to determine an appropriate threshold for free shipping is to determine the average order value. Knowing how much an average customer spends per transaction can provide a better idea of what a business’ minimum order value for free shipping should be.
A free shipping threshold should be slightly (about 30%) above the average order value. This can motivate customers to spend more while helping a business cover its true shipping costs. For example: if the average customer is spending $45 per order, consider setting a free shipping threshold at $60.
How to calculate minimum order value:
- Subtract the Average Order Value (AOV) from the proposed Minimum Cart Value (MCV).
- Take that number and multiply it by your Gross Profit Margin (GPM).
- Take that number and subtract your Average Shipping Costs (ASC).
If the resulting number is less than 0, the free shipping threshold is not fiscally viable. If it is more than 0, the free shipping threshold is viable.
It is important to remain realistic when determining how much customers are willing to spend for free shipping. Consider A/B testing two threshold amounts and measuring their effectiveness to make a more informed decision.
Here’s an example:
A business wants to set their minimum cart value at $50. Right now, their average order value is $35, their gross profit margin is 40% and their average shipping costs are $7.
$50 − $35 = $15
$15 × 0.40 = $6
$6 − $7 = −$1
Because −$1 is less than 0, this minimum order value isn’t a good choice fiscally.
So, the business returns to square one and tries a minimum cart value of $60.
$60 − $35 = $25
$25 × 0.40 = $10
$10 − $7 = $3
Because $3 is more than 0, this minimum order value is a viable fiscal choice.
Test the tipping point
When a business determines its free shipping threshold, it needs to convey the message to shoppers visiting their website. Consider alerting customers when their cart is close to the minimum order value for free shipping, especially during the checkout process. Additionally, consider dedicating a portion of the checkout screen to display items that customers can quickly add to reach the threshold.
Test the waters throughout the year with short-term sales that use free shipping incentives. This will highlight when customers are willing to spend more in order save on shipping.
Commit to understanding customers’ online buying habits. If they see value in free shipping promotions, then they may be more likely to buy more items, thus leading to improved conversion rates and increased profits.
- “2019 Shopper Insights Survey Mapping The Customer Journey: What Works — And What’s Broken,” Retail TouchPoints, October 2019.
- Kristina Lopienski, “How to Offer Free Shipping on Your Ecommerce Store + FAQs,” ShipBob, Inc., May 28, 2020.