6 Benefits of Offering Free Shipping. Conversions, Order Values and More!
Benefits of free shipping
“How much will the shipping cost?” And “When will my order arrive?” are decisive questions that determine whether a buyer will complete their purchase or not.
The modern-day online consumer is confident and shrewd, they expect free shipping and they expect rapid shipping and they will keep looking until they find the deal that they’re happy with. With more than 90% of U.S. based online consumers expecting a 2-3 day shipping time, and 30% expecting their orders to be shipped on the same day, online customers expect high standards of service.
When it comes to consumer purchasing behaviours, a 2021 Consumer Trends report found that 71% of consumers shopped around for the product they wanted to find the lowest shipping price. While 61% were happy to shop around for the product they wanted with the fastest possible shipping time. Free or low-cost shipping and fast shipping are two of the top five reasons why people shop online. And if these are not offered? People are happy to abandon their baskets and look elsewhere.
Unexpected shipping costs accounted for 25% of U.S. cart abandonments and having no express shipping available attributed another 4%. The global average abandonment rate in 2020 was 81%. With that in mind, your eCommerce business might want to consider a free shipping strategy. In the article below we will explore the considerations and benefits of offering your customers free shipping.
Free shipping isn’t ree
There are lots of benefits to offering free shipping, both to customers and merchants. But there are certain things that need considering before doing so. Why? Because free shipping isn’t free. At least not to merchants it’s not.
Depending on the type and size of the business selling items to customers, you may not be in a position to offer free shipping on all orders. This is especially so for retailers selling general merchandise, which includes high volume and low-cost items. Deciding at what order size to set your free shipping threshold may seem unimportant, but not it isn’t, and it’s far from arbitrary. Calculating the free shipping threshold should be a key component of your free shipping strategy, and one that holds a hidden benefit.
An important metric in this calculation is the median order value.
“Median is the midpoint of a frequency distribution over which there is an equal probability of being above or below it.”
To put it another way, if you know what your median order value is, half of all orders will be below, and the other half will be above.
It is also possible to use the average order value, (sum of all orders divided by the number of orders), however, if the business in question has a large distribution of product values, there may be outliers that skew your average. It would be wise to speak to a financial professional if you’re not sure.
Other items need to be considered also, but which are beyond the scope of this article, such as:
- Your standard shipping costs.
- Any other transactions fees, such as import/export duties.
- Credit card fees.
- The cost of the products, packaging and your profit margin.
Free shipping nudge – the first benefit
Using this information, the free shipping threshold can be used to provide a ‘nudge’ to your customers. Setting the free shipping basket amount at just the right point above your average order can mean increased sales. Your customers now have an incentive to purchase that one item extra or add in something they didn’t even know they needed…just to get that free shipping perk for their overall total order. Why would a customer pay £5 for shipping when then could add an extra item for that amount and receive something tangible in return?
Scores of online retailers operate in this way. Some provide an on-screen reminder, for example, “spend just £6.99 more to get free shipping”. There are lots of different ways to embed this feature into the shopping experience, through pop-ups or by suggesting related items that similar customers have included in their baskets.
This can be a lucrative and subtle way to boost revenues and encourage your customers to increase their basket size.
Customer loyalty and brand recognition – the second benefit
Again, free shipping is never free. But there are ways to offer this and still get something in return. For example, take Amazon and their Amazon Prime offer. They essentially sell free shipping to their customers, which sounds oxymoronic, but attracts 220 million people as of 2021.
Prime membership now comes with other benefits and any loyalty scheme that you might want to offer along with free shipping might be more modest in scope. But that doesn’t mean it won’t work.
Having a loyalty program encourages a connection between business and customer. A good loyalty program can be designed to offer a large benefit, such as free shipping, through incentives. This can build an emotional connection to customers and helps establish a pattern of repeated spending which positively impacts revenue.
In this way it is possible to tie in free shipping costs to a larger loyalty programme, providing companies with something in return, while still benefiting the customer in a meaningful way. Consumers will gravitate towards retailers who offer free shipping, and as a result there it is more likely they will repeatedly shop through these channels. This process builds brand recognition.
Competitor advantage – the third benefit
A customer experience is the perception a customer has of a brand. Every interaction matters when it comes to customer experience, no matter how brief and completely irrelevant of whether a customer completes a purchase or not. All contact, even a fleeting visit to a website contributes towards the experience of the customer. The aggregated feelings of your customer following their experiences is the key to understanding a customer’s experience. We have already seen that baskets abandonment rates are high and that shipping cost and speed is a large determining factor.
Companies that recognise that their customers care about shipping, and then do something to help create a smoother checkout process are creating a better customer experience, all other things being equal.
This gives them a distinct advantage in the marketplace and has the added benefit of increasing their brand recognition at the same time.
Likewise, if you’re a merchant and your competitors are offering free shipping when you aren’t, you had better find a way to keep up, otherwise, you will lose market share. Quickly.
Boosted conversion rate – the fourth benefit
The most common cause of basket abandonment is the extra charges seen when checking out being too high. At this moment the customer is on the verge of committing to the purchase and making the transaction final.
Customers are consciously doing a cost/benefit analysis of the items they want against the money they have. If the benefit is marginal, these extra shipping costs can create doubt, or completely scupper the transaction altogether.
During this point of the purchase, why would a retailer want to introduce a reason NOT to make a payment? Seriously.
Reducing the friction points of any transaction process is common sense. We already know that unexpected costs (and shipping) are the main reasons people abandon their baskets, so why not remove those aspects and streamline the experience, allowing for boosted conversion rates.
By offering a free shipping benefit in this way, companies are also maximising their audience in terms of potential customers. Research conducted by UPS found that:
- 46% of people are strongly influenced by shipping costs when deciding on a retailer.
- Heavy shoppers were more likely to be enticed by the cost of shipping.
- 71% of people expected to consider the cost of shipping as extremely important in future online purchases.
Based on these consumer sentiments, offering a free shipping solution gives you a greater reach in terms of customer base. This is displayed in the report which found that retailers reported a 10%-20% lift in revenues when offering free shipping.
Compete with the high street – the fifth benefit
When developing a solution to free delivery for customers, it isn’t just online retailers that provide the competition. Although the high-street has faded in no small part because of the rise and rise of eCommerce, those bricks and mortar retailers that remain are becoming more adept and novel in retaining market share.
In many ways, eCommerce channels have an advantage over the high-street, but there is one thing that they cannot replicate. Trying a product before buying. This is a key draw of some physical retailers and allows for a no consequence, low-risk shopping experience.
This shopping experience acts as a huge boon for the shopping experience provided by the high-street. Customers can see, feel and try the product in person. This increases their desire to own it and builds confidence and trust in the retailer. Even better, at the point that a customer decides to make the transaction, the store does not add on any surprise additional costs! And of course, it is less likely that customers will pick up items, carry them around and then abandon their ‘basket’ before leaving.
That said, eCommerce retailers have a very powerful advantage over the high-street shopping experience, and that’s the greater range and choice available to them. The inventory doesn’t have to be out on display, merely accessible from a logistics hub. Significantly increasing the products that can be offered online in comparison to physical retailers. By coupling free shipping to this greater choice, eCommerce channels can compete with “try before you buy”, by offering an experience as close to that as possible. Albeit that customers have to delay the immediacy of ownership instead of a wider array of products to choose from.
Logistical efficiency – the sixth benefit
By having an integrated and comprehensive shipping strategy, retailers will be able to collect a large amount of data on your customer network. Over time this data will build up and businesses will be able to determine the average spending habits and geographical locations of their customers. This type of metadata can be used to make strategic business decisions, such as the method of storing and shipping products. Should products be held centrally or spread between a warehousing network to cover a larger area? Should storage be kept in-house or outsourced to a third party that can fulfil orders on behalf of the retailer? These decisions can be vital in encouraging growth and remaining competitive, for example, if companies can keep inventory as close to their customers as possible, logistics expenses and shipping times are both reduced.
These types of decisions require careful planning and analysis. There can be hidden costs that are incurred and that has the potential to impact the company’s balance sheet. Keeping a close eye on business metrics is key to ensure success. Speaking to third-party logistics providers can help businesses to better understand the exact costs that would be incurred by outsourcing the pick, pack, and shipping process.
As the online retail space becomes more and more competitive, for some retailers there is little option but to offer a free shipping solution.
For luxury or high-value retailers, this may be less important, but in some segments such as clothing free shipping is almost ubiquitous amongst the market leaders. This makes it vital that companies competing in this market can offer the same.
Customer expectations are high, meeting them and providing a positive, smooth and pleasant customer experience is very important to grow brand recognition. Especially as consumers are quite happy to shop around to find themselves the very best deal.
Free delivery comes at a cost. There is no avoiding this. Someone has to pick up the cost. Businesses can choose to pass on the cost by simply increasing the cost of the products sold. However, this may put businesses at a disadvantage compared to competitors.
A less risky option is to work out the free shipping threshold and then leverage this to boost conversion rates and customer experience. Loyalty programmes or subscriptions offering customers free shipping can be an attractive way to offset the costs of providing this benefit whilst also encouraging customer retention and brand recognition.
The benefits of free shipping are numerous, but there is a potential downside that needs to be considered. Offering free shipping without a plan could negatively impact the bottom line of a business and this could be hard to turn around once implemented. Without the right economies of scale, a business might find itself left with huge costs or unable to compete with larger players in the same marketplace.
Free delivery also has an environmental impact that shouldn’t be taken lightly. Customers expect businesses to be conscious of environmental factors and this will need to be offset to protect the brand image. There are also impacts on customer behaviours, with returns becoming more likely as people buy items just to try them out.
Whichever way a business decides to implement the benefits of free shipping, there are people who can help.
Hi, we’re Accountancy Cloud
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