We’ve all made online purchases that go something like this—we visit a website, find the items we want to buy, put them in our cart, and click through to checkout. Soon after, the retailer prompts us to choose a shipping option.
Depending on the retailer (and what you’re purchasing), shipping costs sometimes exceed the purchase price. You can bet that the consumer paying $12 for shipping on a $10 order will abandon their cart. And it’s a proven fact—43 percent of shoppers abandoned their carts because of high shipping charges, according to PayPal.
But how can you offer free shipping without going broke? One thing you can do is charge more for your products.
Wait… what? It might seem like this recommendation defies logic. Especially in an age when savvy consumers can compare prices online with just a few clicks. However, don’t underestimate the power of free, predictable shipping.
According to Oberlo, an e-commerce platform, consumers may be willing to pay more for a product if one retailer offers free shipping and a competitor doesn’t. Ninety-three percent of online buyers will buy more products to reach a specific threshold and qualify for free shipping (e.g., Get free shipping when you spend $50 or more).
A Real-World Example
A company is weighing the pros and cons of offering free shipping. Currently, they sell a widget that costs $25 to produce and retails at $99, for a profit margin of $74. With a shipping charge of $19 and an actual shipping cost of $8.50, their shipping margin is $10.50. Overall, the company’s profit margin in this scenario is $84.50.
Now let’s look at how those numbers compare when they offer free shipping. The company decides to increase their product price from $99 to $114, bringing the profit margin up to $89. But the shipping margin is now -$7.65 with free shipping. Overall, this brings the profit margin down to $81.35.
On paper, the non-free shipping scenario seems more beneficial. The company will see a profit margin of $3.15 less if they offer free shipping.
But when you consider the statistics mentioned above—how 43 percent of shoppers will abandon their carts if shipping costs are too high and 93 percent of buyers will end up spending more to get free shipping—suddenly $3 doesn’t seem like a lot.
And then there’s predictability. One of the reasons Amazon Prime has become so successful is because of the retail giant’s free shipping model. But consumers also like to know when they can expect to receive their package, and Amazon delivers. The overall premise is that the faster their orders arrive, the happier consumers will be. Free shipping is the icing on an already sweet deal.
There’s a reason Amazon owns 45 percent of the U.S. e-commerce market and one in three Americans have a Prime membership.
The Big Question
If your company faced a scenario like the real-world example above, here’s a question for you: Would you sell more products with free shipping?
You might be surprised to find the answer to that question is yes.