Think back to the last time you bought something online: did you pay for shipping? These days, it’s becoming increasingly likely that you didn’t, either because the chosen seller offered free shipping or because you purposefully avoided online shops that didn’t offer it.
The practice of shipping products for free has become standard in e-commerce. The Digital Commerce 360 Top 1000 Database shows that 74.4% of retailers offer some sort of free shipping: 20.4% unconditional for all orders, 45.1% with a value threshold, and 14.5% requiring membership in a loyalty program.
It’s no wonder that many businesses believe they must offer free shipping to remain competitive in the market. In reality, it’s not right for every seller. This article will cover the historical context of free shipping and some pros and cons to help your e-commerce business make the right strategic choice on the topic.
Have we always had free shipping?
Unsurprisingly, free shipping was popularised by e-commerce giant Amazon in the early 2000s. After two holiday seasons of offering free shipping to customers spending $100 or more, the company was considering making free shipping available to everyone, but it was cost-prohibitive.
According to Brad Stone in his book The Everything Store, this is how the story played out:
“Greg Greeley [a finance employee] mentioned how airlines had segmented their customers into two groups — business people and recreational travelers — by reducing ticket prices for those customers who were willing to stay at their destination through a Saturday night. Greeley suggested doing the equivalent at Amazon. They would make the free-shipping offer permanent, but only for customers who were willing to wait a few extra days for their order. Just like the airlines, Amazon would, in effect, divide its customers into two groups: those whose needs were time sensitive, and everyone else. The company could then reduce the expense of free shipping, because workers in the fulfillment centers could pack those free- shipping orders in the trucks that Amazon sent off to express shippers and the post office whenever the trucks had excess room. Bezos loved it. ‘That is exactly what we are going to do,’ he said.”
From there, Amazon started by offering “Free Super Saver Shipping” in 2002 on orders over $99, then $49, and eventually $25. Eventually, this turned into the membership program we now know as Amazon Prime.
Since then, free shipping has had its grip on the e-commerce landscape, as it allowed customers to demand convenience and speed from online businesses. It’s grown to become a fairly standard marketing tactic, and is often an expectation of customers.
“No such thing as a free lunch” – Free shipping isn’t free
It’s worth pausing to remind ourselves that free shipping is exactly what we said above: a marketing tactic. There’s no such thing as “free” shipping, since there are costs associated with sending products from businesses to customers, whether for the initial order or a return or exchange. Postage, supplies and even customs fees or import taxes when shipping internationally all have to be paid for by someone.
The reality is that either the business pays for shipping or the customer does. If the business offers “free shipping” and pays for it, that reduces their profit margin. If the business wants the customer to pay for the “free shipping”, then the costs of shipping must be added to the price paid for the products themselves.
The question for e-commerce businesses isn’t really whether to offer free shipping or not. It’s whether the price of shipping should be included in the display price paid by the customer, or if it will be charged as an extra fee on top.
Pros and cons of free shipping
This is clearly a complicated topic, so let’s cover some of the pros and cons of offering free shipping as an e-commerce business:
Pro 1: It increases conversion rates
Since 59% of online shoppers consider free shipping to be a deciding factor in purchase decisions, second only to price, offering free shipping can boost conversion rates for your e-commerce store. Conversely, charging shipping fees can increase cart abandonment: According to Sendcloud research, 65% of European shoppers left a checkout because the shipping costs were too steep.
By eliminating visible shipping fees, you remove a potential barrier to purchase and encourage customers to complete their transactions.
Pro 2: It brings in new customers
Meeting consumer demand is a significant benefit of offering free shipping. When a potential buyer sees that a product comes with free shipping, it becomes more attractive and makes them feel they are getting a better value for their money.
To bring in new customers, businesses have to, at a minimum, meet expectations. Since 80% of consumers expect shipping to be free if they hit a certain spending threshold, and 66% expect free shipping for all sizes of online orders, this can play an important factor in attracting new customers to your store.
Pro 3: It encourages loyalty and repeat purchases
Once you bring in customers, it’s worth doing everything possible to hold onto them. Retention is cheaper than acquisition, after all.
Customers appreciate the perceived value they receive when shipping is free, which can lead to them viewing the overall shopping experience as positive. Satisfied customers are more likely to be loyal, returning to your store for future purchases and recommending your business to others. This impact is amplified even more if your competitors do not offer free shipping.
Pro 4: It increases AOV
In cases where customers need to meet a minimum order value to qualify for free shipping, this can incentivise customers to add more items to their carts, increasing the average order value (AOV) and boosting your revenue. One survey found that 59% of respondents were willing to increase their order size to qualify for free shipping.
If you are going to offer free shipping, general industry advice is to set the minimum threshold about 15-30% higher than your AOV to encourage customers to top up their carts.
Con 1: It has cost implications
Offering free shipping either means absorbing the cost of shipping orders yourself and decreasing your margins, or increasing product prices to cover the cost, potentially decreasing your unit sales. The second option is usually recommended. Shipping expenses, packaging materials, and logistics can become a significant cost for your business, particularly for large or international shipments. Businesses also need to consider how they’ll respond if shipping rates, for example the cost of postage, increases.
Free shipping is even trickier if you sell low-cost or low-margin products. In these cases, absorbing the cost is probably not possible if you want to make a profit, but folding shipping costs into the product price can quickly turn a €2 product into a €6 product.
Con 2: It creates sustainability issues
Sustainability issues are a huge concern when it comes to free shipping, due to the carbon emissions and waste created when shipping higher volumes, faster, to more locations. According to Earth.org:
Product shipping and return accounted for 37% of total greenhouse gas emissions in 2020
When shoppers opt for a fast delivery (e.g. 2-day shipping), emissions are far greater than those generated by in-person shopping or slower delivery options
Return rates exceed 30% of all purchased goods, adding to the overall environmental impact of the free shipping offer
Con 3: It creates logistical challenges
To offer free shipping, businesses must be prepared with the proper logistical capabilities. For example, can your distributors handle the volume you will require? How will returns and exchanges work? What speed of delivery is to be expected? How will you ensure the offer is not being abused by customers ordering and returning products often?
All of these concerns are amplified even more for small businesses, who may not have the resources or logistics setup available to larger sellers.
Should your e-commerce business offer free shipping?
Whether to offer free shipping, and what the parameters for that offer will be, is a significant strategic decision for any e-commerce business. While it is a helpful way to bring in new customers, incentivise repeat purchases and boost the AOV, there are real sustainability, cost and logistics issues to contend with.
Before making a decision, businesses should consider the pros and cons listed above, as well as questions such as:
Are there any other options besides free shipping that would incentivise your customers even more?
What are the parameters for your free shipping offer? Can you take advantage of bundle shipping, where customers wait a few days longer to get their item so it can be included in a larger shipment?
How much does your specific customer base actually appreciate free shipping? What does your market research show about their willingness to pay a bit more to compensate for shipping costs?
At Omnia Retail, the prices we scrape online and use to develop insights for users are all inclusive of shipping costs. This is because that’s the price the consumer compares in the end, making it the most important to focus on. Learn more about Omnia ‘s pricing software for retailers and brands here.