E-commerce Profitability

Set a free shipping threshold that boosts your profitability

Henrik Hoffman
September 4, 2023

Free shipping is a common practice that, for many e-commerce businesses, is almost there just as a default. "It should be like that" or "We need to have that to be attractive". However, offering free shipping without a threshold can significantly impact a business's profitability. This is likely to happen for companies with a lot of variation in basket size between customers and even more, if the e-commerce company offers worldwide shipping.

To maintain profitability while offering free shipping you need to find the sweet spot for your threshold that balances your profit with customer expectations. In this blog, we’ll explore how to set a free shipping threshold that maximize profitability.


Determine your profit margins

Before making any changes, you need to know your different average cost structure and profit contribution (Net Gross Profit 3) for your different type of orders. Differences to look for here is mainly between shipping providers and countries/regions since that's where you will be able to offer different free shipping thresholds. You could of course do this on an customer by customer basis, but first things first: Get the basics right.


The Order Cost formula

  • COGS (your purchase price for the products based on the Net Sales, ie excluding the orders that are returned)
  • All logistics and fulfilment costs (transaction cost, packaging, picking, shipping, customs, and the cost of the returns)
  • Average marketing cost per order

When you've done this you know on average what an order costs and what minimum Average Order Value you need the minimum basket size that is required to break even for your different shipping providers and countries/regions.

A click away in the Dema Platform, you get your orders plotted with your Net Gross Margin 2 on the y-axis and AOV on the x-axis

Analyze your customer data

Knowing your customer data helps you set an appropriate threshold for free shipping. Analyze your customer data to identify the average order value. This will help you determine the minimum order value required for free shipping, without decreasing your average order value. You can analyze your customer data by using an analytics tool or consulting with your marketing team.


Test different thresholds

To find the perfect balance between profit margins and customer expectations, it’s essential to test different threshold values. Start with a low threshold, and gradually increase it while monitoring how it impacts your conversion rates, average order value, and profitability. This approach allows you to find the right balance for your business.


Communicate your threshold clearly

Once you’ve determined your threshold, communicate it clearly on your website. This ensures that customers are aware of the free shipping policy and encourages them to take advantage of the offer. Be sure to make the threshold value visible on the shopping cart page and include it in your marketing campaigns.

Continuously monitor and adjust

Your free shipping threshold is not set in stone and can be adjusted based on customer behavior and business needs. Continuously monitor your sales data, conversion rates, and average order value to ensure that your threshold is still relevant. Adjust the threshold as needed to maintain profitability while offering an attractive deal to your customers.


Conclusion

Setting a free shipping threshold is a delicate balance between profit margins and customer expectations. Determining the best threshold requires analyzing your profit margins, customer data, and testing different thresholds. Clear communication of the threshold ensures that customers understand the offer and encourages them to take advantage of it. Continuously monitoring sales data and adjusting the threshold as needed helps maintain profitability while offering a valuable deal to customers. By following these steps, you can set a free shipping threshold that boosts profitability while also improving the customer experience.

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