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To Free (Shipping), or Not to Free (Shipping)?

  • 22 March, 2022
  • Podify Admin

The question if whether to offer free shipping or not has pondered eCommerce entrepreneurs since the dawn of online shopping.

Of course customers will be more likely to purchase if the shipping they see at checkout is $0.00, but at what literal cost to the merchant?  If a customer is not paying money for shipping, they are either giving up margins for exactly nothing or will have to mark up the product base cost to make up for lost revenue.

Think of it this way..

You have product X that costs from Podify $15 to buy and ship.

You offer the customer to buy it for $25 + $5 shipping, netting a healthy $15 profit.

But what if the customer was offered to buy it for $25 with free shipping?

The profit margin suddenly drops a full $5, or in other words, 1/3 less profit.

The conversion rate will likely go up of course – the customer is paying less.

It’s Not Just About Conversion Rates

The most important thing for a merchant should not be quantity of orders or even revenue but profits.  What good is revenue if overall the campaign is in the red?

Let’s say a merchant sends 100 clicks to this product and they usually get 4% conversion rate when they offer $5 shipping.

Before marketing costs are factored in, the the merchant made $60 profit off these 100 clicks.  Not bad!

And let’s do the math if they offered free shipping and made only $10 profit per order.

The merchant would need to see their conversion rate jump by 50% just to break even.  They would need 6 sales just to make the same $60.  

A 50% increase in conversion rate is very significant.  It’s unlikely free shipping will cause the conversion rate to increase by 50%, and again, that’s only to breakeven.

And that’s not including additional costs in credit card processing fees and customer management.  Would a merchant rather have 4 customers or 6 customers, assuming they make the same profit in both scenarios?

Usually when a customer has already reached the shipping page they have pretty much already decided to buy.  A shipping cost is expected.

The conclusion we reached based on our evidence is that customers expect shipping costs and as long as the shipping cost is not excessively expensive they will pay for it.

Our recommendation: merchants make the most overall profits when they do not offer free shipping.

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