The holiday season starts early for us marketers. We should be busy finalizing our holiday season email promotions, sprucing up landing page creative, coordinating upcoming promotions with affiliates and customer service department, such as Black Friday and Cyber Monday specials.
One of the nagging question ecommerce businesses struggle with is whether shipping should be considered a profit center or a marketing tool. With the highly competitive retail holidays fast approaching, I thought I jump in and add my two cents to this conversation.
Retailers that give free shipping away use it as a conversion tool and competitive advantage over the competition. Retailers who haven’t given free shipping often wonder if they should. Some give free shipping over a certain dollar purchase threshold and others charge a low flat fee, as low as $2.95, from what I’ve seen.
Two years ago, I viewed shipping charges as a profit center. It definitely added to our bottom line and helped us recover the ever-increasing costs of shipping we pay to UPS, FedEx and U.S. Post Office. But the competitive nature of my industry changed my view about this. We tried different formulas like a flat rate charge of $9.95 when the order under $100.00 and free shipping on purchases over $100.00.
Eventually, we figured out that we broke even around $150.00 because some of our products are pretty heavy when purchased in bulk. I was fine with breaking even on shipping and even subsidizing it a little bit so we could grow our sales. The tricky part can be figuring out your top line sales growth if you’re giving away free shipping.
As I said above, this is a good time to test this theory. It’s different for every retailers and it’s based largely on profit margin, conversion rate, AOV (average dollar purchased), amongst other metrics. With the holidays fast approaching, your site will experience increased traffic, and this is the best time to check (test) where your break even point is or if your profit level will increase if you give away or subsidize free shipping.
Below is a link to a free shipping calculator, compliments of Mike Ober, Senior Manager, Merchant Developer. Check it out and give us some feedback on what your findings are. Would you share your opinion or experience with regards to Free Shipping.
Mike Ober’s free shipping calculator http://bit.ly/b2QupJ it opens as an Excel spreadsheet. You can also follow him on Twitter by clicking this link: http://twitter.com/MikeOber
With more than 20 years retail/wholesale & e-commerce experience, Shirley Tan educates eCommerce business owners to be profitable while maintaining their sanity!
Hi Shirley, thanks for this post. Positioning shipping standards for the holidays will make or break sales and/or profits. Such a fine line to walk as to whether drive more sales with low / free shipping or to risk less sales with higher shipping costs.
Seems shoppers are getting more knowledgeable about where and how to find the lowest price possible which is the main determinate of a sale, but reviews play a big part as well. If a retailer has a horrible rating but free shipping, I might pay a bit more for another merchant with stellar ratings but a higher shipping cost.
Just heard that UPS is increasing their shipping rates effective January 3,2011, you can read it here: http://www.rates.ups.com/
Here is the gist of the rate increase:
Effective January 3, 2011, UPS Daily Rates will increase as follows: UPS Ground services will increase a net 4.9% through a combination of a 5.9% increase in rates and a 1% reduction in the UPS Ground fuel surcharge; UPS Air and International services will increase a net 4.9% through a combination of a 6.9% increase in rates and a 2% reduction in the UPS Air and International services fuel surcharge.*
In addition, the dimensional weight divisor used to calculate dimensional weight will change from 194 to 166 for domestic U.S. UPS Ground and Air services shipments, and from 166 to 139 for U.S.-origin export shipments.
Also learned the FEDEX published their rate increase couple weeks ago, their rate according to what I’ve read is similar to UPS rates, I guess they are like the airline industry these days, they’re in the matching each others rates to keep a monopoly on profits.
How does this affect your view and marketing strategy on “Free Shipping” now?