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Is Free Shipping Right for Your Business?

For many Internet retailers, the question isn't whether to offer free shipping. It’s how to do so most profitably. By Jimmy Guterman

If you work for an independent Internet retailer, you know that the giants in the market have taught customers to expect free or near-free shipping. Large firms can get away with this because they operate at such scale (and, in the case of Amazon, sell a growing percentage of virtual goods that don’t need to be shipped). And, as eBay notes, customers don’t care whether your store is a one-person shop or a much larger operation. Whatever size the seller, “Buyers especially love free shipping; many will only purchase items that ship for free.”

Indeed, eBay lobbies hard for its sellers to adopt free shipping, asserting that “free shipping can pay for itself in many ways.” How? Reasons range from a boost in search results to a greater likelihood that price-conscious consumers will pick an item with free shipping when multiple sellers offer the same item at similar prices.

As with some other Internet retailing practices, among them easier return and cheaper prices, it may seem counterintuitive that raising the cost of business is good for a seller. But policies that please customers help your business, as long as you balance the needs of the customer with your need to make a profit. Here are some areas to explore when considering whether free shipping – and which type of free shipping – is right for your business:

Free shipping can increase order size. In addition to offering free shipping to members of its $75-per-year “Prime” plan, Amazon also offers free shipping for many orders over $25. That means customers whose initial orders are $24.99 or less are incented to add another item in return for free shipping. This increases margins on each order.

Before you decide what sort of free shipping to offer, know your margin. Some experts advise offering free shipping above your store’s average order value; others advise experimenting until you find the right fee.  Since margin per order is the surest way to track whether some form of free shipping can work for you, make sure you understand the implications of free shipping for your business. You won’t be so excited that your orders are doubling if you learn that you’re losing money on each order. It may be much easier to keep margins high on unique items that only your store sells than on commodity products available from any number of vendors.

Free shipping is not the differentiator it used to be; simple free shipping still is. Some sort of free or near-free shipping is quite common now, so it’s unlikely that free shipping alone will seal the deal. But not every Internet retailer does a good job of communicating its free shipping policies (what’s included, what’s required, what’s not) and integrating it into the shopping process. Letting customers know early and often what your policy is makes it easy for them, and easy is, after all, one of the main reasons people are shopping online. And, of course, you should keep your free shipping plan as simple as possible.

There are many ways to succeed in a world where free shipping has become commonplace (FedEx, sponsor of this site, has a white paper on the topic). How have you navigated this issue? Please let us know your best tips and we’ll pass them along.

About the author

Jimmy Guterman president of The Vineyard Group; previously he was senior editor of Harvard Business Review.

Jimmy Guterman

The views and opinions expressed in this article are those of the author and do not necessarily reflect the views and opinions of FedEx.