As the owner of an ecommerce fulfillment business, I work with hundreds of successful webstore merchants and am in a unique position to see both the threats and opportunities posed by free transportation approaches.
Different Sorts of Delivery Offers
Most online retailers now offer limited delivery ignoring that takes the sort of absorbing unreimbursed shipping expenses such as dimensional weight minimums or rural locality delivery surcharges.
Another frequent discount program is a set shipping-and-handling fee that is terrific for any size order, like a $6.95 fixed speed, regardless of the actual shipping cost. This, of course, promotes larger orders.
The fastest growing discount offer is free transportation in exchange for a minimal buy. This may be in the range of $75.00, but the minimum varies widely.
Oftentimes, merchants offer free shipping for a limited time only, for example four weeks prior to the Christmas shipping deadline.
Online consumers, predictably, prefer 100 percent free shipping with no minimum, or a free upgrade to express delivery.
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Free Delivery Can Produce Benefits, Downsides
There can be big profit potential in free shipping offers, such as:
- Gain from the complete number of orders.
- Average earnings per order could rise.
- Item prices could be raised resulting higher gross profit.
- With larger volume, per-order costs may decrease.
The downside risks inherent in free shipping offers are equally large. They include:
- The earnings per pound may be too low for shipping discounts.
- Additional gross profit may be insufficient to replace missing shipping earnings.
- Some customers may comparison-shop free shipping deals.
The problem is exercising the bottom line impact of free shipping offers when costs and benefits are so hard to calculate. An excellent starting point, however, is to collect the facts and figures for your particular position in a spreadsheet format such as this one, that you may download here.
Screen capture of “Free Shipping Model” spreadsheet.
The benefit of an economic model like it is the many free shipping options can be contrasted side-by-side regarding net contribution to overhead and profit.
A decision model makes getting started easier, but the simple truth is that the key decision factors can only be understood by real world testing.
Have a”What-if” Decision Model
The example spreadsheet assumes an average of 12,000 orders annually with earnings of $100 per purchase, gross profit at 40 percent of earnings, an existing $15 per order shipping and handling fee and $13 per buy real shipping cost. It’s possible, of course, input your own personal assumptions about your ecommerce project.
This sample analysis considers four choices.
- don’t change anything.
- Switch into a $6.95 fixed delivery fee.
- Provide free delivery on at least a $200 order.
- Provide free delivery period.
In this example, the merchant’s contribution to profit and overhead currently averages $504,000 every year on product sales of $1,200,000 and shipping and handling revenue of $180,000 annually.
Option 2: Fixed Shipping Fee of $6.95
The case merchant is considering a $6.95 fixed transport fee offer. The first assumption is that the normal order would rise by $20.00 and there might be a $1.30 net profit from the standard shipping cost. These assumptions would need to be analyzed, but if the true world outcome were just enjoy the fiscal model, you will find a $16,200 reduction of operating margin. In cases like this, the excess revenue wasn’t sufficient to cover the drop in transport and managing income and pay the excess shipping expense.
Option 3: Free Delivery With Minimum Order
In the case of free delivery subject to a $200 per order minimum, the initial assumption is that there could be a 1,200 order per-year reduction in sales volume. But due to the greater earnings per buy, there are a general increase in dollar sales. As a result of heaver bundle boat weights, there’ll be a related increase of $8.50 in transportation cost. If these assumptions were proven true by subsequent testing, the net result would be a $127,800 per year increase in operating margin.
Option 4: Free Delivery With No Minimum Order
If the offer were free shipping with no minimum, the initial assumption is a 3,600 growth in order volume yearly without a substantive change in per-order ship cost. If this were the real world result, the merchant would see a $82,800 per year reduction in operating margin.
These are just random examples of just how many free transport supplies can be analyzed. The main point to keep in mind is there is a really straightforward approach to model free shipping economics, but real world testing must be conducted to project real results.
Per-pound Costs Decrease as Weight Increases
There’s a vital truth that supports an offer of any kind that leads to larger orders: Shipping cost per pound decreases as ship weight gains.
You may note from the carrier comparison chart in one of my earlier Practical eCommerce posts, “Shipping Rates: Comparison Shopping Save Money”, the delivery cost of a 6 ounce package sent first class mail is $7.65 per pound, but the average cost of a 6 pound package delivered UPS ground is only $2.02 per pound.
In effect, as order size and weight increases, revenue goes up, but shipping cost as a percentage of revenue goes down. This opens the door to discount offers of all kinds.
Free shipping or some sort of shipping discount program is possibly a desirable alternative to your ecommerce business. A wonderful way to start the assessment procedure would be to accumulate the basic per purchase revenue and cost data and model the possible results of different shipping discount offers. From there you have the ability to run a set of real world sales evaluations to properly gauge the cost versus the benefits.
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