Ecommerce Know-How: The Free Shipping Equation

Ecommerce Know-How: The Free Shipping Equation

In 2009, every major carrier in the USA will be raising shipping prices. Profit conscience online shopkeepers, therefore, should take pause and reevaluate whether offering”free shipping” is a truly fantastic idea.

There is, of course, no such thing as free delivery. The United States Postal Service (USPS), FedEx, and the United Parcel Service (UPS) all insist on getting paid for flying or trucking your wares throughout the country. What”free shipping” really means is that merchants are concealing shipping costs, marking up a product’s price instead of being up front about the true cost of transporting products. However, according to a new Practical eCommerce survey, 52.2 percent of our subscribers provide free delivery on at least some requests. And there’s anecdotal evidence that customers prefer it as well.

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To Offer or Not to Offer Free Shipping

In this”eCommerce Know-How,” I shall (1) introduce what I call the free delivery equation, (2) look at two actual products and run them through the equation, and (3) discuss the notion of creating a profit from shipping.

Free Shipping Video

The Free Shipping Equation

The decision to offer free transport or not should be a financial one. Like every marketing tactic, you require a way to quantify return on investment. Here’s the bit of mathematics that I use every time I consider offering free or even discounted shipping.

First, think about the cost of the product or products you will be shipping. By way of instance, take the most popular item in your shop and determine your actual cost–the price that you pay the manufacturer for the product plus an individual thing’s share of transport costs from producer to your warehouse. If a widget costs $1.00, and is sent in a master package of 12, and if this master package costs $6.00 to get hauled from the manufacturer or distributor for you, then your total cost for this widget could be $1.50–its price plus its share (1/12th) of the freight costs.

Then compute your credit card processing and shopping cart charges. Each payment processor takes some cut of your earnings, and several shopping carts, for example Yahoo!, take 1.5 percent or more of each transaction. Oftentimes, fees can complete 5% or more of a sale.

Now consider your packing expenses. Luckily, the USPS, FedEx, and UPS all offer free boxes for their premium services, but you might still need to buy boxes for some products. In case you’ve got a cost associated with packaging, make sure you consider it. Do not forget packaging”peanuts”, tape, labeling, and labour costs.

As soon as you have these basic costs, calculate your normal shipping costs. Select a medium sized city about 1,000 miles from your shipping location. And receive prices from your preferred carrier.

Now you can total it up. What’s your actual cost to purchase, package, and post your very best selling product? Subtract what you find from the price that you list on your site. Can you make a gain in the event the delivery is free?

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A Little Red Wagon

For a particular example, let us take a look at the Radio Flyer No. 18 Classic Red Wagon. In this case, I will make two assumptions. First I will presume that a merchant pays about $50.00 for every No. 18 wagon. I don’t understand the true cost, but this looks like a reasonable guess for a product in this category. Next, I will presume that our warehouse is in San Diego, Calif..

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Our No. 18 wagon must travel from Radio Flyer’s facility in Chicago to San Diego, and we then send our bundle, say, to Odessa, Texas, which is 1,009 miles off. We won’t have to bundle the No. 18 wagon, it comes in a fantastic box and the No. 18 weighs about 26 pounds. In the table, I’ve separated the item cost of the first shipping cost.

It’s not recommended to offer free shipping if you market the No. 18 Red Wagon. The gain margin is too thin. You would need to sell 11 times as many wagons because of your free shipping deal to compensate for the gap and break even. If offering free shipping will not increase your overall sales by 1,100 percent (if you normally made 55 sales, you’d need 605 orders), do not do it.

Woman’s Down Jacket

For a second example, consider the North Face Antoinette Down Jacket. We assume that our warehouse is in San Diego and we are going to assume that the shop’s cost before freight for this jacket is $70.00. Also, we will assume it will ship from the North Face’s centers in San Leandro, Calif.. Our client is in Odessa.

With almost $100.00 in profit after all costs, free shipping will not really hurt your bottom line. If it brings in more customers, offer everything you like, but you’re still giving money away.

Why Don’t You Make Shipping a Profit Center?

When Internet retailing was young, many internet proprietors thought they had to provide free shipping so as to compete with brick and mortar stores where customers lug their own purchases home. However, in reality online stores provide a value proposition that does not really require giving away transport, rather customers buy online because of convenience and they buy online because of accessibility.

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Why not make a profit on your shipping? Run the equation above, but this time build in $1.00 profit on every sale, charging the shopper the cost of delivery and packaging and your profit. On the No. 18 wagon your gain will be $17.08.

I know of a retailer that earns 5% of total profits from adding an extra delivery fee. Plus, we picked an illustration shipping fee sending a product farther away might have cost much more.

And even our coat would have earned 12 percent more profit, if we’ve passed the delivery expenses onto our clients and added a $1.00 fee. Does the free shipping offer really growth of orders by 12 percent?

Summing Up

For high-margin things, offering free delivery is perhaps a sensible marketing endeavor. However, in price competitive classes, it makes no business sense to provide discounted or free shipping. In actuality, in price competitive markets, you might wish to consider including a fee and making more profit.

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