Do Companies Lose Money on Free Shipping?

Everyone loves free shipping. Think about it, if you’re looking to buy something from one online retailer and notice another eCommerce business has it at a slightly higher price but offers free shipping, which one gets your money? The reality is that eCommerce professionals can’t afford to not offer free shipping options. In today’s competitive online marketplace, offering fast and free shipping is essential for any online retailer’s business model. But, can companies offer free shipping and not lose money?

Do Companies Lose Money on Free Shipping?

Shoppers expect free shipping at checkout, and if you don’t offer it, they’re going somewhere else that will ship for free. In a survey, 66 percent of shoppers expect free shipping on all orders. 88 percent of shoppers expect free shipping thresholds, such as if they reach a certain minimum order amount.

It’s not surprising that many eCommerce businesses offer free shipping to their customers (thanks to Amazon Prime). But what are the real costs of providing this service free to your customers? Surely shipping fees must impact your business and its profits. Let’s unpack the real costs of free shipping.

What Will Free Shipping Cost Your Business?

61 percent of consumers say they’re likely to cancel an order if the company doesn’t offer free shipping on their order. If you’re an eCommerce store owner, it’s vital to incorporate free shipping into your business model. While you can increase your profits by attracting more people with free shipping, that’s not always the case.

The reality is the cost of shipping must come from somewhere. If your customer isn’t paying for it, you’ll have to work it into your business costs. Free shipping comes at a price, and retailers must carefully consider how it will affect their business.

Free shipping is worth offering if you can offset the costs in other areas of your business operations. You can end up shrinking your margins and potentially hurting your company without a way to offset these costs.

Logistics and Free Shipping

Free shipping takes a toll on your logistics. Increases in logistics costs eat into your margins and your profits. Considering how often shipping costs fluctuate, especially when supply chains are strained, you could make a costly mistake.

To offset fluctuations in shipping costs, retailers shipping large volumes will often negotiate lower rates with carriers. Therefore, the more volume your business does, the more leverage you have with shipping companies that want your business.

Increasing volumes gives your business the pricing power, not the shipping company. As a result, you’re more likely to get the shipping company to bend to your will and provide a discounted rate. As your company grows, you will gain more leverage to get deeper discounted rates that enhance your profit margins.

However, what do you do if you don’t ship large volumes? How will you offset logistics costs to other business areas without harming your company, brand, margins, and profits?

How to Offset Free Shipping Charges

Retailers aren’t in the business of losing money. After all, the reason why you started a business was to make money, right? In order to reduce the harm of offering free shipping to your customers dies to your bottom line, you’ll need to offset these costs somewhere. Here are two tactics that can help.

Minimum Spending Threshold (MST)

Implementing a minimum spending threshold (MST) incentivizes customers to spend more at your online store to receive free shipping. This method ensures shoppers spend a specific dollar amount on qualifying free shipping.

You’ll have to calculate your expenses carefully to ensure you offer the right value amount to make economic sense of the deal. This model offsets free shipping costs by increasing the average order value (AOV).

Increase Product Prices

The final option is to increase your product pricing. However, baking the cost of the shipping into the product might come back to bite you. If another store offers it at a lower price and AOV-model shipping discounts, you’ll lose business.

So, Do Companies Lose Money on Free Shipping?

The answer is yes; companies lose money on free shipping. Regardless of the size of your organization, not being able to pass logistics costs to the consumer means they come out of your margins. However, you can offset these expenses and still make money with the right strategy.

Additional Reading: How to Offer Free Shipping & Two-Day Delivery: Compete With Amazon While Increasing Profit Margins – Shopify

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