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How to integrate free shipping to boost average order value
7 Mins Read
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Online retail has rapidly evolved over the years, with customers now expecting more convenience and value from their shopping experiences. One of the most sought-after features is free shipping. Based on a 2022 study by Digital Commerce 360, out of the 1,116 consumers surveyed, 76% placed free shipping among their top three most crucial factors in online shopping.
As a result, offering free shipping has become essential for New Zealand businesses looking to stay competitive in the e-commerce market.
Benefits of free shipping for customers
Integrating free shipping into your e-commerce business offers numerous benefits, not only for your customers but for your company as well. Let’s explore three significant advantages of providing free shipping:
1. Driving sales growth
One of the main benefits of free shipping for customers is that it encourages them to make a purchase. Customers who see that their order will be shipped at no additional cost are more likely to complete their purchase. This can lead to increased sales and a higher Average Order Value (AOV) for your business.
AOV is a metric used in e-commerce to measure the average total amount a customer spends on a single order. It is calculated by dividing the total revenue generated by the total number of orders during a specific period.
2. Cultivating brand loyalty
Offering free shipping can be instrumental in boosting customer retention. As your customers recognise and appreciate the extra value of free shipping, they are more inclined to make repeat purchases and stay engaged with your brand. This can translate into a robust customer base and a positive reputation for your e-commerce business.
3. Providing a competitive advantage
Free shipping will also set your business apart from competitors who do not offer this service. When customers compare similar products from different online stores, free shipping can be the deciding factor that tips the scales in your favour.
Crunching the numbers: Calculating breakeven free shipping costs
To successfully implement free shipping on your orders and capitalise on its benefits, you will need to determine your breakeven point. This involves identifying the extra revenue required to offset the cost of shipping. From here, you can assess whether offering free shipping is a viable option for your business in New Zealand.
Here’s a step-by-step guide to calculate the breakeven point for your e-commerce business:
1. Calculate your fixed costs
Fixed costs are expenses that remain constant regardless of the number of orders you process. Examples of fixed costs include rent, salaries, and insurance. Add up all your fixed costs to determine the total fixed costs.
2. Calculate your variable costs
Variable costs are expenses that change based on the number of orders you process. Examples of variable costs include shipping fees, packaging, and transaction fees. Determine the variable costs per order, including the cost of offering free shipping.
3. Calculate your contribution margin
The contribution margin is the difference between the selling price of a product and its variable costs. Subtract the variable costs per order from the AOV to determine the contribution margin per order.
4. Determine the breakeven point
To find the breakeven point, divide your total fixed costs by the contribution margin per order. The result is the number of orders you need to process to break even on your free shipping offer.
By calculating the breakeven point, you can assess the financial feasibility of offering free shipping on orders and make informed decisions about whether it's a suitable strategy for your e-commerce business.
Weighing your options: Discounted vs free shipping
Before committing to free shipping, consider the pros and cons of offering shipping discounts as opposed to free shipping. Take a look at this comparison to help you make the right choice for your business:
Pros and cons of discounted shipping
Pros | Cons |
1. Cost control Discounted shipping allows you to maintain control over your shipping costs. By offering a reduced shipping rate, you can still motivate customers to make a purchase without compromising your profit margin. | 1. Lower conversion rates Although discounted shipping can still entice customers to make a purchase, it may not be as appealing as free shipping. Customers may perceive the discounted rate as less valuable, leading to lower conversion rates. |
2. Simplicity Implementing discounted shipping can be simpler than offering free shipping, as it doesn't require a complete revamp of your shipping strategy. You can easily adjust shipping rates based on factors such as order value, customer location, or promotional periods. | 2. Competition with free shipping If your competitors offer free shipping, customers may still prefer their products over yours, despite the discounted shipping rate you provide. It's crucial to stay competitive and consider the impact of other businesses' shipping strategies on your own. |
3. Flexibility Discounted shipping offers flexibility in terms of promotions and customer incentives. You can experiment with different discount levels, promotional periods, or order value thresholds to determine the most effective strategy for your business. | 3. Limited impact on brand loyalty Discounted shipping may not foster brand loyalty as effectively as free shipping. While customers may appreciate the reduced shipping cost, more is needed to encourage repeat purchases or create long-term customer relationships. |
Pros and cons of free shipping
Pros | Cons |
1. Higher conversion rates Free shipping removes a significant barrier to purchase, which can contribute to higher conversion rates. Customers are more likely to complete their orders when shipping costs are not a concern. | 1. Increased costs The cost of shipping can eat into your profit margin, especially if your business has a low AOV. Depending on the size and weight of your products, shipping costs can quickly add up, making it challenging to maintain profitability. |
2. Marketing advantage Free shipping can serve as a powerful marketing tool. By promoting free shipping in your marketing efforts, you can attract customers who are seeking a hassle-free shopping experience. | 2. Logistical challenges Offering free shipping can lead to a sudden increase in order volume, which may strain your logistical capabilities. The increased demand may require additional resources for order fulfilment, such as hiring more staff and expanding warehouse space. |
3. Encouraging larger purchases When customers know that they won't have to pay extra for shipping, they are more likely to add additional items to their cart, increasing your AOV. Free shipping can serve as an incentive for customers to purchase more products, ultimately boosting your revenue. | 3. Diminished product value perception In some cases, offering free shipping can lead to customers perceiving your products as less valuable. This may not be an issue for all businesses, but it's essential to consider the potential impact on your brand's image. |
Finding the right approach for your business
With that in mind, if you decide to introduce free shipping, there are a number of strategies you can adopt to make it work for your business. Here are some popular approaches to consider:
1. Communicate the value of your products
For starters, focus on effectively communicating the unique selling points, quality, and benefits of your products to prevent diminished product value perception. This can help customers appreciate the value they receive, even when free shipping is offered. Utilise compelling product descriptions, professional imagery, and customer reviews to reinforce the value of your products.
2. Set minimum order thresholds
To balance the cost of free shipping and encourage larger purchases, you can set minimum order thresholds. This approach encourages customers to add more items to their cart to qualify for free shipping while helping you maintain profitability. However, finding the right threshold is crucial to avoid alienating customers with low-value carts.
3. Offer free shipping for a limited time
Promote free shipping as a limited-time offer during peak shopping periods or special occasions. This can create a sense of urgency for customers to take advantage of the promotion and can lead to a surge in sales.
4. Partner with a reliable third-party logistics (3PL) provider
You can also outsource your shipping and fulfilment to a 3PL to help you reduce costs, increase efficiency, and improve the overall customer experience. A 3PL can streamline your logistics process and handle complex shipping scenarios, making it easier to offer free shipping without negatively impacting your bottom line.
Embrace free shipping
Overall, to boost sales and increase customer satisfaction, offering free shipping on orders can be an effective strategy for e-commerce businesses in New Zealand. By considering the benefits of free shipping and calculating your breakeven point, you can make an informed decision on how to best implement this service.
When it comes to offering free shipping, partnering with a reliable delivery partner is essential. DHL Express is a global leader in logistics, providing fast, secure, and reliable shipping services for businesses worldwide. By partnering with DHL Express, you can ensure that orders are delivered quickly and efficiently from warehouse to customer, creating a seamless shopping experience that keeps your customers coming back for more. Open a DHL Express business account to get started.
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