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According to the 36th Webshoppers report, Brazilian e-commerce generally increased its free shipping offer in the first quarter of 2017 compared to previous half-years. Free deliveries jumped from 35% to 38%. Considering only the ten largest retailers, the percentage fell from 22% to 18%.
This may be a move toward breaking even and profitability, as the largest have been reporting billions in losses in recent years. However, the big question is how small and medium online stores can use free shipping to make a profit.
Amazon's shipping cost in 2016 was $16.2 billion, approximately 17% of the order value. In a market with tight margins, giving this power to the consumer can be decisive in achieving (or not) profitability.
Yes, you can
The good news is that it is possible. But you need to run some tests to find the ideal strategy. Start with an A/B test for 50% of your users; the sample size is very important for the test. A store with up to 50,000 unique users per month should run the test for much longer than a store with 200,000 unique users per month.
Offer a free shipping coupon and then analyze the following results:
- Change in conversion rate: analyze the variation in sales conversion; if it increased from 1.0% to 1.2%, you achieved a 20% increase; add the decimal value (1.2) to variable A in the equation below
- Change in average ticket: set a minimum value for free shipping and evaluate the change in the average ticket; if it rose from R$100 to R$110, you achieved a 10% increase; add the decimal value (1.1) to variable B in the equation below
- Change in net revenue: evaluate the impact of free shipping on your margins; if your margin was 50% when customers paid for shipping and dropped to 35% with free shipping, then your margin decreased by 30%; add the decimal value (-0.3) to variable C in the equation below
Now for the math:
% change in profit (x) = [(A * B * (1 + C)) – 1] * 100
x = [(1.2 * 1.1 * (1 + (-0.3))) – 1] * 100
x = [(0.924) – 1] * 100
x = -7.6%
As a result, the promotion caused a 7.6% decrease in profit. This type of situation is very common, which is why we present some strategies to reverse this math.
5 ways to profit from free shipping
Set a sustainable minimum value
If the average shipping cost for your store is R$15.00, for example, what order value would justify free shipping? Calculate how much the average ticket would need to increase to bring profitability even while offering free shipping. It's pure math: if your profit margin is 20% and the average shipping cost is R$15.00, you will need an increase of more than R$60.00 in your average ticket to justify free shipping.
Use the cheapest shipping method
If you have a carrier gateway, configure your rules to offer the cheapest option. If you work exclusively with the Post Office, opt for PAC. Offering express delivery methods for free may seem foolish, but in some situations, such as around Christmas, Children's Day, and Mother's Day, SEDEX can emerge as a major incentive for completing the purchase.
Offer fixed shipping at a low price
This approach has several advantages. Customers pay an acceptable amount for shipping on lower-margin orders and can benefit from fixed shipping regardless of how many products are added. As the cart grows, the profit margin increases, subsidizing incremental shipping costs. In addition to being a predictable value, a little is better than nothing.
Include shipping in the price
Test this with your store's customers. One alternative is to offer free shipping on all purchases and raise product prices to cover shipping costs. Another alternative is to offer the same deal mentioned above, but with a discount for orders above a certain value. You guarantee your margin in both situations, and your customer will feel like they got a good deal.
Exclude items from free shipping
Put an asterisk (Free Shipping*) in your promotion's call to action. Reduce the negative impact on profit margins:
- Offer free shipping for large purchases (in value or quantity)
- Exclude orders containing only low-value items from the free shipping offer
- Exclude heavy or large products that can generate high shipping costs
In summary…
Free shipping doesn't have to be a wound in your e-commerce. Use it to increase sales and don't feel pressured by the market to offer free shipping. The best way to guarantee customers is through differentiation and shopping experience; shipping is the icing on the cake.
