One of the most important and potentially expensive decisions that an online retailer can make is whether or not to offer free shipping. Over 2 million Google searches each month in the United States include the phrase “free shipping.” Most online merchants have at least considered offering it. It’s a tough decision because shipping is expensive — Amazon’s shipping expense was $16.2 billion in 2016, over 17 percent of its total order value.

How can a retailer afford an additional 15 to 20 percent expense?

The good news is that you can.

Begin with a simple A/B test, in which a random sample of shoppers — 10 to 50 percent — is offered free shipping. Compare the control group with the test group to see the change.

Then, track three outcomes to determine the real cost of offering free shipping.

• Change in conversion rate. For example, a change from 5 percent to 6 percent is a 20 percent increase, or 1.2 expressed as a decimal. In the equation below, it’s variable A.
• Change in average order value. An AOV improvement from $50 to $51 is a 2 percent increase, or 1.02 expressed as a decimal — variable B, below.
• Change in gross margins. If the control group gross margin is 50 percent, and the test group gross margin is 35 percent, then the gross margin decrease is 30 percent: -15% ÷ 50% = -30%.This is -0.3 expressed as a decimal. It’s variable C, below.

Next, compute the percentage change in profit from offering free shipping, as follows.

% Change in profit (x) = [(A * B * (1+ C)) – 1] * 100

x = [(1.2 * 1.02 * (1 + (-0.3))) – 1] * 100

x = -14.3%

The change in profit from free shipping in this case is -14.3 percent.

What follows are seven strategies and tactics to turn free shipping from a -14.3 percent cost center into a profit increase.

7 Ways to Profit from Free Shipping

Set minimum order value. By adding a minimum threshold for free shipping, you can increase AOV because shoppers will have an incentive to increase basket size. You can also reduce the negative impact on margins because free shipping will be offered on fewer orders, and thus reduce situations where shipping cost represents more than 20 percent of the total order value.

Step 1: Choose a threshold. A good starting point is to add 10 to 15 percent to your current AOV. For example, if AOV is $50, offer free shipping on orders over $55

Step 2: Run the A/B test again. Your results could look like this:

• Conversion rate increased from 5 percent to 5.5 percent — 1.1, variable A.
• AOV increased from $50 to $57.50 — 1.15, variable B.
• Gross margin declined from 50 percent to 43 percent — -.14, variable C.

Now, the change in profit from free shipping is +8.8 percent:

% Change in profit (x) = [(A * B * (1+ C)) – 1] * 100

x = [(1.1 * 1.15 * (1 + (-0.14))) – 1] *100

x = 8.8%

Step 3: Supersize it. Adding a minimum of $55 for free shipping increases profit by 8.8 percent. Thus, we should heavily promote it. Here are three ideas.

• “You almost qualify.” When shoppers add an item to the cart, inform them how much more they need to spend to qualify for free shipping
• “Take advantage of your free shipping.” Once free shipping is earned, remind shoppers that they can take advantage of the free shipping to buy more.
• “Look how much you saved!” Remind shoppers at checkout how much money they are saving with free shipping

Use only ground shipping. Change the equation by offering free shipping only via your least expensive shipping option, such as USPS Flat Rate Boxes or UPS Mail Innovations. The promotion for this could be: “Free economy shipping on orders of $55 or more.”

According to 2017 survey by Internet Retailer and Bizrate Insights, nearly 90 percent of online shoppers say they are willing to wait longer for delivery of an order in exchange for free shipping. Most shoppers are likely to choose the free shipping option.

By using only ground shipping, you could cut your free shipping expense by more than half.

Offer low flat-rate shipping. Offer a flat-rate shipping charge on all orders. Amazon Prime Pantry does this well by leveraging consumer psychology to drive basket sizes up.

This approach has many advantages. Customers cover shipping expense on smaller, lower margin orders. Shoppers are incented to buy more, since additional items ship for free. As the order size increases, overall gross margin goes up, covering the incremental shipping cost.

Include shipping costs in product prices. Consider the effect on conversion rates from these two offers:

• Option 1: $30 + $5 shipping charge.
• Option 2: $35 with free shipping.

Bill D’Alessandro, of Rebel CEO, a consulting firm, ran this very test for a skincare product. The conversion rate for option 2 was twice that of option 1. This approach can work well for items that are unique and hard to price shop across multiple sites.

How do you include shipping costs in item prices? One approach is to change the pricing of items below the free shipping threshold to include a portion of expected shipping cost.

Say a merchant offers free shipping for orders of $75 or more. For a $25 item, add 33 percent ($25/$75) of the shipping cost to the item price. For a $10 item, add 13 percent ($10/$75) of the shipping cost to the item price.

The $25 item would now be offered at $28. The $10 item now has a price of $11.30. You still offer free shipping, but you’ll recoup a portion of the costs. Customers may prefer to pay $11.30 with free shipping versus $10 with $1.30 shipping.

Exclude items from free shipping. Reduce the negative margin impact of free shipping by:

• Offering free shipping only on high volume items with low shipping costs.
• Excluding low margin items from free shipping altogether.
• Excluding heavy and bulky items with high shipping costs from free shipping.

Substitute service types. If you are offering free ground shipping, and charging an additional fee for expedited 2-day shipping, avoid displaying on your website the carrier name and specific service type that you intend to use.

In many cases, you’ll be able to use economical ground shipping to meet even the 2-day shipping requirements for expedited orders. For deliveries in close proximity to your distribution centers and drop shippers, for example, you can ship using the cheapest ground option and still meet the delivery window for some of your expedited 2-day orders and pocket the savings.

Sell via Amazon Prime and FBA. Gain access to over half of U.S. households by offering select products through Amazon Prime while using Fulfillment by Amazon to cut fulfillment costs. While FBA is certainly not free for merchants, some find that the efficiencies and volume gained through Amazon Prime and FBA can cover the cost of free shipping.

Not a Cash Sink

In short, free shipping doesn’t have to be a cash sink. Smart retailers of all sizes use free shipping as a lever to increase conversions and average order values while minimizing its negative impact on profits.

Moreover, free shipping can also reduce customer service costs for returns. Customers often request to be reimbursed for shipping when returning an item. But there’s nothing to reimburse on free shipping!

For more than 40 ways to reduce your shipping costs and be profitable, check out this ultimate guide to profitable free shipping.

Most retailers put a lot of time and effort into attracting new customers. It makes sense: you need customers to buy your products and sustain your business. However, generating more sales from existing customers is a more efficient, less expensive way to grow.

The probability of selling to an existing customer is 60 percent to 70 percent, compared with the 5 percent to 20 percent chance of selling to a new customer, according to the White House Office of Consumer Affairs.

Every dollar spent retaining or reselling goes further than one spent to attract new customers.

I invite you to reconsider the post-purchase customer as a prospect for continued, expanded business. In many ways, they’re an ideal prospect — you know what products they like, you know that they like your brand, and you have their trust.

Existing customers are also a great source of new prospects: 42 percent of online customers find recommendations from friends and family influential, and 23 percent are influenced by social media recommendations, according to BigCommerce’s Consumer Shopping Habits Study.

 

7 Ways to Turn Post-Purchase Interactions Into New Sales

The moment a customer completes a purchase, you should think of them as a new prospect, with opportunities for add-ons and additional sales on the horizon. Each interaction is an opportunity for more sales, more revenue per purchase, and more referrals.

1. Make good use of your order tracking page.

Between purchase and delivery, customers who track their orders visit the order tracking page an average of 3.1 times per order, according to the 2017 Narvar Post-Purchase Benchmark. They’re also three times more likely to click through a marketing asset on that page than a regular marketing email. Customers who visit the tracking page are excited about your products. Make good use of that prime real estate with targeted ads for products that would complement their recent purchase.

2. Answer their questions.

This might seem straightforward, but too many retailers are missing this crucial foundation. After purchase, customers expect you to be just as helpful as when you were trying to close the sale. At the simplest level, your website needs an easy-to-find FAQ about topics like shipping, refunds and exchanges.

Ideally, customers should be able to get an answer via any channel: phone, live chat, email, social media, or even in-store. According to Parature, 43 percent of customers cite being passed from agent to agent as a top aspect of bad customer service. Getting this right requires an an omnichannel order management system (OMS) that centralizes information for every agent. A customer standing in your store doesn’t want to hear that they have to call the 800 number, and now they won’t have to.

3. Order modifications: anywhere, anytime.

With the advent of sophisticated order fulfillment software, customers expect you to locate and modify their order right up until the moment it ships. Order management software can solve this challenge, integrated with OMS so that service representatives don’t have to call the warehouse to make changes.

It’s a worthwhile investment. When customers can modify their order, they’re more likely to buy add-ons, knowing that their products will arrive together. You also save on refunds and exchanges by eliminating shipping products that customers don’t want. Finally, you enhance your relationship with customers, who trust you to get them exactly what they want.

4. Provide smooth and easy returns.

Returns are unavoidable. According to the marketing experts at Invesp, 30 percent of products purchased online are returned. A full 35 percent of those returns aren’t due to any error, but just because a customer decided not to keep the item. Turn this potentially negative situation into an opportunity by delivering an outstanding, frictionless experience.

Customers want to return or exchange a product via any channel, not just the one where it was purchased. If they bring a sweater they purchased online into their local store, a store employee should be able to process the exchange, then delight the customer by offering the replacement item for pickup or quick shipment. An OMS makes this possible by centralizing all orders, inventory, fulfillment and returns.

5. Make it personal.

Once a customer purchases from your brand, you suddenly have an enormous marketing advantage: you know what they like. Fifty-nine percent of shoppers want personalized marketing online, including special offers, exclusive coupons or advertising for products they’re interested in, according to the Accenture Personalization Survey. Use what you know to market related products via email, direct mail, social media and other channels, and start soon after purchase while your brand is top of mind.

6. Don’t forget the packaging.

Let’s say that 20 percent of your customers open each of your marketing emails — pretty good! How many open the package that contains their order? More like 100 percent. Packing materials are an excellent marketing asset, and not to be overlooked.

Beyond the baseline — delivering the order on-time, complete and undamaged — you can delight customers with enclosed free samples or discount offers. Then make it easy for them to follow up. Set up a special short URL for the offer so they can place their order quickly while they’ve got it on their mind.

7. Get the most out of happy customers.

Loyal customers don’t only bring additional revenue, they can also bring in new customers. Consider implementing NPS, the simple survey that asks customers, “How likely are you to recommend this company to a friend?” Identify happy customers, then follow through: offer referral perks or encourage them to share their favorite products on social media.

Loyalty programs are another great option, although they can be complex to administer. According to Accenture, members of loyalty programs generate 12 percent to 18 percent more revenue than customers who aren’t members. Loyalty programs keep customers actively engaged and drive repeat purchases, social media buzz and new referrals.

Conclusion

Getting the most out of your post-purchase customer interactions has two major parts: a well-designed and well-executed marketing strategy, and an omnichannel delivery and service commitment. Both pieces are necessary to drive higher customer retention, loyalty and referrals, and overall revenue. Businesses that adopt omnichannel strategies achieve over 90 percent greater year-over-year customer retention rates compared to those that don’t.