Make Shipping Costs Work to Your AdvantageMany online shoppers will tell you that the biggest disadvantage of online shopping is shipping costs. Of course, many of these people have never compared shipping cost to the true expense of going to a store and picking up an item (especially with soaring gas prices). Regardless, perception is reality. There are many things that online retailers can learn from the largest online retailer, Amazon.com. One of the most profound things Amazon is able to do is use shipping costs to get customer to buy more products from them!
Amazon is setup such that a customer can select a free shipping method (Free Super Saver Shipping) when their order total hits $25. If a shopper visits Amazon to order a book that is $15 and sees that they can get free shipping if they just order $10 more worth of product, what are many people going to do? Keep shopping! The shopper may even find several products that they now must have. These customers feel good that they are now receiving something for free and don't think about the fact that they may have just spent much more than they would have otherwise.
Of course, any merchant that is going to experiment with such an option should do it methodically. To get a good base line, you will need to take a good look at your data over the last couple of months. Document the number unique visitors that enter your store, your total revenue, and your true shipping cost.
The next step is to setup your promotion. Where should that threshold be such that free shipping makes sense? For starters, look at your average order net, your average shipping cost, and your average profit margin per product from the previous month. Let's say that last month your average order net equaled $60 and your average shipping cost was $8. Let's also assume that you have been passing 100% of the shipping cost on to the consumer. With a 30% profit margin, you are making $18 per order ($60 * 30%). Now, let's say that you expect your average shipping cost to increase to $12 with this promotion (customers will be inclined to order more from you therefore your shipping cost will go up). To break even, you now would need to increase your profit per order to $30 ($18 + the $12 shipping cost you now have to eat). Offering free shipping on all orders over $100 ($30/30%) would be a good starting point. Run this promotion for the month and compare your average profit per visitor. Remember that not all your customers are going to place $100 plus orders and so some will still pay shipping costs. It is important to look at the profit per visitor metric since it's likely that the number of unique visitors is going to be different from month-to-month. If this type of promotion looks promising, you can continue to adjust the threshold to find your "sweet spot" that maximizes profit.
The success of this type of promotion may be contingent on several factors. If your average shipping cost is high and your margins are low, it may be tough to get such a promotion to work in your favor. However, in running this promotion, you may find that your average order size goes up significantly. It's also possible that your conversion rate will increase.
Keep in mind that Amazon has been successfully running this type of promotion for a very long time. If it didn't work for them, they would have already abandoned it.
