How to Calculate Your Free Shipping Threshold: A Step-by-Step Guide
Offering free shipping can attract customers, increase sales, and improve overall satisfaction. In fact, more recently, customers have come to expect it as standard. However, offering free shipping without a strategy can be costly. Setting a free shipping threshold (or a minimum purchase amount before free shipping kicks in) can be a great solution.
Here’s how to calculate it:
- Understand Your Margins
Before diving into calculations, have a clear understanding of your profit margins. Know the cost of your products, operational expenses, and how much you earn from each sale.
- Determine Average Order Value (AOV)
Your AOV is the average amount customers spend when they shop from your store. To calculate it, divide your total revenue over a specific period by the number of orders in that same period.
AOV = Total Revenue / Number of Orders
- Calculate Actual Shipping Costs
Find out how much, on average, you pay for shipping. Consider factors like package weight, dimensions, destinations, and the shipping service you use.
- Analyse Competitors
Look at businesses similar to yours. What are they offering in terms of shipping? While you shouldn’t copy them, understanding the market can guide your decision.
- Decide on Your Goal
Are you trying to increase order values, move specific merchandise, or improve customer loyalty? Your goal can influence your threshold. For instance, if you aim to increase order values, set your free shipping threshold slightly above your AOV.
- Factor in Promotions and Discounts
If you frequently offer discounts or promotions, factor these into your calculations. A 20% off sale, for instance, can affect the final amount customers pay and thus, your AOV.
- Consider Incremental Costs
With an increase in sales volume (thanks to the allure of free shipping), there might be incremental costs – more packaging, labour, etc. Ensure you factor these into your threshold to maintain profitability.
- Regularly Review and Adjust
The e-commerce landscape is dynamic. Regularly review your threshold, especially during peak sales periods. Consider factors like seasonal demand, changes in product range, or shifts in customer behaviour.
- Communicate Clearly
Once you’ve set your free shipping threshold, communicate it clearly. Ensure it’s prominent on your website, especially on product pages and at checkout. This clarity can nudge customers to add just one more item to their cart.
- Test and Optimise
Finally, don’t be afraid to test different thresholds. A/B testing, where you offer two different thresholds to different customer groups, can provide insights into what works best.
Setting a free shipping threshold is a strategic move that, when done right, can boost sales while protecting profitability. By understanding your costs, analysing your market, and regularly reviewing your strategy, you can find a balance that benefits both your business and your customers.