How Do E-Commerce Companies Pull Off Free Shipping Perks?

How e-commerce companies offer free shippingI’m sure you’ve heard about the importance of offering free shipping in e-commerce. Perhaps you’ve even seen some of the latest stats, where it’s being reported that upwards of 74% of online shoppers drop out of their cart due to high or unexpected shipping charges. It certainly makes sense that people don’t want to pay a lot for shipping, and especially due to the presence of companies like Amazon that offer all sorts of shipping perks, free shipping has become more the norm than the exception. But have you ever taken a moment to think about how companies are able to offer free shipping to online shoppers without dipping too far into profits? We’ve done some research and below are some of the findings.

Your Shipping Rates Play a Big Role

Most business-to-consumer shipping is done via small parcel shipping, though larger products may use other methods such as less-than-truckload (LTL). We’ll focus on small parcel shipping in this article but the same general rules apply for larger freight. If you’re an existing company with regular order volume, you no doubt have your own rates that you’ve negotiated with the carriers such as USPS, UPS, and FedEx. The shipping companies provide you volume discounted rates based upon how many orders you ship and other volume characteristics, such as percentage of residential shipments, average dimensions and weight, among others.

In order to provide any free shipping offers to your customers, the first step is to make sure that the rates you obtain from the carriers are as good as possible. If you haven’t had a discussion with your freight carrier of choice, be sure to reach out to them periodically (at least yearly but more frequently if you have events that may help justify a rate decrease) – and don’t be afraid to shop with another carrier that you aren’t using. Shopping your freight rates with multiple carriers increases the competition and can result in better pricing.

Assuming you do have the best rates possible based upon your own volume characteristics, there is still one other option to improve upon your shipping rates – using a fulfillment service. Fulfillment companies store and ship orders on behalf of companies. You may have heard of them before or perhaps you use one now. If you don’t use one now, using one may offer significant savings in freight costs. Like your e-commerce company, they also obtain freight rates from the various shipping carriers, and because they ship products for multiple companies, their rates may be significantly better than yours. By using a fulfillment service, you can “piggy back” off of their rates. This will help ensure you have the lowest rates possible so that you can employ some of the free shipping strategies. According to Joseph Palisano at Lincoln Warehousing, “we work with multiple carriers to ensure our customers get the best rates and services for their e-commerce fulfillment shipping needs.” If you are using a fulfillment service, be sure that you check with them every so often as well to make sure that you’re taking advantage of their best rates.

Identify Ways to Improve Other Warehousing and Shipping Costs

Improving shipping costs isn’t the only way to create additional margin to justify free shipping. Be sure to take a look at some of the other warehousing and shipping related costs of your business to see if there’s any wiggle room for improvement. For example, some of the major shipping carriers have “free box” programs. This is a way to decrease some of the packaging costs of your business. While you may not get some of the benefit of custom packaging, it allows you to cut down on part of your shipping expenses. Another alternative is to utilize recycled boxes or re-use boxes from returns. Every dollar counts when trying to help compete with other free shipping programs of competitors.

Sometimes, it makes sense to change some of your procedures to reduce fulfillment and shipping costs. For example, minimizing some returns can help lower overall costs. In this case, you’ll have to weigh the pros and cons and do a thorough analysis, but taking a creative look at your processes and procedures may open the door for other cost saving methods.

Finally, there may also be other shipping services that you can use to lower costs. For example, FedEX has its smart post option where their drivers deliver to a certain stage and then “inject” the package into USPS systems. Because of this, they’re able to offer the service at a slightly lower cost. These types of programs are worth looking into to make sure you’re as competitive as possible.

What is Your Competition Doing?

Before we provide a listing of some of the free shipping options at your disposal, it’s worth mentioning that you should always take a look at the free shipping competitive landscape in your niche before jumping in with both feet. Pay close attention to what others are doing. Are they offering free shipping? What types of free shipping offers do they employ on their site? By doing your own research, you can see how to best position yourself versus your competitors.

What Free Shipping Options Should You Use

Especially if you need to be conservative with your free shipping offers, it pays to know what available options are out there so that you can choose the most effective strategy. In rare cases, companies offer free shipping across the board – this is usually a very calculated decision and certainly isn’t for everyone. Also, some companies have the luxury of having a very high priced product, so they can lose some money on shipping due to their high margins to begin with. If you don’t have as much margin to pay with, here are some ideas to use:

  • Set a minimum order amount. You’ll have to determine the best minimum level, but this at least forces the consumer to spend over a threshold.
  • Offer free shipping for select items – e.g. only higher priced items. This helps you maintain control to offer free shipping on your highest margin items.
  • Offer a promotion for a certain period of time. This will allow you to minimize the free shipping losses to a certain period of time.
  • Only offer economy shipping, such as USPS ground. When you do offer free shipping, there’s nothing wrong with ensuring that it goes the cheapest method.
  • Use member and loyalty programs. Take a page out of Amazon’s book and require membership.
  • Put shipping costs into the product price. This is a bit riskier and will be dictated by your competitors’ prices.
  • Use selective free shipping options, such as “only if they abandon their cart” or in exchange for placing a review on social media.

Free shipping is by no means an easy thing to figure out. You’ll want to spend a good amount of time coming up with the best strategy. By taking a look at your costs, areas for cost improvements, investigating what your competitors are doing, and choosing between the free shipping options, you’ll put your company in the best position for success.

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