What’s the real cost of free shipping for direct-to-consumer brands?
Everybody wants free shipping. So how do brands make the math work?
Nothing in life comes free — not even free shipping.
We all know that when a brand generously offers to waive our shipping fees, the cost is getting absorbed somewhere. Perhaps the brand has padded their margins out a bit, or they’ve convinced us to spend enough money with them it's not a problem for them to cover it for us.
Still, no matter how aware we are that it costs money for goods to be shipped directly to our doors — and, in a roundabout way, it’s us footing that bill — it’s not something we want to see itemized on our bills. Spending $6.99 on shipping? It does not spark joy.
“I don’t think many people actually understand the real cost of shipping, and that’s because we’re so accustomed to it being either free or very cheap,” says Joe Welstead, the founder of U.K. sleep supplement brand Motion Nutrition. Even when people do pay for shipping, he says, what they probably don’t realize is that the brand may also be topping that up for them.
Motion, for example, currently charges customers £3.99 for shipping on small orders — a cost that recently went up from £2.99. “But that’s not the full price,” Welstead says; Motion is also covering the extra £2 that it costs, in total, to ship the products. “When somebody places a small-ish order, say £25, if you had to pay £6 on top of that for next-day delivery, that really hurts,” he says.
By covering part of the cost, Motion can stop people from abandoning their shopping baskets. According to Statista, 53% of shoppers say free delivery is the most effective way to get them to hand over their money when shopping online.
This reality is why the world of online shopping is littered with free shipping — according to Shippo’s 2021 State of Shipping Report, 70% of 814 ecommerce companies surveyed offer some form of free shipping, with 22% saying they provide it on every single order.
Free shipping can be an expensive business — when you order from an online brand, 12% of the money you gave them will be spent on shipping, on average, according to the Shippo report. To make it work, brands have to have a close understanding of the profit margins of every product they sell, particularly as they navigate rising shipping costs, due to inflation and increasing fuel prices.
“Say your product is $25, and you have a 50% gross margin,” explains Nima Elyassi-Rad, who works in business development at Shippo. “You have $12.50 to play with. If you want a custom box, that might be $3.50. That remaining $9 is for you to advertise on Google, Instagram, and [so on]. It’s hard.”
Having different products with different price points (and therefore different profit margins) that customers might mix and match within their individual orders makes it even harder to figure out if it’s viable to offer free shipping.
But the benefits can be huge — a lack of free shipping is one of the most common reasons for abandoning a shopping basket, while asking customers to spend a certain amount in order to qualify for free shipping can increase average order values.
Sean McGinnis, the president of footwear brand Kuru, says that adding a static banner to his brand’s website that explicitly stated “free shipping — free exchanges — free returns" resulted in a 23% increase in revenue per visitor, according to an experiment the brand ran with Google Optimize, where it tested different messaging.
Not offering any form of free shipping could even be seen as a risky business move: the growth of huge ecommerce marketplaces such as Amazon (which can afford to absorb shipping costs) have reset consumer expectations. According to the National Retail Federation, 75% of consumers say they expect free shipping, even if they’re spending less than $50.
“For that reason, you’ve got to start thinking creatively about bundling or getting people to buy bigger orders,” says David Bell, a former Wharton Business School professor and cofounder of Idea Farm Ventures. He uses toothpaste tablet brand Bite as an example. “Their shipping costs are inherently not that much, because they’re selling you a glass jar and a paper bag with refills. But instead of [sending you] toothpaste pills once a month, they try to push you to a cadence where it’s once every four months.”
It’s common for brands to encourage customers to spend more as a quid pro quo for free shipping. For brands that aren’t big enough to absorb the cost of a blanket free shipping policy, a minimum order threshold (beyond which customers can qualify for free shipping) is a common tactic.
Motion, for example, offers free shipping on orders over $100 to its U.S. customers. “And the average basket value for an American order is about 2.5 times the U.K. orders,” Welstead says.
While at Wharton, Bell tested the psychological pull of free shipping offers, running an experiment where shoppers were offered a $10 dollar discount on a basket of $50 or more, 20% off a $50 or more basket, or free shipping, which saved them $6.99. “We found people responded more strongly to free shipping, even though the economic value was [lower],” he says. “It’s another variable in the portfolio of things you can do to drive behavior.”
“People would rather fill up their cart and spend more money than pay for shipping,” agrees Ben Kennedy, the cofounder of ShipScout, which helps brands figure out how to set profitable free shipping thresholds. By analyzing data from ShipScout’s own tests, he estimates that for every $10 a brand ups its free shipping threshold by, it’s average order value gets a 2-3% boost.
Bell likens this phenomenon — where customers end up spending more money than if they’d simply taken the hit on shipping — to stuffing yourself at an all-you-can-eat restaurant. “If you’ve got to pay $10 to get in, you’ll probably end up eating more, because you’ve figured, ‘somehow, I’ve got to get the best value I can’. It’s the same idea with shipping."
"You see it in the offline world too," he adds. "When people go to CostCo on the day they have to renew their membership, they spend a lot more money.”