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How to calculate free shipping minimum for ecommerce

Free Shipping Minimums Free Shipping Threshold Formula, Calculate free shipping costs

A customer is shopping on their favorite site and as he adds an item to his cart the customer wonders, “How much do I have to spend to get free shipping?” Shipping wars exist in the online retailer world. Amazon recently lowered their free shipping minimum for non-prime members to $25. Around the same time Target increased its free shipping minimum from $25 to $35. Online shoppers are faced with a wide array of free shipping minimum options. While there is a growing list of businesses that offer free shipping no matter how much or how little you spend, most ecommerce managers must punch the numbers to determine if it’s time to increase the minimum on free shipping. The trick is finding that magical balance between encouraging shoppers to add another item to their cart and the threshold being too high that the shopper abandons their cart altogether.

Process for calculating free shipping minimum

Setting a free shipping threshold arbitrarily can destroy your margins. Many retailers ask themselves, “What amount would my customer be willing to pay to get free shipping?” That’s not an effective way to set a free shipping minimum. If your average order value is $30 and you set your free shipping minimum at $200, you’re not offering enough value to counteract the increased spend by the customer. Consider the consequences of inadvertently setting a shipping minimum too low where suddenly 75% of orders qualified, but pricing never changed to absorb the cost of shipping. This strategy leaves you to eat the shipping costs. It comes down to calculating different options and testing the results. Here’s a quick formula to help set a free shipping minimum.

  • Average Order Value (example, $35)
    Calculate Average Order value without shipping costs
  • Average Shipping Cost (example, $5)
    The Share A Refund Reporting Dashboard tracks all shipment data across all carriers in a single excel report to help with quick calculations. Alos, this number should include the direct costs of shipping products like boxes, tape, fulfillment, etc.
  • Gross Profit Margin (example, 40%)
    To calculate subtract Cost of Producing Goods from the Total Sales and divide that number by Total Sales. An example would be to take (100,000-60,000)/100,000. The result is a 40% gross profit margin.
  • Proposed Minimum Cart Value (example, $40 and $55)
    Shipping thresholds are normally set in numbers ending in -0 or -5.

Find the difference between Proposed Minimum Cart Value and Average Order Value. Multiply the difference by the Gross Profit Margin. Then subtract the Average Shipping Cost from the result.

Example 1:
$40.00 – $35.00 = $5.00 * .40 = $2.00 – $5.00 = ($3.00)

Every qualifying free shipping order still costs you $3. This shipping minimum threshold most likely won’t work to protect your profit margins and simultaneously hit the minimum shipping threshold “sweet spot” for your customers. Let’s adjust the free shipping minimum to $55.

Example 2:
$55.00 – $35.00 = $15.00 *.40 = $6.00 – $5.00 = $1.00

Put your free shipping threshold to the test

This data will tell you if your shipping threshold is too high or too low, but tests are always necessary to refine the threshold. This isn’t the only strategy for offering free shipping. Consider promoting free shipping on high margin products or you can offer free shipping to customers who place orders frequently. Whatever method you choose, make sure to measure your results.

Test your ideal range of thresholds

The numbers don’t lie. Adjust the free shipping threshold and run it for a month to see how the numbers compare. Avoid running during peak times when shipping might spike and creating too many tests that make your customers feel like guinea pigs. Repeat until you have data on a series of thresholds that will tell a story about free shipping minimum and how they impact your business. You’ll know you’ve found the sweet spot when customers easily add items that motivate them to reach the dollar amount that earns the free shipping.

Do the A/B test

If you want to test out the effects of raising your shipping threshold, you could simply eliminate your current threshold. Conduct an A/B test where half of your visitors get the higher threshold as a “promotion,” and the other half of customers get no threshold. If a customer perceives added value from your shipping promotion, they will be more willing to add additional items to the cart

Will a free shipping minimum increase cart abandonment?

Customers are conditioned to add more items to their cart to secure free shipping. Shoppers spend 30% more per order when free shipping is included. On the contrary, a Visual Website Optimizer ecommerce survey states, 28% shoppers abandon carts because of unexpected shipping costs. Multiple studies always find the cost of shipping to be the main reason for cart abandonment. Tracking these metrics alongside your various shipping threshold tests could show you a correlation between shipping costs and cart abandonment, and how to find the optimal target.

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