4.Using Shipping Discounts to Increase Conversions

Using Shipping Discounts to Increase Conversions

Why is it that small retailers are so afraid of eating shipping costs?

Reducing shipping costs can dramatically increase conversions - meaning it costs you less to acquire each order. Shipping discounts may decrease your net margin per order - but you'll likely get significantly more orders.

I've seen cases where retailers gain a full point on conversion rates by offering free shipping! (Meaning out of every 100 shoppers, 1 more places an order)

Why is shipping cost such a big deal?
Shipping cost is becoming an increasingly important factor in shoppers decisions on where to spend their money. Here's why:

  • You're competing with local stores for the order. More than half of internet shoppers indicated that they frequently use the internet to research products they want to buy - then purchase locally at a brick-and-mortar store. You have to compete with those local retailers for the shoppers business - and one area they consistently win is that there are no added costs to the order.
  • As cost of oil goes up, so do shipping costs. Internet shoppers are becoming increasingly more weary of high shipping costs. A shopper looking to make a $50 purchase will likely be concerned from the beginning of their shopping experience that shipping costs will destroy any value proposition they find.
  • Shoppers now have more tools available to easily compare the entire offer. The online ease of shopping a half dozen stores for the same product with just a few clicks has made it easy for shoppers to compare retailers based on the entire offer - product cost, shipping and taxes. You can easily lose business to a competitor whose price is higher - but eliminates shipping cost.
  • As the economy flags, shoppers are more likely to pinch pennies, and shop more aggressively for the best deal.
  • Shoppers have always loved a "great deal", and they always will. Free shipping offers provide additional incentive to complete an order.

What types of retailers will see the biggest gains by offering free (or discounted) shipping?

  • Online retailers competing heavily with brick-and-mortar stores. These online retailers must always be offering a value proposition that beats their brick-and-mortar counterparts, without adding any additional negatives to the deal.
  • Online retailers competing heavily on price point. If you get much of your business by offering a better price point than your competition, free shipping can play a big role in sealing the deal.
  • Online retailers selling generally inexpensive items. Nobody wants to purchase a $10 item and then be jolted in checkout with an $8 shipping tab. Especially if the items are small and inexpensive to ship through the post office.

Should you set minimum order terms for free shipping?
Generally speaking, it is wise to set a minimum order amount for free shipping. This will provide the value, with an incentive to add that one-more-item to the order.

It's as important to understand the dynamics of your average order price points, as it is to weigh the impact to your bottom line when determining where to set the minimum order cutoff.

One of the best ways to get an idea where this magic number should be is to run a report on the size of your average ticket. Then get a count of orders under your average ticket, and a count of orders over your average ticket. If you get more orders under your average ticket, then set the shipping discount at right around your average ticket value. If you get more orders over your average ticket, set the minimum cutoff 10-15% over your average ticket value.

If the goal is both to increase conversions and increase average order size, then you'll generally want to set the minimum cutoff above your average ticket. But be careful not to set it too far above, or the positive impact on conversions will be very limited.

How much shipping cost should you discount?
How much shipping cost you should discount is different for every retailer.

If you have decent enough gross margins, and can afford to discount shipping entirely, it will probably provide you the strongest conversion benefit to do so.

Some simple math you can do to find out how much you can afford to discount:

  • Get your most current month's traffic and sales report and figure out what your conversion rate was.
  • Increase that conversion rate by .5% (projecting that will be your increase in conversions because of your free shipping offer).
  • Based on the number of visitors you had in that month, multiply it by the increased conversion rate to figure out how many orders you might project with the shipping offer.
  • Subtract your actual order count from that projected order count. Then multiply that number by the amount of your average ticket. This will give you a projected increase in revenue.
  • Now run a report on how much the average shipping cost was in the previous month for orders that exceeded the minimum cutoff point for your proposed free shipping offer.
If the value proposition of offering free shipping - the increased conversions versus shipping cost absorbed isn't workable, you might then calculate how much shipping cost you'd be absorbing if you offered $5 flat rate shipping, or some other variation on the theme.

If most of the orders placed on your site select typical ground shipping (versus more expensive overnight or 2nd day air options), then you should also consider making the offer apply ONLY to ground shipping options, so you limit your cost exposure.

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