How to get a profitable online store by setting an ideal shipping price
Shipping orders is one of the most important parts of running an online store. In fact, there is no other way to reach your customer? Lots of companies are offering shipping solutions with multiple delivery methods. The fact remains that shipping is expensive, a domestic shipment already costs around 5€ to 6€. Moreover, customers expect the delivery of their orders to be free, as this is standard the major ecommerce companies like Zalando. A big part of the online retailers cannot offer free delivery, as it is too expensive.. That’s why it’s important to implement the right shipping price strategy for your online store. 64% of online shoppers abandon their shopping cart because of too high shipping costs. This is why it’s important to set the right strategy for your shop.
The secret behind your shipping costs
It all starts with calculating your exact shipping costs. It would be useless to think about the right pricing strategy, without knowing how much you are exactly paying for a shipment. The price you pay for shipping your parcels depends on a number of things:
- Dimensions of the package
- Weight of the package
- National or International delivery
Packaging and branding costs
But that’s not all. Packaging costs are an essential part of shipping your products. If you use basic packaging, the costs are relatively low, but if you choose for a customized package design, costs can rise quickly. Don’t forget to check what your competitors are doing with their packaging. Are they keeping it simple with basic packaging? Then it might be a good idea to use customized packaging for your online store to differentiate. Research by Dotcom distributions showed that 52 percent of consumers are likely to make repeat purchases from an online retailer that delivers orders in premium packaging.
Returns, the nightmare of every online retailer, have a big influence on the shipping costs. After all. you are obligated to reimburse the purchase price of the order, including the shipping costs if a customer returns their package. This is something most online retailers tend to forget, however being transparent about your returns policy can lead to a profitable shipping strategy. The following examples shows that shipping costs are influenced by returns:
|Total shipping costs||Actual purchases||Costs for 1 shipment||Shipping costs per purchase|
The total cost to ship 100 orders is €500, but 15 customers return their order. This results in an shipping cost of €5,88 per actual order.
4 possible shipping strategies and how to utilize them successfully
Free shipping as from a certain threshold: Free shipping on all orders is (for most online stores) not profitable. That’s why a lot of online retailers offer free shipping above a certain threshold. By doing so, you make sure that your margins are large enough to compensate the free shipping policy. You also encourage customers to buy more in order to get free shipping. It is important to test what threshold works best for your online store. If your threshold is too high, you might put off customers, however if your threshold is too low, you will lose profit. You can easily test this by setting up an A/B test in your online store. Suppose your current threshold is €75 and you set it to €50. Then it’s important to follow up the influence of this change on your margin:
Conversion improvement: +18%
Average order value: -12%
Net margin/order: -9%
⇒ Improvement in net profit/visitor: 1,18*0,88 * 0,91 = -5%
This example shows that lowering your threshold will not always lead to more profit. Therefore it’s smart to test different thresholds and to compare results to find your ‘sweet spot’.
Fixed shipping price: Research (of the Canada Post Corporation) has shown that 24% of online stores charge a fixed delivery fee, no matter the value of their purchase . An example of this strategy is offering a certain delivery method for €4,95. Furthermore, the research has shown that this strategy is not the one, since conversion can drop by 50% when no form of free shipping is offered. Still want to keep the fixed shipping fee? Then it’s important to A/B test the fee comprehensively and discover what happens when you decrease or increase this fee with a certain amount. Do the extra amount of purchases compensate the margin that you lost by lowering your shipping fee?
Free shipping: Offering free delivery to all your customers, regardless of order amount, isn’t possible and profitable for most online stores. Big players like Zalando can afford this strategy, as they get a volume discount from carriers, but smaller online stores do not have the power to negotiate these kinds of discounts. These stores will get burned by low profit margins.
It is however a good idea to offer free shipping during specific festivities, as part of your marketing strategy. Free shipping during Christmas, Valentines day or father’s day can trigger customers to buy at your online store instead of at stores of your competitors. Research of David Bell, of the Wharton School of Business, has shown that consumers are more interested in free delivery (where they can save €6,99 with) than a discount of €10 in your shop.
An exception on the “free shipping rule” applies to online stores that sell expensive products with a big margin. If you don’t offer free shipping on products that cost more than €100, customers will be displeased.
Include shipping fees in product prices: Do you really want to offer free shipping, although your margins are too low to offer it? Then you could consider including the shipping fee (partly) in your product prices. Normally you should sell a product for €55 and ask €2,95 delivery costs. Then it is an option to raise the price to €57,95 and offer free delivery. Applying this strategy, you have to keep track on your competitor’s prices. Your prices might be more expensive with this strategy, which might result in losing customers to your competitor. So keep an eye on your conversion rate when applying this strategy for your online store.
Thus, how to make your shipping strategy profitable?
The ideal shipping strategy will be different for every online store. Therefore, it is important for you to test different strategies and find the one that’s most profitable. Do you already have a shipping price strategy that works for you? Then dare to experiment with the threshold or fixed shipping fee. You could probably still improve it and make it more profitable. So, to summarize how to get profitable?
- Never charge the full shipping fee to your customers
- Don’t offer free shipping by default
- Test with different shipping strategies and keep optimizing
- Use free shipping as a marketing tool and communicate this clearly on your product pages and homepage
- Take returns into account when calculating your shipping costs
- Last but not least: take packaging and marketing costs into account
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