How to Make Free Shipping Profitable, Part 4

Whether you’re a brand or a retailer, the internet is a crowded place to sell things. You're constantly fighting for coveted shopper attention in your emails, ads and paid Instagram posts. Once you have a visitor’s attention, it’s about nailing that conversion to a paid customer.

Free shipping could be just the thing to bring your site visitor to the finish line. This part of the ultimate guide series will focus on using free shipping promotions to acquire new customers while preserving your long-term profits. (Here are parts one, two, and three in this multipart series.) Below are five ways to incorporate free shipping in smart marketing strategies:

1. Offer free shipping with annual fee loyalty programs.

A loyalty program brings the promise of continued business. It eases the burden of shipping costs and converts a one-time buyer into a recurring customer. According to a study by CFI Group and Radial, retail loyalty members are 12 percent more satisfied, 10 percent more loyal, and 13 percent more willing to recommend a retailer than other customers.

The increase in the frequency of purchases from inclusion in a loyalty program is reflected in customer lifetime value (CLV), which is the basis for most loyalty programs. CLV is easy to calculate:

CLV = (average order value) x (average gross margin) x (average number of transactions per customer over a year) x (average lifespan of a customer in years) + (loyalty program fee per year) x (average lifespan of a customer in years).

For a loyalty program to be successful, CLV should increase when compared to CLV without the loyalty program.

If there's an increase in CLV despite a decrease in gross margin, the loyalty program would be considered to have worked.

A few examples of annual-fee-based programs designed around free shipping are Shoprunner and Instacart. Shoprunner members get free two-day shipping from high-end stores like Ray-Ban and Saks Fifth Avenue for a $79 annual membership or free with a qualifying a credit card. Instacart’s annual membership is $99 per year and provides free grocery deliveries for orders $35 and above; this encourages frequent shopping behavior from its members (per delivery fee is ~$8).

Credit: Shoprunner

Pros:

• Alleviates the burden of offering free shipping through an upfront annual fee.
• Membership fee encourages customers to shop more to make the most of what they have paid for.
• Customer data, acquired through loyalty programs, is useful for other marketing campaigns as well as designing future products.

Cons:

• “Stick” approach. Customers may feel punished for not buying a certain number of times, instead of feeling rewarded.
• Paying up front can be a turn-off for new customers who are still unsure about the merchant.
• The success of loyalty programs is difficult to assess over a short period given the need for customer longevity.

2. Offer free shipping with spending-based loyalty programs.

While a membership fee may increase purchase frequency, some consumers may find it unpalatable that they have to pay up front to enjoy the perks. An alternative is to set up a tiered system that provides more rewards with more purchases. Keep in mind that the loyalty program needs a robust product offering to attract customers. From the same study as above, about 63 percent of consumers say offering faster delivery influences them to sign up for a retail loyalty program. Below is an illustration from Cahoot (a peer-to-peer order fulfillment network) on how to incorporate free shipping benefits into a rewards program.

Credit: Cahoot® Ecommerce Order Fulfillment Network

Below is a program from Neiman Marcus which is designed to acquire and retain customers across multiple ranges of spending.

Credit: Neiman Marcus

Sephora’s Beauty Insider program rewards loyal beauty shoppers with community and access. It’s more than just discounts and free shipping. It offers early access to products, exclusive events, access to like-minded beauty enthusiasts, and other extra frills.

Credit: Sephora

Pros:

• “Carrot” system. The point system allows customers to reap benefits progressively, and customers get more benefits as they purchase more.
• More flexibility for tiers of exclusivity with spend-based vs. annual fee-based, and easier for new customers as no upfront fee is required.
• Customer data from loyalty programs is useful for tailoring future marketing campaigns

Cons:

• Need to strike the right balance between offering attractive but costly loyalty perks and increased sales.
• Requires a solid understanding of your customers’ wants and needs. It's challenging to grow membership without a very compelling benefit.
• Measuring success takes time. It will require at least a few months to see which customers will achieve the high tiers.

3. Convert engaged audiences with limited-time free shipping.

If you have a high engagement rate on your website but a low conversion rate, that may mean consumers need a nudge to make a purchase. Offering a limited-time free shipping offer will excite prospective buyers and turn window shoppers into paying customers. Limited-time free shipping can be a good investment to boost sales during slow periods. It's essential though to be careful about frequency of these offers, and not make free shipping the norm.

Credit: Anthropologie 

Free shipping gets you closer to your short-term business goals — e.g., quickly boost sales, gather reviews for your website, generate social media buzz. To encourage repeat purchases, offer free shipping on the next purchase only after checking out. This acts as a reward for shopping with your brand and entices the customer to explore your catalog for future purchases.

Credit: FresherThan

During peak sales season, every merchant is competing for customers’ share of the wallet with promotions. Free shipping or even expedited free shipping could be the thing to get consumers to switch to your brand instead of your competitors. In 2019, major retailers lowered their free shipping purchase threshold for the holiday season to match Amazon.com's $25 minimum, including Macy’s (from $75 to $25), J.C. Penney (from $99 to $25), and Kohl’s (from $75 to $25).

Third-party sellers on various marketplaces such as Amazon can also benefit from offering free shipping on major sale days such as Prime Day. Even if you don’t offer free shipping year-round, temporarily offering free shipping could help you convert a larger share of the increased traffic to the site. The objective is to increase overall profits by boosting gross sales at a lower margin.

Pros

• Limited-time offers of free shipping require relatively fewer changes in fulfillment operations.
• Free shipping promotions can be added on top of your existing discount promotions to make them more effective.
• Unrealistic customer expectations of free shipping year-round are not set.

Cons:

• Running limited-time offers too frequently may train consumers to expect free shipping all the time.
• Free shipping promotions being so commonly available these days can get lost amongst the host of other promotions if not coupled with other promotions.
• Peak season is a busy time for both carriers and sellers. Prepare your operations team to fulfill this sales peak on-time and not disappoint your customers.

4. Alleviate doubt with free returns.

According to a study by Paazl, only 8 percent of store-bought items are returned, but that number jumps to 25 percent for items bought online. Some customers value free returns almost as much as free shipping. Hence, you risk losing sales if you’re not offering free returns.

There are a few categories where customers think about returns even before checkout. These are products that people typically like to try on first, such as fashion, home décor, or jewelry. A customer’s perceived risk is higher if returns are complicated (e.g., how to print the label, how to mail them, how much will it cost to ship). This can cause shoppers to hesitate and abandon their purchase.

Credit: Pearls of Joy

Free returns can become very costly for items that have high shipping costs. Therefore, think about which products are worth offering with free return shipping. Products that are light and small with healthy gross margins are good candidates as the reverse logistics costs won’t eat up all your profits.

Nevertheless, try to keep returns to a minimum by helping customers choose the right item in the first place. This can be done by having a detailed product information section, multiple size charts, FAQs, and useful visualizations. In early 2020, Pinterest introduced an augmented reality tool that allows shoppers to try on lipstick before they buy. Such additions improve shoppers’ confidence in buying makeup products online, and will also reduce returns.

Credit: Pinterest

Besides making returns free, make sure that the customer receives hassle-free service during the return process. Provide clear instructions on the site and include a pre-paid return shipping label inside the original package.

Pros:

• By offering free shipping on returns only, not all orders will incur the cost of additional shipping expense.
• It attracts customers who are wary of shopping online because of the fear of getting duped by inflated product presentation.

Cons:

• A free returns policy can encourage unwanted consumer behavior such as wardrobing or ordering an item without serious intent to keep it.
• Free returns must be accompanied by investment in product visualization and additional product description to ensure minimum surprises to the customer.
• Some products can’t be resold when returned. Keep in mind local laws and marketplace policies when you’re considering free returns.

5. Encourage subscription with free first-time delivery.

Getting customers to try your products for the first time can be a big hurdle in growing your business. Offering free shipping could be the nudge that consumers need to buy from a new seller. Such an offer makes sense for a seller who is looking to broaden its base or acquire new customers.

Credit: Inner Origin

Subscription and continuity programs are simple but effective strategies. Subscription and delivery services, such as Postmates and Blue Apron, have used them successfully in the past to get new customers on board. Once the consumer realizes the value of the service, they stay on to become regular paying customers. Petco offers a similar deal to first-time customers.

Credit: Petco

If you're an existing seller with a new product offering or a new online store, free shipping can be a form of sampling to get your products into consumers’ hands and encourage subscription. This is especially useful in consumable categories like pet food, coffee, and vitamins, where customers tend to order the products routinely.

Pros:

• A way to get new products into the hands of consumers or for a new store to gain visibility to shoppers.
• Paves the way to a long-term relationship when coupled with consumables/regularly purchased items.

Cons:

• May be vulnerable to exploitation if not executed properly (e.g., multiple fake accounts by the same customer).
• May not be enough to entice new customers depending on what your competition is offering.

Manish Chowdhary is the founder and CEO of Cahoot, a peer-to-peer network where merchants collaborate to increase their sales and margins by offering profitable one-day and two-day free shipping to customers nationwide without spending a penny more than the economical ground shipping.