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Case Study: Free shipping or shipping fees?

How to design the most effective shipping fee strategy when selling online.

Author

Thomas McKinlay
May 16, 2024

Topics: Ecommerce | Pricing
For: B2C

👤 Question from

This is a pooled question from the co-founder of Yoseyomo and Tony Cox, president of specialty food marketing agency 5th Food Group.

❓ Question

[Combined and paraphrased]

How useful is it to offer free shipping in ecommerce? Is there a proven impact on conversion rates?

If it needs to be paid, what are the best pricing options? For example:

  • Whole dollar (e.g. $100) vs just-below pricing (If so, should it be $.99 or $.95?)

  • Flat rates (e.g. $9.99 regardless of order size) vs a shipping table (e.g. $9.99 for orders up to $50, $14.99 for orders 50-$100, etc.)

🎓 Answer

The answer is not as straightforward as we’d first expect.

There is certainly a strong relationship between free shipping, different shipping fees, and the number of sales.

Here’s how it all works, and what you should do depending on what you sell.

Free shipping for returnable products

Offering free shipping usually increases sales. But it also increases returns. In most cases, this makes it unprofitable.

Free shipping is unlikely to be profitable if you sell products that are “risky” impulse buys driven by emotions (e.g. fashion, specialty foods, decorations), as people are more likely to change their minds and return them.

If the products you sell are more functional and bought out of necessity (e.g. glue, pots, cleaning supplies) you will get fewer returns, so you have a higher chance of offering free shipping profitably. [Research paper]

If you do offer free shipping, label it as “$0” or “at no cost” (v.s. “free”). It reminds people they are not losing money, rather than gaining something “free”, making it feel more valuable. [Science Says insight] 

Free shipping for non-returnable products

Do not offer free shipping for non-returnable items. Since customers can’t return the item, free shipping will not motivate them to buy. Instead, offer a lower product price and higher shipping cost. People will perceive the total cost of the product as lower. [Research paper]

Free shipping subscriptions

If you offer products that people buy regularly (e.g. supplements, cosmetics), offer a flat-rate free shipping subscription (just like Amazon Prime). People will order and spend more. 

This subscription feels like a sunk cost, so people try to use the benefits - free shipping - as much as possible. It’s especially effective for occasional buyers and those who buy a wide variety of products. [Science Says insight]

Free shipping only above a certain threshold

Most of the time, threshold-based free shipping (e.g. free shipping for orders over $40) backfires, it has been shown to decrease purchases and increase returns. [Research paper]

The exception is when customers have highly varied basket sizes (e.g. e-grocery delivery store where someone orders a few dinner items vs someone who does their weekly groceries). In this case, threshold shipping discounts motivate some people to top up their orders. [Research paper]

So it’s usually better to offer the same shipping fee no matter how much people buy (e.g. $3.99 for all orders).

Use just-below prices for your shipping fee

Just below (vs whole) shipping prices ($4.99 vs $5) seem cheaper, so customers will be more likely to pay the shipping fee, rather than abandon their cart. [Science Says insight]

Stick to .99 prices rather than a price like .95. The evidence suggests that they don’t help in differentiating your product and give the same impression to people, so you might as well charge the maximum possible price. [Research paper]

Keep the pricing as simple as you can

Make your shipping pricing simple. If your options and extras pricing is simpler than that of your competitors, people will perceive you as fairer and cheaper, even if you are more expensive. [Science Says insight] 

This suggests it’s better to avoid shipping tables (e.g. if your order crosses a certain weight, then it will cost more), or to keep them as simple as possible. In most cases, you are best off offering a flat-rate.

Offer an alternative slower and cheaper shipping method

Many people are happy to wait for slower shipping in return for a lower fee, especially if their purchase is not urgent (e.g. restocking their laundry detergent supplies).

For those in a rush, you can offer a more expensive, faster, shipping option. Remember, rather than just speed, the most important part is a guarantee of receiving it within or on a specific date. [Research paper]

📖 Research cited

Remember: Peer-reviewed, scientific evidence is the best knowledge we have - by far. But that does not mean it is guaranteed to work in your situation. If it’s a risky change, always test it on a small scale before rolling it out widely.