Free shipping: who actually pays for it, and how to set a threshold
Shoppers like free shipping, and many expect it. But the label still costs money, and if you have not decided who pays for it, you do. On a cheap product the label can take most of the profit.
What it does to one order
A $28 candle that costs $11 to make. The label is $6.40 and the box and filler $0.75.
| Customer pays shipping | Free shipping | |
|---|---|---|
| Price | $28.00 | $28.00 |
| Product cost | −$11.00 | −$11.00 |
| Label and packaging | −$7.15 | −$7.15 |
| Shipping charged | +$6.40 | $0.00 |
| Profit | $16.25 | $9.85 |
| Margin | 58.0% | 35.2% |
Free shipping cut the profit on this order by almost 40%. Shipping is a fixed amount per order, not a percentage, so the cheaper the product, the harder it hits.
There are three ways to pay for it.
1. Put it in the price
Raise the product price by the shipping you absorb and advertise free shipping. To keep the $16.25 profit, the candle would go to about $34.
This works well when your product is hard to compare directly with someone else’s: your own brand, handmade goods, bundles. It works badly when the identical item sells elsewhere for less, because the higher price is the first thing a shopper sees.
2. Charge for it
Keep the product price low and charge shipping at checkout. Honest and simple, and the margin stays where it was.
The catch is that an unexpected shipping charge at checkout is a common reason for abandoned carts. If you charge it, show it on the product page, and consider a flat rate rather than a price the shopper only finds out at the end.
3. Free over a minimum order
The most common choice, and usually the best balance. Small orders pay for shipping; bigger orders get it free, and the bigger basket carries the label.
Setting the threshold
- Start from your average order value. Your store’s reports show it. Say it is $38.
- Set the threshold a bit above it, enough that a typical customer would add one more item. Here, $45 or $50.
- Check that an order at the threshold still pays. With a 55% gross margin before shipping, a $50 order makes $27.50. Take off an average label and packaging of $7.15 and $20.35 is left. That works.
- Check the worst case. If the heaviest item, or the farthest delivery zone, costs much more to ship, make sure a threshold order of that item still makes money, or exclude it.
If the threshold is below your average order, most orders ship free and you are back to option 1 without the price rise. If it is far above, almost nobody reaches it and it does nothing for sales.
Show the gap
A threshold only works if customers know about it while they shop. A line in the cart like “you are $7 away from free shipping” is what turns it into an extra item in the basket.
Shipping costs people forget
- Returns. If you pay for return labels, the cost of returns belongs in your shipping cost per order: return rate × return label cost.
- Dimensional weight. Carriers charge large light parcels by size, not weight. A bigger box than needed can move a parcel into a more expensive band.
- Rate changes. Carriers raise prices, often once a year. Rerun your numbers when they do.
The quick check
Put your price, cost, label and packaging into the shipping cost calculator. It shows what shipping takes out of each order and the price that would keep your profit where it was. Then run your threshold order through the profit margin calculator with the label as an “other cost”.
Disclosure: MatrixInn Solutions, the team behind this site, makes a free shipping bar app for Shopify that shows customers how far they are from the threshold. Everything in this guide works without it.