How to make free shipping work for your marketplace

Christmas is approaching and, as you may have gathered, Amazon is feeling festive. Last week the $1 trillion dollar e-commerce giant announced it will offer free shipping to non-prime members until the end of the holiday period.

The offer has intensified the already-fierce competition between the major marketplaces surrounding shipping fees. Target had already offered free 2-day shipping on hundreds of thousands of items with no minimum purchase and no membership required, while Walmart has also moved to offer free 2-day delivery for orders over $35, again waiving the membership fee restriction.

This ‘free-for-all’ has reframed the debate around shipping fees, and marketplace operators around the world will be wondering whether they should removing the shipping fees from their own deliveries. It’s certainly a crucial question, and one each operator will have to work out on their own.  Marketplaces Inc will build and host your marketplace for you, but this is very much a personal decision, based on each marketplace’s individual circumstances.

In many cases, free shipping gives an edge over the competition and build a loyal customer base. There are, however, several factors to consider when deciding whether offering free shipping is a smart strategy for your online business. 

Is it right for me?

Before you decide whether or not to follow Amazon’s lead, here’s a quick guide to the opportunities - and the risks.

Free shipping might not have a measurable impact on a business’s bottom line, but it’s clear that it affects marketplaces in two principal ways. Firstly, the psychological triggers of persuasion draw customers in and keep them shopping: research has shown that online shoppers are twice as likely to respond to free shipping offers than price discount offers. 

Secondly, free shipping doesn’t just offer a positive trigger; it avoids a negative one. Richard Thaler - who won the Nobel Prize last year for his work in behavioral economics - has found that when financial loses are ‘segregated’ in consumers’ minds, they have more of an impact. So when shoppers reach an online checkout after a draining bargain hunt and then find an extortionate shipping fee, the impact is doubly profound and they’re more likely to be turned off. Free shipping avoids this pain-point.

This two-pronged benefit can seriously boost your marketplace’s conversions. In fact, some e-commerce companies have reported that free shipping incentives have boosted their orders by 90%. What’s more, when there’s a minimum threshold, free shipping has been proven to increase order value: a 2015 survey found that over 50% of American shoppers had added items to their shopping cart to qualify.

First, the obvious. Providing a free shipping service means covering the costs. In 2017, Amazon spent $21.7 billion on shipping costs, nearly double the amount it spent in 2015. That may be small change for them, but, for smaller marketplaces, the bill can really dent their profit margins. Ultimately, it depends on whether your customers have a tendency to make low-cost orders on products that have a small profit margin. If so, it’s probably best to ask them to keep paying for the shipping.

There’s also the issue of returns. Every marketplace, no matter how big, is at risk from the increasing trend of customers returning orders. Driven by consumer-friendly returns policies - and, of course, free shipping offers from the likes of Amazon - we’re sending goods back at a greater rate than ever, and it’s a major problem for eCommerce. Research suggests that 30% of products bought online ends up being returned, a rate four times greater than physical purchases. So it’s important to consider the vertical your marketplace is operating in before you start offering free shipping. If you’re operating in the fashion space, be warned: the return rate is seriously high.

Then, there’s the issue of variable rates. Shipping isn’t a fixed cost: rates go up and down, and big jumps can really hurt the profit margins of smaller retailers. It’s probably worth asking yourself whether you want to subject your business to these fluctuations, and whether your marketplace can sustain them. 

If, after all these considerations, you’ve decided that free shipping is the way forward, you’ll need to think about how to deploy effectively. The way you frame your policy - whether, for example, you offer conditional or unconditional free shipping - will go a long way to ensuring success or failure.

Here are four simple steps to make free shipping work for you:

1. Do your research. To negotiate all the various cost factors, you need to do your homework. Make sure you check out the following:

2. Conduct a solid analysis. Once you’ve done your research, it’s time to pour the data into a rigorous analysis of how much free shipping is going to cost you, and how much damage you could sustain from product sustains. 

This analysis will help frame your policy, so the more research you can do, the better.

3. Build your plan. Using your analysis, it’s time to build your bespoke free shipping policy. The term might sound simple and universal, but each free shipping plan is subject to all kinds of terms, conditions and qualifications.

Your plan should consider the minimum order value that qualifies for free shipping on your marketplace; the delivery speeds that will be covered; the regions your coverage will extend to; and the duration of your free shipping offer (if the cost of the policy is likely to be high, it may be worth rolling out the offer for a month or two initially, rather than embedding it for the long term).

4. Sell it.  Free shipping is a huge selling point, so you need to sell it! Make sure your customers know the initiative by highlighting it wherever possible and always remind them how much they are saving. Send notifications through all your social media channels, and don’t be afraid to dedicate a blog to the subject on your website. If you’ve got any partners, ask them to give you a plug as well.

In all your promotion, make sure your conditions are clearly marked. Don’t bury them in micro-font at the bottom of your announcement. If customers come to your marketplace expecting free shipping and find they don’t qualify, your reputation will take a huge hit - in fact you’ll end up worse than you started.

And don’t forget, you’re putting your free shipping plan together, or simply thinking about doing so, e-commerce platforms such as Marketplaces Inc. can help you break down your data through extensive analytics, enabling you find your ideal shipping policy. This will boost conversion rates, increase customer satisfaction and put your e-commerce business ahead of the curve.