I was on a LinkedIn forum recently, and someone asked a very good question: “If I offer free shipping, how will it affect my business?”
There’s a fair number of common (but good) business questions in my line of work, and most any consultant worth his salt can answer them. But when one comes along that’s different and specific, such as this one, I’m compelled to chime in. Here, in all its glory, was my response:
“It’s hard to pinpoint how much free shipping will impact your sales, but a good benchmark is ~15% increase. A study by Alix Partners shows that shipping costs are a significant barrier to pulling the trigger on a purchase. Here is the study:
In particular, look at Figures 2 and 3.
Free shipping is usually used by a) high-volume businesses like Amazon, and b) businesses selling high-margin items. The key, of course, is to make sure the additional shipping expense doesn’t cut into your revenue drastically. If you can eat it, and the forecasted increase in sales represents a profit in the long run, then great. Otherwise, do what others do: offset or completely cover the shipping cost expense by raising your margins. Warning: Use common sense — only increase margins to what the market will bear.”
There’s not a lot more I can add than that. So often, business is based on making assumptions and then testing them. It’s not what most people want to hear when they are starting or growing a business. Still, there are enough constants and best-practices that you can make reasonably accurate, less-risky assumptions. Hence, the above response: to wit, ‘there’s a benchmark, a study, some recommendations… now, go test it. And have fun.’