Many small business owners offer free shipping as a loyalty program reward, a bonus for reaching a certain purchase amount, or as a limited-time offer. For many retailers, free shipping is an easy way to boost sales outside of big shopping occasions like Black Friday or back-to-school season.
A recently published study suggests that free delivery is worth more to businesses and customers than previously imagined. New research showed that free-delivery subscription plans, such as Amazon Prime, can offer financial benefits to everyone involved.
The benefits of offering free shipping
Offering free shipping as part of a subscription nets positive results for businesses and their customers. The study reported two key findings:
- A universal free delivery plan in which all customers pay the same subscription fee for unlimited free deliveries generated 33.7% more overall profit.
- A tiered plan, offering extra perks for higher fees, generated an additional 1.9% in profit over the universal plan.
Free shipping subscriptions are more profitable because other factors increase profits enough to offset shipping costs. The study's co-author reported that free delivery subscriptions motivate more purchases.
"People who are subscribing to these plans buy more on average every year. Since they no longer pay separate shipping for each purchase, their cost per unit is lower, prompting them to purchase more," said Anant Balakrishnan, a professor of information, risk, and operations management at the University of Texas at Austin McCombs School of Business.
Subscriptions also boost customer loyalty and repeat sales. According to Shippo's 2023 state of shipping report, over 60% of consumers said they wouldn't consider buying from a retailer that didn't offer free shipping. The Texas McCombs study also noted that customers are more likely to shift their purchasing to retailers with free shipping — especially if they've already subscribed.
[Read more: The Pros and Cons to Offering Free Shipping for Your E-commerce Business]
If you're not sure whether your business can afford free shipping, Shopify has a free shipping minimum threshold calculation that can help you understand the financial implications of this perk.
Is free shipping right for every business?
In short, no. Unlimited free shipping, even for a fee, can hurt smaller retailers if customers take advantage of their subscriptions too much. Some customers may shop so often that free shipping becomes more expensive than the additional revenue can justify.
If you're not sure whether your business can afford free shipping, Shopify has a free shipping minimum threshold calculation that can help you understand the financial implications of this perk. As you go through this exercise, you will need to factor in shipping costs, average order volume, and customer preferences.
It's also worth noting that this study looked specifically at free delivery subscriptions rather than traditional, once-off free delivery. A free shipping subscription, sometimes called membership-based free shipping, charges a monthly or annual fee in exchange for free shipping on all (or a certain number of) orders you place within a specific time frame. It's essentially a loyalty program focused on delivery costs. Not every retailer is equipped to organize and maintain these programs.
How to offer free shipping on a budget
Free shipping subscriptions are still a good option for smaller merchants, though with some caveats. Ideally, small businesses should consider offering flexible options, such as a free shipping subscription for a specific number of orders per month. Or offer a free shipping subscription to a specific tier of your loyalty program or certain geographic area.
You can also consider bundling benefits into the free shipping subscription to make it more attractive and profitable.
"In addition to free shipping, retailers can add other perks, such as access to online entertainment, exclusive sales, or different return options. If the package is attractive enough, customers might be willing to pay more than they would spend for shipping alone," according to the study.
The additional benefits don't need to break the bank. Early access to sales, invites to exclusive events, or personalized recommendations are affordable customer perks that pair well with free shipping.
Free shipping is a powerful incentive that can bring in more repeat customers, boost sales, and incentivize a higher average order value. But ultimately finding a system that works for your business is the first priority for your free delivery subscription.
[Read more: 10 Ways Your E-Commerce Business Can Save Money on Shipping Costs]
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