#14 Free Shipping Threshold

Today, I'll show you the simple tweak that made one retailer an extra $25M in annual profits—just by adjusting their free shipping threshold.

Free shipping is one of the most tempting offers you can give your customers. Numbers show that more than 50% of shoppers will add extra items to their cart to qualify for free shipping. Moreover, unexpected fees at checkout scare off more than half of potential customers.

Free shipping influences customer behavior at a deeply psychological level, and you can use this to your advantage.

You need to identify the sweet spot where customers are motivated to spend a little more to qualify for free shipping, without making it so high that they abandon the purchase altogether. Simply connect it to your Shopify store, and it will run all of the analytics we'll be looking at in this week's edition on its own.

👉 Get RetentionX if you want to skip the manual calculation.

How it's done

To get started, we examine the distribution of your customers' AOVs over the past 6 months - divided into 25 buckets.

To calculate a free shipping threshold proposal, you need to use the median order value (MOV). The median is the midpoint of a set of values with an equal number above and below it. So the median order value means that half of all your orders are above the median and half are below the median.

The MOV is preferable to the AOV in some scenarios where the AOV may be off due to outliers, such as extremely high- or low-priced SKUs, which can skew the average and distort the value of your median cart.

The MOV represents your customers' typical shopping behavior and should be slightly lower than your free shipping threshold. Your free shipping threshold should be set just high enough to make your customers spend more than they normally do to receive the offer, but not so high that the customer feels the threshold is not worth reaching.

1. Your free shipping threshold is set too low

If your free shipping threshold is lower than the MOV, you will see a large number of orders at and beyond your threshold level. Your data may look like this:

In this case, there are a large number of orders smaller than the threshold that qualify for free shipping, which means you're giving away free shipping too cheaply, so a large number of your customers have no motivation to take advantage of it.

Solution: Raise your shipping threshold. This is a potentially unpopular move, but one that could have a big impact on your bottom line.

2. Your free shipping threshold is set too high

If your free shipping threshold is set too high, you will see a large number of orders at and before your threshold level. Your data may look like this:

Implementing a free shipping threshold which is too far from the median order value can ultimately lead to driving customers away as they value free shipping and aren't encouraged to add extra items to their cart to qualify.

Solution: Move the free shipping threshold lower, which should result in a significant increase in order values.

3. Your free shipping threshold is set just right

If your free shipping threshold is set just right, you will see a dip between the highest number of orders and the threshold, but it will be a small one:

If you're on the right track, congrats! The highest number of orders fall below the threshold, but not far below it. The threshold is set just far enough from the median order value that customers are still willing to add an extra item or two to their carts to qualify for free shipping, ultimately increasing AOV.

What Else to Consider

To determine your free shipping threshold, you should also consider the following factors:

• Average shipping cost: This can be affected by average box size, geography, and the weight of the products you ship. Determine both what you charge customers and what the carriers charge you.

• Transaction fees: Other fees you pay, such as customs duties or credit card fees.

• COGS, packaging, and your profit margin: How much of a hit are you willing to take to your overall profit?

Once you've decided on your free shipping threshold, it's time to embed it throughout the customer shopping experience, such as by adding a free shipping progress bar that makes the bonus tangible to customers as they shop.

That’s it for this edition!