September 15, 2010, 2:23 PM

Does free shipping pay off?

Free shipping is common but online retailers must decide how much it lifts sales.

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Although free shipping of one form or another has become common on e-commerce sites, merchants must decide whether it really improves business or becomes just another cost to bear.

So what’s a customer-hungry, cost-conscious retailer to do? Several merchants advise testing what works best with different product categories and pricing strategies—for example, offering free standard shipping only for light-weight but high-margin products, or setting a minimum order value.

“The sweet spot comes from being analytical, knowing your competition and your average order value and seeing if you can get customers to a higher order threshold,” says David Redlich, co-founder and director of sales at RestockIt.com, an online-only retailer of office and restaurant supplies that is No. 365 in the Internet Retailer Top 500 Guide.

ReStockIt, which has experienced conversion rate hikes of 20% to 30% through free shipping offers, has found free-shipping works best by offering it as standard fare on more than 100,000 of its higher-margin products.

The retailer also offers free shipping through limited-time promotions for other lower-margin products. Cases of large-size Gatorade energy drinks, for instance, may come with long-term free shipping, while cases of smaller Gatorade bottles may come with free shipping only occasionally.

Aleva Health, which operates six niche health products sites, including AlevaLegs.com, FocusFeet.com and SportSocks.com, has tried several minimum purchase thresholds for letting customers qualify for free shipping, says Derek Gaskins, the company’s president. “Our sweet spot is $75,” he says.

Aleva Health, with an average product price is $40, found that setting a free-shipping threshold of $75 persuades many shoppers to buy two products instead of one, Gaskins says.

At BedBathstore.com, a web-only home furnishings retailer, chief operating officer Mike Reichman uses a spreadsheet tool developed in-house to periodically analyze several fixed operating metrics associated with free-shipping offers along with variables, such as a specific purchasing threshold, associated with particular shipping offers.

The fixed metrics include total revenue, operating margin, number of orders, number of customers who viewed a free-shipping offer, average shipping cost per order, average order value of shipped orders, and the average conversion rate for a free-shipping promotion. By also plugging in the unique aspects of each promotion, BedBathstore can determine which offers bring in the most profit, Reichman says.

The retailer will also look at such data over a 90-day period to determine what has the best impact on conversion rates, sales and profits. “Based on our current data, an $89 threshold for free shipping is best,” Reichman says. “We found that it was more profitable than a $79 threshold.”

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