Is Offering Free Delivery The Holy Grail Of eCommerce Conversion?
Which Delivery Options Are Optimal And What Should You Offer?
The problem with delivery or shipping is that someone always has to pay. There is no such thing as free delivery, just as there is no free lunch. Your boss might take you out for dinner, or you might have "free pizza Fridays", but ultimately you'll pay for that in extra time donated to the front line effort. Buying loyalty with a free lunch is a battle-tested tactic!
Your customer might expect and enjoy "free delivery" but either they will pay for it in the form of higher prices, or you will pay for it in reduced profit. Adjusting the formula to hit the sweet spot is what I am going to help you with today.
Dealing With Customer Expectations
When you buy something on eBay for a couple of pounds, and then the delivery charge doubles the purchase cost it sows the seed of doubt as to the value of the item being purchased. It is that doubt that leads to an abandoned shopping cart, and it is why all the top eBay listings are filled with free delivery:
If it is unclear whether offering free delivery is part of the eBay search listing algorithm, it is no coincidence that the top listings have the best price AND free delivery, so the top sellers are operating at slimmer margins to get to the top of the listing and have a higher overall volume of sales.
This is to be expected and it is repeated on Amazon.co.uk. If you want high volume sales and you are prepared to sacrifice margin then free delivery is the way to market.
But wait! How much margin should you be prepared to sacrifice?
The problem with price cutting is that there is always someone who can offer a generally available product at a lower price. On Amazon especially it is well known that sellers will discount heavily and lose money in a bid to gain customer reviews. Without customer reviews, you are a naked spectator at the football match, sticking out like Wally all alone on the beach.
So in the case of eBay, Amazon and other comparison platforms offering free delivery is an essential part of doing business on the platform. In my example, although the items are light and easy to post. What happens when you are dealing with large bulky items?
Here's a car battery example:
Once again all the top listings on eBay offer free postage. What is noticeable though is that these are all OEM (original equipment manufacturer) replacement batteries. They are cheaper to resell and will also withstand heavier discounting than the equivalent branded product.
These examples tell us that offering free delivery on listing comparison websites is a prerequisite for success. Unless you have a product that can not be found elsewhere you have little choice but to absorb the cost and hope you can buy cheaper in bulk to maintain any sort of margin. The more you buy the cheaper the product will be but if you continue down this path you are likely to go out of business because managing more and more orders on wafer-thin margins is unsustainable long term.
Which neatly brings me to an important point - just because someone else is doing it does not necessarily mean they are doing it profitably.
Returning to our first vape battery example let us source the product at the cheapest price:
Here is how I worked out my delivery costs:
Here is how I worked out my packaging costs:
We buy 300 batteries at $5.10 each.
Total purchase cost 300 x $5.10 = $1,530
Inbound Shipping = $195.10
Todays exchange rate $1 = £0.78, $1725.10.
Total Purchase: £1,351.75.
Cost per battery = £1,351.75/300 = £4.50
Postage Cost: £1.01
Packaging Costs: 7p
eBay fee £0.80
Paypal fee £0.47
Total Cost Of Sale: (£4.50+£1.01+0.07+£0.80+0.47) = £6.85
If the retail price is commonly £7.99 on comparison sites then we will make a profit of £1.14 per battery.
Gross profit 300 x £1.14 = £342
Total Return £1,693.75
Using the same formula we can calculate a reduced cost price for 1,000 units:
1000 (units) x $4.65 (price per unit) = $4,560
+ $589.39 (shipping cost)
Total Purchase £4,105.46
Cost per battery = £4.11
Outbound Postage = £1.01
eBay fee £0.80
Paypal fee £0.47
Total Cost Of Sale: (£4.11+£1.01+0.06+£0.80+0.47) = £6.45
If the retail price is commonly £7.99 on comparison sites then we will make a profit of £1.54 per battery.
Gross profit 1000 x £1.54 = £1,540
Total Return £5,645.46
In this second example, we have increased our investment by approximately 300% going from £1350 to £4,105 and reduced the net resale price of our battery from £4.50 to £4.11. This means for the same 300 units we have made an extra overall profit of £120 or £0.40 per battery. Clearly buying in bulk results in a better profit but it also disproportionately increases the amount of capital you have invested and the associated risk.
The problem with this model is not the base cost of the product but the big slice of the pie that payment processing fees and delivery charges consume. Because of these high fixed charges, it will always be difficult to increase the profit margin using a free delivery model.
Offering Free Delivery - The Options
We know that offering free delivery will work wonders for our listings on comparison sites and we know that it will convert a much higher proportion of our abandoned shopping cart baskets into actual sales, but will that increase in sales make up for sucking up the delivery charges?
In my examples above we are working on very fine margins. Delivery charges and credit card processing fees make up two-thirds of the final retail price. How do you reduce those costs and make inroads into offering free delivery?
The first place to look is in your website payment processing charges. You can substantially reduce fees by using a card payment processor like Cardstream. Check out my payment processor comparison tables for help in finding the best deal for your website. Stay away as much as possible from using Paypal and Shopify payment systems, these have the highest payment processing charges.
The second place to look is in combining delivery charges for orders with multiple items. EKM and 3Dcart both excel at providing routines for delivery options so it is well worth exploring what can be done depending on the shopping cart you are using.
The last place to look is the actual delivery carrier service you use. Of course, all eCommerce website businesses are different and you'll probably be packing much bigger items than rechargeable batteries but spending some time researching the various delivery options available to you can make all the difference between being able to offer free delivery or not.
I'll cumulate the parcel delivery resources as I come across them and add them into the resources below so that we gather all delivery options together in one easy to glance table.