Free Shipping, Order Size and Conversion Rates

A particular site I work with sells products that range in price from $10 to $150. The site does a decent bit of volume, and we have a fair amount of historical data, and fairly steady data at that. That is to say, that unless there is a clear change in the site, dramatic change in traffic or external environment, we typically know what to expect in terms of our weekly conversion rate, total traffic, total sales and average order size. Usually our deviation will be no more than 10% from the expected, and usually much more like 5% or so.

Shipping charges for the products can range a good bit, depending upon the speed of delivery the customer chooses and what product they have. For the most part, we’re not talking about exceptionally heavy or bulky items. It has been my contention that shipping does not play a major role in the buy/don’t buy decision process for the more expensive items, as its then a small percentage of the customer’s total cost – but rather that for the lower priced items (those in the $10-30 range or so) it does play a role. Its entirely possible for someone to buy a $10 product that costs $7 to ship… thus shipping represents a larger relative cost.

So what did we do? We decided to test out the concept of offering free shipping, and see how that impacted our conversion rates and bottom line. Long story short, here’s what we found:

  • Conversion rates did increase with the free shipping offer – about 20% higher or so. Thus, if our rate was 2.0% before, it would have been roughly 2.4% afterwards.
  • Average order size decreased, by about 30%. Thus, we had to ship 30% more orders just to meet the same total revenue as before.

Looking at the above it was clear to us – 20% more orders, but we’d need it to be at least 30% more to make up for the lower order average. My conclusion is that this is simply b/c we removed a barrier for the low-priced items. A $100 item may have cost the customer 10% less in total with free shipping, but the $10 item was now 50% less or more. Thus, we saw alot of very low dollar orders, increasing our conversion rates, but lowering our average order.

Talk to most internet retailers and they’ll tell you that what they want is a way to increase the large dollar orders, not the smaller ones – especially if you are offering free shipping. For a $10 item with free shipping, the shipping itself might cost $3-5, often more than the profit margin (gross margin) on the product itself. You run the risk of losing money. Of course you are banking that this offer also generates more mid and large level orders, thus making it worth your while.

In our experiment we may roughly the same total revenue, slightly less, which resulted from lower average orders but more of them. At the end of the day we decided we’d rather switch back as it was more profitable for us…

However, I do plan to strongly consider following up this small experiment. What really got us was the small orders. What if we picked a price point at which our gross margin would surely cover the cost of offering free shipping, and then some? In this example, perhaps $30 or $40 would work – large enough to not give money away on the low-dollar orders, but hopefully significant enough of an enticement to increase conversions on the mid-range and large dollar orders.