Setting the right free delivery limit is a game-changer for any business that delivers products directly to customers. It’s more than just a logistical decision; it’s an opportunity to enhance the customer experience, drive purchasing behavior, and keep you ahead of the competition.
In this guide, we’ll unpack 17 crucial factors to help you find that sweet spot. Let’s dive into the practical strategies that will enable your delivery policy to work as a driver for both customer loyalty and profitability.
1. Average Order Value (AOV)
The Average Order Value is the average amount customers spend per transaction. Knowing your AOV helps in setting a free delivery limit that encourages customers to spend more without negatively impacting your profit margins.
- Calculation: Total revenue divided by the number of orders.
- Application: If unsure or short of time, set the free delivery limit slightly above your AOV to incentivize customers to add extra items to their cart.
2. Consider delivery costs
Delivery costs include shipping fees, packaging, handling, and any additional logistics expenses. These costs directly affect your bottom line when offering free delivery.
- Fixed vs. variable costs: Understand which costs are fixed per shipment and which vary with order size or destination.
- Cost absorption: Determine how much of the delivery cost your business can absorb without compromising profitability.
3. Profit margins
Your profit margin per product influences how much you can afford to offer in terms of free delivery.
- Gross margin: Revenue minus the cost of goods sold (COGS).
- Net margin: Gross margin minus all other expenses, including delivery.
- Threshold setting: Ensure the free delivery limit doesn’t erode your profit margins.
4. Customer purchasing patterns
Analyzing how customers actually shop can provide you with insights into setting an effective free delivery limit.
- Purchase frequency: Frequent small purchases may warrant a lower free delivery threshold.
- Basket composition: Identify commonly purchased items together to set thresholds that promote bundling.
5. Competitor analysis
Understanding what your main competitors offer helps you remain competitive.
- Benchmarking: Compare free delivery limits and shipping policies.
- Differentiation: Offer superior shipping options or lower thresholds to attract customers.
6. What are your business goals?
Your free delivery policy should support your broader business goals.
- Increasing AOV: Set thresholds that encourage higher spending.
- Customer retention: Use free delivery to boost loyalty.
- Market expansion: Attractive shipping policies can help enter new markets.
7. Geographical considerations
Delivery costs and customer expectations can vary by region.
- Domestic vs. international: International shipping often incurs higher costs.
- Urban vs. rural: Remote areas may have additional delivery expenses.
8. Seasonal demand and promotions
Adjusting your free delivery limit according to seasonal trends can optimize sales.
- Seasonality: Lower thresholds during peak shopping seasons like holidays. Instead of offering discounts, try out different thresholds for free or cheaper shipping including convenient shipping offers like home delivery.
- Promotional campaigns: Temporary offers can stimulate demand during slow periods.
- Free for some: Offer free delivery or lower the threshold for a part of your assortment. When customer buys your selected products that qualify for free delivery or lower threshold, make that very clear to the customers before the checkout. Use filters to show only products that are included.
9. Customer feedback and satisfaction
Customer opinions on delivery fees can inform your policy.
- Surveys and reviews: Gather feedback on how delivery costs affect purchasing decisions.
- Customer experience: High satisfaction can lead to repeat business and positive word-of-mouth.
10. Have a look at order frequency and customer loyalty KPI:s
A strategic free delivery limit can foster customer loyalty.
- Repeat purchases: Lower thresholds may encourage customers to buy more often.
- Loyalty programs: Offer free delivery as a perk for members or frequent shoppers.
- Monthly fee: Look at Amazon that offer Prime memberships than include “free” shipping.
11. Consider psychological pricing strategies
Use pricing psychology to encourage higher spending.
- Price thresholds: Set the free delivery limit just above common spending amounts.
- Perceived value: Emphasize the savings customers gain from free delivery.
- Inform the customer: Show a banner that tell how much more they must spend to get free delivery.
12. Inventory and fulfillment capacity
Higher order volumes require adequate inventory and fulfillment capabilities.
- Stock levels: Maintain sufficient inventory to meet increased demand.
- Warehousing costs: Consider the impact on storage and handling expenses.
13. Return rates and policies
Higher sales can lead to more returns, affecting profitability.
- Cost of returns: Factor in return processing expenses.
- Return shipping costs: Decide if you’ll cover return shipping under your policy.
14. Shipping carrier relationships
Strong relationships with carriers can reduce costs.
- Negotiated rates: Secure better shipping rates through volume discounts.
- Service levels: Ensure carriers can handle increased volumes efficiently. Do you have flexibility built into your deal with the carrier?
15. Operational considerations
Increased orders impact various operational aspects.
- Staffing: Additional personnel may be needed for order fulfillment.
- IT infrastructure: Ensure your e-commerce platform can handle higher traffic and order processing.
16. Competitive advantage through innovation
Innovative options can set your business apart.
- Alternative delivery options: Implement click-and-collect or local pickup points.
- Subscription models: Offer memberships that include free delivery or a reduction of the shipping fee.
17. Financial modeling and forecasting
Plan for long-term success with thorough financial analysis that ensures sustainability.
- Long-term impact: Assess how the free delivery limit affects profitability over time.
Setting the right free delivery limit is not just a strategy—it’s a necessity in today’s competitive landscape. By considering all of these 17 factors, you’re not just tweaking a policy, you’re positioning your business for long-term success, increasing customer loyalty, and unlocking greater profitability.
But hey, it’s your business. You can always stick with what’s comfortable, or you can seize this opportunity to gain an edge. And if you’re ready to take that step and want guidance from a team that lives and breathes digital growth — tag along with us at Omniarch. We’ll help you turn free delivery, and every other part of your e-commerce strategy, into a competitive advantage that fuels lasting success: letstalk@omniarch.se
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