How it's calculated
- Subsidy = orders already at or above the threshold × shipping they no longer pay
- Gain from one order that tops up = (threshold − its value) × margin on product revenue − the shipping it no longer pays
- Share that must top up = subsidy ÷ the gain if every order below the threshold topped up
- Rule of thumb, for comparison = average order + shipping label ÷ margin
Every figure on this page comes from the margin engine in Offer Suite's own code (packages/engine), the function that prices offers in the product. Money is computed in whole cents and rounded once per line.
Worked example
A store charges $7.00 shipping and gets 980 orders a month averaging $41.73, with 55% margin on product revenue. The rule of thumb puts free shipping at $55.37. Try $50.00.
240 orders a month are already at $50.00 or more. They stop paying for shipping and buy nothing extra: $1,680.00 a month given away. A $25.00 order that tops up earns $6.75 more, but a $45.00 order that tops up earns −$4.25: the few dollars of products it adds keep less than the shipping it no longer pays. Even if every order below the threshold topped up, they would add $1,585.00, less than the subsidy.
At $75.00, only 40 orders already qualify, so the threshold gives away $280.00 a month and pays once 2.4% of smaller orders top up. The best threshold is rarely the one the rule of thumb gives.
Assumptions
- An order that tops up adds exactly enough to reach the threshold. Real top-ups overshoot a little, which helps.
- Orders below the threshold top up in proportion across the bands. Orders just below it are the likeliest to, and they gain the least.
- The threshold does not change how many orders you get. If free shipping also wins new buyers, their margin comes on top.
- The label cost does not change: you paid for shipping before and you still do. What changes is what the customer pays you for it.
- The order bands are an example. Your order report, grouped by order value, gives yours.
Questions
How do I calculate a free shipping threshold?
Start from your orders by value. Every order already above the threshold costs you the shipping it no longer pays. Every order below it that tops up earns the margin on the extra products, less the shipping it no longer pays. The threshold pays when enough smaller orders top up to cover the first cost.
What is wrong with average order value plus shipping divided by margin?
It sets a level but never asks what the threshold costs. Orders already above it are the cost, and it doesn't count them. With many large orders a threshold can lose money at any level of top-ups.
What margin should I use?
The contribution margin on product revenue: the share of an extra dollar of products left after unit cost, extra picks, card fees and refunds. The bundle and option calculators on this site work it out per order.
What does it mean when topping up never pays?
The orders below the threshold are so close to it that topping up adds less margin than the shipping they stop paying. Every top-up then loses money, so no share of them can cover the subsidy. Raise the threshold or keep charging shipping.