In plain words
Free shipping means the customer pays nothing for delivery. It removes the most common reason a cart is abandoned at the last step, which is why so many stores offer it.
Nothing about the cost changes. You pay the same label. What goes away is the shipping revenue the order used to bring in, less the fees that were charged on it. Free shipping is a discount with a different name, and its size is what you used to charge.
Formula
- Cost of free shipping per order = shipping previously charged × (1 − costs charged as a share of revenue)
Worked example
With $7.00 charged for shipping, the coffee bag's order brings in $47.00 and keeps $21.81. Shipped free, it brings in $40.00 and keeps $15.36. The label is $7.50 either way.
Free shipping has to bring 42.0% more buyers to earn the same per visitor.
The example order
A $40.00 bag of coffee, shipped free, every cost counted
2 declared kinds cost nothing on this option
| Step | Grain | Amount |
|---|---|---|
| Revenue | – | $40.00 |
| Cost of goods | per unit | −$12.00 |
| Pick and pack | per order | −$1.18 |
| Packaging | per parcel | −$0.50 |
| Shipping label | per parcel | −$7.50 |
| Card fee per order | per order | −$0.30 |
| Refunds | percent | −$2.00 |
| Card processing | percent | −$1.16 |
| Contribution margin | – | $15.36 |
| 2 kinds costing nothing | – | $0.00 |
Computed by the margin engine in Offer Suite's own code, in whole cents, from a $40.00 bag of coffee with a $12.00 unit cost.
Free shipping is not a shipping cost
It changes what the customer pays and leaves what you pay alone. A report that files free shipping under fulfilment cost will show costs rising when nothing about fulfilment changed, and will miss that revenue fell.
Using it
Price it as the revenue it gives up, per order, and compare that with the lift you expect. Where the full cost is too much, put it behind a threshold, limit it to bundles or subscriptions, or build part of it into the product price. On a subscription, decide separately for the first order and for renewals.