In plain words
A free-shipping threshold is the order value at which shipping stops being charged. It is meant to make customers add to their cart to reach it.
It has a cost that is easy to miss. Every order that was already above the threshold stops paying for shipping and buys nothing more. That lost shipping revenue is the threshold's subsidy, and the threshold pays only if enough smaller orders top up by enough to cover it.
Formula
- Subsidy = orders already at or above the threshold × shipping they no longer pay
- Gain per top-up = (threshold − order value) × product margin − the shipping it no longer pays
Worked example
With 980 orders a month and $7.00 shipping, a $50.00 threshold gives away $1,680.00 a month on orders already above it. Even if every smaller order topped up, they would add $1,585.00.
At $75.00 the subsidy is $280.00, and 2.4% of smaller orders topping up pays for it.
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 |
| cogs | per unit | −$12.00 |
| pick_pack | per order | −$1.18 |
| packaging | per parcel | −$0.50 |
| shipping | per parcel | −$7.50 |
| processing_fixed | per order | −$0.30 |
| refunds | percent | −$2.00 |
| processing | percent | −$1.16 |
| Gross 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.
The threshold is not average order value plus shipping over margin
That rule of thumb sets a level without asking what the level costs. It ignores how many orders already sit above it, which is the threshold's whole cost. Two stores with the same average order can need very different thresholds.
Using it
Start from your orders by value, not from the average. Count the orders already above each candidate level, work out what the threshold would give away on them, and compare that with what the orders just below could add by topping up. Try several levels: the best one is often higher than the rule of thumb suggests.