Ecommerce Fulfillment and Offering Free Shipping That Increases Profit Margins

Ecommerce Fulfillment and Offering Free Shipping That Increases Profit Margins

You know your numbers, right?

Not the ones you’re expected to be able to recite instantly when pitching investors privately or publicly on Shark Tank. We’re not talking about how much it costs to acquire a customer or customer lifetime values for different customer segments.

The numbers we’re talking about are a lot less sexy….

But they often mean the difference between crushing it with your shipping strategy or being crushed by it.

Knowing your numbers today requires merchants to dive into the fulfillment and shipping weeds so they can better match their product offerings with the appropriate shipping container. We’re talking about the numbers associated with:

  • Shipping container geometry, dimensions, and associated pricing
  • Identifying the average box size associated with customer orders
  • Quantifying popular SKUs by size, analyzing how they might better fit in flat rate shipping containers, and adjusting best selling products accordingly if possible

These are the new numbers you must master to compete in a world where 93% of consumers say they’re motivated to purchase by free shipping...

Recently, we’ve shown you exactly how to intelligently set free shipping thresholds by reducing checkout fear and how to use decoy pricing to incent behavior that persuades consumers to add to cart and results in increased average order values. But you’ll never reach your potential or become a top performing ecommerce company unless you control your shipping costs on the backside of all this.

However, when you begin thinking inside the box- how shipping container dimensions and the size of your product offerings may be better matched- you’ll better position your company to offer free shipping- or conditional free shipping- that actually adds to margins and boosts your bottom line.

Not knowing the new numbers can be dangerous…

Especially since they routinely change and some of your competitors have already mastered them.

Pack ‘Em Tight & Ship ‘Em Flat

Just like traditional business metrics…

The numbers associated with shipping container geometry and pricing are constantly being changed, and generally not in ways that are helpful to your bottom line. It might even feel overwhelming trying to keep up with the latest changes:

  • UPS just changed its dimensional weight calculations literally days before I wrote this (March 3, 2017)
  • FedEx just announced it may adjust fuel surcharges on a weekly basis a couple of months prior (Jan. 2, 2017)
  • The USPS just increased rates for most products, weights, and zones a few months prior (October 19, 2016)

In fact, USPS commercial flat rate prices have increased year over year as well:

How To Think Inside The Box & Offer Free Shipping That Increases Profit Margins

Image via: Ship Easy

Despite the rate hike, which may not look like much on the surface but can be material for low-margin offerings or merchants who experience high return rates, high performing merchants are increasingly looking toward flat rate shipping containers as a way to continue offering “free shipping” while insulating themselves from margin erosion.

In essence, these merchants are attempting to convert a portion of their variable shipping costs into fixed costs that allow them to better plan, manage, and execute.

You might further improve your bottom line by discovering how to creatively incent customers to add more items that fit inside flat rate shipping containers that allow you to:

  • Offer customers “free freight” on your terms
  • Fix and control shipping costs which increases certainty and visibility
  • Split test thresholds to identify the sweet spot that allows you to ship more flat rate orders

It’s all about the geometry of the container, the mix of products that can fit inside that container, and the data-informed free shipping threshold you’ve identified that makes this combination just as valuable to the merchant as it is for the customer.

Think this sounds like a theory that’ll never work in the real world or something dreamt up by a marketer who has never shipped a product?

How to Double Your Margins with a Box

Then here’s a real world example thanks to our friends at ShipHero, which offers a mobile warehouse management system that helps merchants manage inventory, pick, pack and ship. While we’re not at liberty to disclose the name of the merchant in this example, ShipHero’s Adam Rosenberg paints a picture for us of a store owner using ShipHero that sells soap and at times holds flash sales to move inventory.

How To Think Inside The Box & Offer Free Shipping That Increases Profit Margins

Image via: ShipHero

The flash sale looks something like this; a 6-pack of soap is discounted to $25 and delivered within 24 hours.

Here’s a detailed snapshot of exactly how that original flash soap sale breaks down when shipping costs are calculated with the cost of goods sold:

How To Think Inside The Box & Offer Free Shipping That Increases Profit Margins

Image via: Adam Rosenberg

Typically, a 24-hour sale will result in 800 units sold and total $3,624 in gross profit with the merchant paying $4.16 per unit delivered.

It’s a respectable day’s work…

But look what happens to demand and profitability when the merchant adjusts her product offering to better fit a flat rate shipping box:

How To Think Inside The Box & Offer Free Shipping That Increases Profit Margins

Image via: Adam Rosenberg

Notice how the reduction in shipping costs- just 16-cents- might seem insignificant until you factor in the following:

  • The USPS provides the flat rate box for free
  • The increased demand for the adjusted product offering

“This increased the gross profit per sale to $5.10, and sales increased from 800 units per sale to 1,400 units per sale,” says ShipHero’s Rosenberg. “Those changes increased gross margins from $3,624 to $7,140- a 97% increase in gross profit for the sale- simply by matching the product offer to an efficient shipping size.”

So even at a lower price point, the adjusted offering is significantly more profitable, in part, because the soap company is incenting customers to checkout with a cart of goods that fits neatly into a flat rate box.

There’s the proof you need…

Now here’s how to make it happen for your business.

Optimizing Around Your ABS: Average Box Size

You’re trained to obsess over shipping costs…

But size, weight, and zone considerations can combine to create a myriad of choices that can cause analysis paralysis and leave you thinking that gaming the shipping game is next to impossible. Even though there are tools you can use to instantly compare real-time shipping quotes from a variety of freight haulers, you can dramatically simplify a significant portion of your orders by changing your mindset.

Instead of focusing solely on shipping costs…

Hone in on shipping container size.

Unfortunately, you’ve also been taught to first look at the shipping container sizes offered by your logistics partners. While that’s important, it’s not where your initial focus should be directed. Once again, none of that data is pertinent until you reverse the process and first look at your own data.

What’s your ABS?

It’s short for average box size and it’s one of the new numbers that next generation ecommerce merchants who refuse to be eaten alive by free shipping hold close to their hearts. Only after you know your ABS can you:

  • Compare your ABS to the size of the flat rate shipping boxes available to you
  • Determine how much space is left in those flat rate boxes & identify incentives that persuade people to add more items to that box thus lifting margins for the same flat shipping rate

ALERT: What we’re condensing in this post for you is the result of much trial, error, and A/B split test experimentation. The merchants generous enough to share these insights, some of whom preferred to do so anonymously, may seem as if they are giving away a competitive advantage. While that may be true in the short run, shipping rates, ABS, and the size of best selling products are constantly changing meaning the process of matching the right offering with the right container at the right price is one that is continuous and without end.

So where to start?

Your starting point will differ depending on how involved you are with fulfillment. But regardless of whether you ship and fulfill from your own warehouse or partner with a 3PL, you can better match product offerings with shipping containers when you treat your products and the containers in which they may be shipped as a puzzle that can be put together in a variety of ways.

Here’s an outline of a process to get you pointed in the right direction:

  • Leverage your business intelligence platform or 3PL partner to identify your average box size
  • Assign a numerical value to each product so you can quantify the size of your products for mix & match shipping container comparison purposes
  • Analyze products that are commonly purchased together and compare with shipping container geometry to identify any container inefficiency or empty space
  • Optimize around your average box size- or identify a flat rate option that may be similarly sized- by adjusting your offering, promoting upsell and cross-sell opportunities, and free shipping thresholds

Once you know your ABS, you can quantify the size of your better selling items, the best selling combinations of those products, and how they fit into flat rate boxes. You’ll also likely have a new AOV (average order size) which you can use a basis to test new shipping thresholds and compare conversion rates.

Optimizing Around ABS: How The Best Do It

This is exactly what Rhone, a premium men’s fitness apparel, and activewear manufacturer, is doing with the kits it recently began selling. The kits are curated collections of everything someone unsure about where to begin shopping might need for the gym, running, traveling or commuting.

Rhone even uses its mastery of the new numbers to improve its more traditional numbers.

Not only do the bundles offer customers multiple products at a value price and allow Rhone to dictate bundle size and thus the best shipping container in which to ship them, the kits also position the company to test and optimize its shipping threshold which has improved conversions and revenue per visitor.

How To Think Inside The Box & Offer Free Shipping That Increases Profit Margins

Image via: Rhone

“The Kits allow us to maintain the cart sizes (more than one item) and is better than shipping out two separate orders,” says Adam Bridegan, Rhone’s V.P. of Digital. “I think it's just about getting creative on the shipping side while continuing to serve customer expectations. We've also done gift with purchases at certain cart sizes to help increase AOV and thus help us with packing more into shipping boxes.”

NOTE: Some of the merchants generous enough to share their insights with us have hundreds of SKUs. This can make for a seemingly infinite number of combinations that fit into an average box size or a single flat rate shipping container. Don’t become fixated on fitting every order into a single flat rate box. Remember, we’re dealing in averages and best sellers here. The idea isn’t to force every customer to do what is most convenient for you. The real point here is that it is possible, even with a large number of SKUs, to optimize a significant portion of your orders- not all of them- around your shipping container of choice.

Merchant Spotlight: Emazing Lights

Brian Lim, founder of Emazing Lights, started a multimillion dollar business out of the trunk of his car…

But the LED gloves Lim sells to performers are frequently shipped in packaging that has been redesigned to be shipped more efficiently. In fact, adapting product offerings based on shipping container geometry is an analysis Lim, who also operates the iHeartRaves and IntoTheAM brands, conducts on a yearly basis.

How To Think Inside The Box & Offer Free Shipping That Increases Profit Margins

Image via: EmazingLights

Here’s exactly how Lim does it:

  • The exact dimensions of flat rate shipping containers are identified and compared with best-selling product offerings
  • The packaging those best sellers are placed in is redesigned to fit inside a flat rate shipping box
  • The result from this change is that Lim, for example, can ship a best seller in Zone 8 for a flat rate of $6.35 instead of $9.59- meaning Lim slashes his shipping costs 33.7% and makes an additional $3.24 per order

Now consider that Lim expects to ship more than 256,000 orders this year and you can start to see how lucrative it can be to match your offering with the right shipping container.

“For EmazingLights more than 50% of sales are from glove sets,” Lim says. “When we designed the original box we tried to balance the packaging size for retail display, on-site vending and ecommerce. It took us about 3 versions to hit the sweet spot and fit the product into flat rate boxes and still look great on display.”

In all, Lim estimates approximately 50% of Emazing Lights’ orders are shipped in flat rate boxes which convert a significant amount of variable shipping costs into fixed costs.

“Yes it does really help control shipping cost and allows us to be more aggressive on lowering prices and knowing that we're not getting killed on shipping cost,” Lim says.

NOTE: It’s more profitable to ship lightweight items, at least for Lim, in poly bags sourced from local vendors rather than well known national suppliers.

Next, Lim leverages his fitted product offering & shipping container combination by optimizing conversions the following ways:

  • Surprising customers who reach certain free shipping thresholds by allowing them to select a free lightweight gift that doesn’t materially impact shipping costs and can fit into flat rate containers

How To Think Inside The Box & Offer Free Shipping That Increases Profit Margins

  • Personalizing the surprise experience with a homegrown application built with Shopify’s technology that offers gift options based on items the customer has purchased in the past
  • Secretly bundling orders with free lightweight items like drawstring bags to create a memorable unboxing experience and highlight product categories in which Lim desires to sell deeper

How To Think Inside The Box & Offer Free Shipping That Increases Profit Margins

Image via: iHeartRaves

Lim combines these Conversion Optimization techniques with three free shipping thresholds- $50/$60/$75- that are tailored specifically to the three brands he operates. It’s also important to note that Lim runs his own 15,000 square foot warehouse and suggests it’s a competitive advantage his peers cannot match.

“It’s bootstrap-owned and self-operated,” Lim says proudly. “We use the insight from our yearly analyses to offer free shipping thresholds specific to each of our brands which have driven our average order values higher.”

Flat Is The New Free

Whether free shipping is actually free…

Or whether it’s simply a perception created in the mind of customers who meet certain thresholds or conditions, isn’t necessarily important for the purpose of this piece. For merchants routinely robbed of margin due to unforeseen or higher than expected freight fees, flat might actually feel like free.

Of course, flat rate shipping containers are certainly not new. But quantifying the size of your SKUs and modifying more of your best sellers to fit snugly inside flat rate boxes is on a relative basis. Even if you don’t run your own warehouse, don’t forget the following insights generously provided by merchants and vendors on the cutting edge:

  • Rate shop annually and aggressively use freight carrier quotes against one another to negotiate the best possible prices
  • Pre-bundle or kit items often purchased together based on purchase histories and trends to save time and increase the percentage of orders that ship in flat rate containers
  • If you outsource fulfillment, a kit or bundle will often count as only one SKU rather than two which can save you even more money
  • Investigate hybrid delivery services in which UPS, USPS, & FedEx work together to deliver packages for up to 50% off standard rates

You might also further leverage the benefits that come with flat rate shipping by using Shopify’s Shipping Scripts to automatically calculate and offer free shipping at the checkout when a customer’s cart contains a combination of items you’ve predetermined will fit inside a flat rate shipping container.

Yes, thinking outside the box is important...

But thinking inside the box is how you make more money on your next order.

About the Author

Nick Winkler is a contributor to the Shopify Plus blog and founder of The Winkler Group, a strategic communications firm that provides content marketing services to the world's best-known brands, businesses, and marketers. Get more from Nick here.