Ecommerce Fulfillment, Free Shipping & Two-Day Delivery: How to Compete with Amazon While Increasing Profit Margins

Ecommerce Fulfillment, Free Shipping & Two-Day Delivery: How to Compete with Amazon While Increasing Profit Margins

In this guide, you’ll …

  • Learn how to accelerate profitability utilizing free-shipping thresholds that turn variable shipping costs into fixed costs
  • Discover the brand new free shipping metric that can help you double margins during your next campaign
  • Slash shipping costs 33%-70% by adjusting product bundles, optimizing shipping containers, or outsourcing

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Keeping up with Bezos.

It’s a seemingly impossible feat when you consider what the architect of Amazon has achieved with regard to ecommerce fulfillment.

But, before you resign yourself to a world in which Goliath makes the rules and the onslaught on margins jeopardizes your future …

What if you could use ecommerce fulfillment and free shipping as competitive advantages?

Advantages that not only allow you to go head-to-head with Bezos but also turns “free shipping” into a profit center that slashes costs, increases average order value, and accelerates growth.

It’s not only possible, but many of your peers and competitors have already mastered ecommerce fulfillment and shipping. Here’s how:

  1. Why Free Shipping Matters in Ecommerce
  2. How to Calculate Free Shipping Thresholds
  3. Doubling Your Margins with a Box
  4. Optimizing Around Average Box Size
  5. Optimizing Shipping by Outsourcing
  6. How Geography Impacts Shipping Costs
  7. Rhone “Kits” to Scale Faster & Efficiently
  8. The Emazing Group Optimizes Packaging
  9. Bathorium Expedites & Cuts Costs 70%
  10. Free, Flat & Fast: Ecommerce Fulfillment

Why Free Shipping Matters in Ecommerce

Want customers to spend more and buy from you more often?

Then consider that 79% of consumers say they’re more likely to shop online when free shipping is offered.

Ecommerce free shipping impact on sales

Data compiled within the Ecommerce Fulfillment and Free-Shipping Guide

Conversely, not offering free shipping can cost you, as 57% of shoppers say they’ll cancel their orders if shipping costs are too high. In fact, research suggests that 39% of consumers will abandon cart once they learn you don’t offer free shipping.

The cost of not offering free shipping in ecommerce

Data compiled within the Ecommerce Fulfillment and Free-Shipping Guide

Trouble is we live in a post-Prime era where consumers expect fast free shipping is the standard, but offering it outright is cripplingly expensive.

Remember what you learned as a child though: there’s no such thing as a free lunch. Free isn’t really free. Someone has to pay for delivering the orders that you fulfill.

What matters is that consumers perceive shipping as being free. Hence, the construct of free-shipping thresholds.

Thresholds are paramount when you consider 48% of consumers will add additional items to their carts to qualify for free shipping. The prospect of thresholds only increases when you also consider those very same consumers intend to keep the items they added to their carts to qualify for free shipping.

How to Calculate Free Shipping Thresholds

Identifying your goldilocks free shipping threshold — the magic number that’s not too high nor too low — requires knowing one key metric: your median order value (MOV).

Median is the midpoint of a frequency distribution over which there is an equal probability of being above or below it. In other words, when you know your median order value you also know that half of all orders are above the median and half are below.

You could also use average order value (AOV) to calculate free-shipping thresholds but beware of outliers, extremely high or low priced SKUs, that can skew the average and distort the value of your median cart.

How to calculate free shipping in ecommerce: AOV and MOV

Ideally, free shipping is set just high enough above your MOV or AOV that it nudges customers to add one or two extra items they were previously denying themselves.

This is a strategy reading eyeglass retailer Peepers uses to increase conversions and average order value. Notice, the site sets free shipping at just under two pairs of glasses, thus pushing customers beyond ordering a single frame:

Peepers and ecommerce fulfillment

As soon as you add an item to cart, Peepers incentivizes the move to free shipping with an in-cart upsell:

Peepers free shipping within the cart

Experiment with different thresholds above your MOV or AOV to find the threshold that performs best. But understand, that threshold may not perform as such in perpetuity.

While variables such as mix, price, and product innovation will ultimately influence customer behavior, routine testing may reveal that you can steadily increase your threshold once higher thresholds are accepted as the norm.

Embed the threshold throughout the customer experience — including not so subtle reminders during the checkout — to coax more shoppers to add items to their carts and earn the free shipping you’re offering.

Bombas takes a similar, though more animated, approach:

Peepers and ecommerce fulfillment

On mobile, Fashion Nova places their free-shipping threshold front and center across the purchase journey, with real-time reminders of exactly how much someone needs to add to their cart to qualify for free shipping:

Fashion Nova's free shipping offer on mobile

The above examples all utilize Shopify Shipping Scripts (alongside UX customizations). You can check out five Shipping Script templates here for inspiration or learn more about creating Shipping Scripts here.

Shopify Shipping Scripts template

One of the challenges automating free shipping generates is making sure it only applies to the least expensive shipping option. If you offer a code and customers use it get priority or overnight shipping for small order, that can seriously hurt profitability.

To meet this challenge, Brian Harder — the IT Director at Oxyfresh — created an ingenious solution:

“We built a fixed-amount discount code with a discount value of $0. Doing this allowed us to utilize the minimum purchase requirement and also limit the use to one per customer without the need to do custom programming.

“Using Shopify Scripts, I was able to create a new shipping script that would look for the discount code ‘SPOOKY’ and if the code was present it would set our standard shipping method to free while our 2nd day, next day, and international shipping options were exempt.”

Oxyfresh's free shipping coupon solution

Your own goldilocks shipping threshold … (1) gives consumers rational “permission” to add more items because (2) it acts as a positive incentive to “earn” something of value as well as (3) leaning on the potentially negative experience of paying for something they’re used to getting for free.

The idea is to create a win-win for you and the customer.

But pinpointing the ideal threshold is just one component of turning ecommerce fulfillment into a growth driver for your business. Persuading consumers to spend more in return for free shipping will only inflate margins if you can optimize fulfillment.

To do that you must begin thinking inside the box — how shipping container dimensions and the size of your product offerings may be better matched …

Don’t have time to finish this article right now?

No problem. You can download the full guide — along with three bonus case studies on exactly how high-growth merchants slashed their shipping costs 33%-70% — and save it for later.

Download the guide

Doubling Your Margins with a Box

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 on the latest changes:

  • UPS increased rates by an average of 4.9% in 2018 and recently began charging $150 to handle oversized
  • FedEx also increased rates by 4.9% and added a third party billing surcharge which will impact drop shippers
  • The USPS intends to increase rates an average of 11.3% and First Class international g containers as a way to continue offering “free shipping” while insulating themselves from rates by 3.9%

Despite the rate hike — which may not look like much on the surface but can be material for low-margin offerings or if you experience high return rates — high-performing merchants are increasingly looking toward flat rate shipping margin erosion.

The goal is 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 “free freight” on your terms
  • Fix and control shipping costs
  • Increase certainty and visibility
  • Test thresholds to find the sweet spot

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 you 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?

Then here’s a real 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 business 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.

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.

Current Method:

The products cost $1.73 a unit, the packaging costs $0.60 per six pack for a total weight of slightly less than two pounds. So with cross-country freight costing $9.69, it leaves a gross profit of $4.53.

Selling price

$25.00

Product

($10.38)

Shipping

($9.69)

Box

($0.40)

Gross profit

$4.53

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 you adjust your product offering to better fit a flat rate shipping box:

Better Way:

The store owner changed the sale to a five pack and lowered the price to $20 delivered to the end-customer because a five pack fits in a Priority Mail Flat Rate Box which costs $6.25.

This lowered the cost for the store owner from $4.16 delivered to $4.00 delivered and reduced the overall ticket, making it more attractive for prospective new customers.

Selling price

$25.00

Product

($8.65)

Shipping

($6.25)

Box

($0)

Gross profit

$5.10

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 from 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 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 check out 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 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 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 businesses 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 flat-rate shipping boxes
  • 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

Note

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 and match shipping container comparison purposes

▢  Analyze products that are commonly purchased together and compare with shipping container geometry to identify inefficiency or empty space

▢  Optimize around your average box size 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 Shipping by Outsourcing

You may have identified the optimal free shipping threshold. And you may be optimizing around your ABS …

But getting that box to customers in two days often requires a network of fulfillment centers scattered across the globe — or at least relatively close to the geographies from which the majority of your orders originate or are to be shipped.

Outsourcing fulfillment to a 3PL (third-party logistics) with a network of fulfillment centers scattered across the country not only allows you to compete with Amazon but also positions you to slash costs and lift profit margins.

Partnering with a fulfillment company offers many advantages. Not only does it offload the time and stress of managing logistics in-house and afford the opportunity to scale fast and successfully. It also helps keep shipping costs down.

Here are a few ways 3PLs make this possible:

  • 3PLs handle large volumes of shipments across thousands of businesses to provide steeply discounted rates with all carriers and services
  • You can use your own custom-branded boxes or use the 3PL’s standard boxes, packing expertise, and dimensional weight optimization
  • 3PLs have a strategic geographic footprint, so you don’t need to invest in the infrastructure yourself
  • Neither do you need to pay for warehouse equipment, utilities, technology, staff nor worry about complying with regulations and obtaining licences
  • Lastly, you can optimize where you store your inventory within the 3PL’s fulfillment network and more easily expand into new markets

How Geography Impacts Shipping Costs

To the delight of many realtors, it turns out that fulfillment center location is everything.

In the 3PL world, there has been a shift toward urban areas to be near the majority of the buying power, as compared to the older, more traditional rural warehouse model. This allows for ground shipping across shorter distances, which is much cheaper than air shipping.

As you utilize more fulfillment centers that are near customers, the zones shipped to are lowered along with costs.

The greater the shipping zone or distance a package travels, the more expensive it will be. That’s why the use of one fulfillment center or warehouse can be limiting.

The map below of the continental US shows an example of a fulfillment center in Los Angeles, CA (as indicated by the yellow star). The legend shows shipping zones spanning from 1 to 8, and the map is color-coded by shipping zone. Orders shipped from the west coast of the United States to east coast would be shipped to the most expensive zones.

Ecommerce fulfillment map: Low fulfillment centers

If we look at another map of the continental US below with three fulfillment centers in Los Angeles, CA, Dallas, TX, and New York City, NY, we see that the highest shipping zones are eliminated entirely.

Ecommerce fulfillment map: Multiple fulfillment centers

This keeps costs down when shipping to the majority of the United States.

Of course, cost savings isn’t the only value that 3PLs provide nor is it the only consideration of online shoppers.

Consumers today want cheap shipping that’s also fast. Businesses must find ways to keep even their expedited shipping options low-cost.

Fortunately, 3PLs are becoming more modern and technology is driving greater efficiencies and optimizations. ShipBob, for example, has a guaranteed 2-Day Express Shipping Program for Shopify Plus businesses that integrate their store with ShipBob and have their inventory in ShipBob’s fulfillment centers.

After a customer enters their shipping destination, ShipBob validates the zip code and items ordered against inventory counts in each ShipBob fulfillment center in real-time. Only customers whose orders qualify for the discounted 2-day shipping option will see the new shipping option, and the order will be shipped from the fulfillment center that is closest to the shipping destination.

Bottom line …

There’s no one right way to offer free shipping that works to increases profit margins. Whether you outsource ecommerce fulfillment or do-it-yourself by optimizing around your ABS, turning fulfillment into a competitive advantage requires creativity and discipline.

To illustrate what this looks like in the real world, three high-growth businesses are revealing exactly how they optimize fulfillment so you’ll have a rough blueprint you can use to turn your ecommerce fulfillment into a growth driver in similar ways.

How Rhone “Kits” to Scale Faster & Efficiently

Pre-bundling items that are often purchased together, otherwise known as kitting can help you lift AOV while simultaneously reducing shipping costs. It’s a fulfillment technique that can work for businesses that fulfill orders themselves and those who outsource the job.

Building kits in bulk, based on customer purchase histories, trends, and future marketing efforts can help businesses who fulfill orders themselves save time. Merchants who outsource fulfillment can save time and money as a bundle will count as only one SKU rather than two.

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 Rhone “Kits” to Scale Faster & Efficiently

“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 a gift with purchases at certain cart sizes to help increase AOV and thus help us with packing more into shipping boxes.”

Some of the businesses 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.

How The Emazing Group Optimizes Packaging

Brian Lim, founder of EmazingLights, started a multimillion dollar business out of the trunk of his car and scaled it from $15-to- $30 million in annual sales in just three years, in part, by optimizing product packaging and fulfillment.

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 The Emazing Group Optimizes Packaging

Here’s exactly how Lim does it:

  • Dimensions of flat-rate containers are identified and compared with best-selling products
  • Packaging for best sellers are 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 three 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 converts 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.

For Lim’s lightweight items, it’s more profitable to ship in poly bags sourced from local vendors rather than well known national suppliers.

Lim then leverages his fitted-product offering and 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:

Free gifts to increase AOV as well as decrease shipping costs

Personalizing the surprise experience with a homegrown application built with Shopify’s API 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:

Lim combines these CRO techniques with three free shipping thresholds — $50/$60/$80 — 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 has driven our average order values higher.”

How Bathorium Expedites & Cuts Costs 70%

Shopify Plus Customer Success Manager, Greg MacDonald, founded and runs his own store, Bathorium. Because Bathorium is based in Canada, working with a 3PL that could efficiently reach their US-based customers was critical to their success.

Shipping from Canada was very expensive and variable for Bathorium, costing about 50% of their AOV and often difficult to predict. Prior to working with a 3PL, Bathorium would spend $18 to $25 on a one-pound shipment, and it would take a minimum of 7-10 business days to reach the destination.

When Bathorium developed a strong US presence by partnering with ShipBob for fulfillment, they achieved a reduction of 70% on shipping costs in the US. This also led to a higher conversion rate, allowing them to grow from a 20% American customer base to 40% in under a year.

“Speeding up deliveries and keeping them affordable for customers is a top concern for us. With ShipBob, we can comfortably assign a shipping cost to each order by pinpointing the product weight and destination zip code. It makes it a lot easier to spend marketing dollars when we know exactly what shipping costs are going to be.”

Free, Flat & Fast: Ecommerce Fulfillment

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 …

For retailers routinely robbed of margin due to unforeseen or higher than expected freight fees, flat might actually feel like free.

Even if you don’t run your own warehouse, don’t forget the following insights generously provided by businesses 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, and 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 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.

Toe to toe with Bezos and Amazon …

That’s exactly where you find yourself, pressured to match or top what on the surface seems impossible — free two-day shipping.

Now though, you have everything you need to ship your orders free, flat, and fast — and leverage your fulfillment to do more than just keep up with Bezos.

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.