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BusinessColumnistsJamie Herzlich

Small Business: Understand your costs when offering free shipping

As free-shipping offers multiply for online holiday shopping,

As free-shipping offers multiply for online holiday shopping, experts advise small businesses to make sure there is a benefit for them before they make the offer. This UPS truck was making deliveries on June 20, 2014 in Cumming, Ga. Credit: AP / David Goldman

Free shipping can be a great motivator when it comes to enticing consumers to buy.

In fact, 58 percent of consumers have added items to their shopping carts to qualify for free shipping, and 83 percent are willing to wait an additional two days for delivery if shipping is free, according to a comScore/UPS survey.

With Target's recent announcement that it will offer free shipping on all online orders until Dec. 20, many retailers are under pressure to follow suit. But small businesses should proceed with caution.

"There's no such thing as free shipping," says Chris Malta, CEO of WorldwideBrands.com, an Orlando-based e-commerce wholesale and shipping company. "Somebody has to pay the shipper."

It's a gimmick large companies can use "because they can afford it," he notes. Most small businesses can't afford to take on that financial burden but often feel pressured to do so.

It can be the deal breaker or maker in a purchase, explains Marshal Cohen, chief retail analyst for Port Washington-based The NPD Group. "It's the great differentiator."

Still, small businesses have to be smart if they choose to offer it.

Don't just give it away. "You can incentivize the consumer to get free shipping, rather than just offer it," Cohen says. "Make it an option." For example, if consumers buy more than one product or spend more than a certain amount, then they get free shipping.

That's what Angela Carillo, owner of Bethpage-based Alegna Soap, does. She offers free shipping of her handmade soaps on orders over $75. Setting a minimum helps her cover her costs, and at times it encourages consumers to add items to their carts, she says.

Not for small orders. "It wouldn't be profitable for me to offer free shipping on a $10 order," she notes. "If they like the product, they're going to pay the shipping."

Online retailers need to understand their costs and set shipping limits that won't kill their bottom line.

"It needs to be part of your strategy and carefully thought out," says John Haber, CEO of Spend Management Experts, an Atlanta-based global supply chain consultancy.

Shipping represents about 10 percent of online retailers' total costs, he notes. "You need to make sure you're making a profit on what you're selling."

Consider setting different levels, such as free five-day ground shipping on orders over $75, and free seven-day ground shipping on orders over $50, Haber says.

Check out what your competitors are offering and how you're shipping, and understand the available options, he says, noting there may be less expensive ways to ship. For instance, if you ship frequently, getting a UPS shipping account may be more cost-effective than individual drop-offs at a UPS store.

Also, carefully examine who your customers are and how you present your products to them, Malta says. "Your marketing message must resonate strongly with the consumers of those products," he notes. "If it does, then free shipping becomes a less important issue."

Maintain your profit. If you feel compelled to offer it, make sure it doesn't cut your profit margin below 20 percent per order, says Malta.

As another option, consider letting customers pick up their orders at your store.

"One of the advantages small retailers have is proximity to the product," Cohen says. "The small retailer offers the ability to be gotten to."

So don't feel you have to give free shipping away.

"Some consumers are perfectly fine with paying shipping," Cohen says. "They look for retailers with more of a personal touch and closer to home."

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