One of the biggest hurdles for small online retailers is coming to grips with a delivery pricing policy.
The first consideration is always, “can my business afford a ‘Free Delivery’ offer?”
According to a survey conducted by UPS, four out of five consumers see free delivery as an important factor when shopping online. UPS also found consumers will select the slowest transit option to qualify.
How can you make Free Delivery work for you?
If you have a unique product mix (not a commodity) build the freight cost into your product and offer free delivery. If consumers are unable to conduct an apples to apples price comparison, then leverage this powerful conversion enhancer.
If you have products similar to your competitors, an alternative is to create bundles or product packages and offer free shipping.
The “Delivery Philosophy”
Though everyone knows and understands the positive influence of a free shipping offer, many businesses cannot cover this cost.
To offer a delivery cost there are certain things a retailer can do to dramatically reduce the risk of losing sales.
In order to achieve this, it is first important to appreciate and understand the philosophies around designing delivery pricing.
Tip 1. Do not profit from your delivery revenue. Delivery revenue should only cover the delivery costs. Consumers are smart, they can tell if you are trying to profit. You will lose sales.
Tip 2. Communicate delivery pricing clearly and early. By clearly setting the expectation of delivery costs early, you build credibility and reduce the need for consumers to hunt around your site trying to find how much delivery will cost; making their purchasing process more seamless and enjoyable.
Flat Rate Delivery Pricing
The easiest delivery pricing model to satisfy the above two philosophies other than a “Free Delivery” offer is flat rate i.e. “$10 Flat Rate shipping nationwide”.
One of the reasons “Free Delivery” is powerful, aside from the no cost element, is the ease in which it can be communicated; on the home page, on category pages, and on product detail pages.
With flat rate comes the challenge in trying to figure out a value to apply across your entire produce mix for the entire country. The New Zealand geography provides challenges in managing this cost. The reality of rural orders tends to concern many retailers, keeping them from implementing this freight pricing option.
You could consider flat rates per geo region, but this instantly becomes difficult to communicate and contradicts the purpose of using flat rate.
Approach to Defining your Flat Rate
To create a flat rate value to effectively cover the varying costs, follow this approach:
Step 1. Analyse your mix of deliveries over a certain period of time. If your business is new, and you don’t have the data, assume the majority of orders will come from Auckland.
Break down your orders by zones and provide summary costs per zone. For example you could break New Zealand down into 5 zones:
- Rural North Island
- Rural South Island
When doing this it is critical to stick to the Pareto Principle (80/20 rule). Focus on the zones which deliver the majority of your business, don’t let the exceptions slow you down.
Step 2. Apply a percentage to each zone and an average delivery cost for each.
- 70% of your orders are delivered in Auckland, $5 is the average cost for all Auckland orders.
- 15% of your orders are delivered to Wellington, $7 is the average cost for all Wellington orders.
- 10% of your orders are delivered to Christchurch, $8 is the average cost for all Christchurch orders.
- 3% of your orders are delivered to Rural North Island and the average cost is $15.
- 2% of your orders are delivered to Rural South Island and the average cost is $20.
Exclude one-off bulky products you carry in your product mix.
Step 3. Apply a total cost per zone based on a set amount of orders. This example analyses 100 orders but to be more accurate you should use more (500 to 1,000 orders).
On 100 orders the cost breakdown by zone would be:
- Auckland orders shipping cost $350.
- Wellington orders shipping cost $105.
- Christchurch order shipping cost $80.
- Rural North Island shipping cost $45.
- Rural South Island shipping cost $40.
Step 4. Take the total cost and divide by the number of orders analysed.
Total cost for 100 orders is $620, meaning your average delivery cost per order is $6.20. Raise the price slightly to $7 or $8 to allow for:
- One-off bulky items (if any)
This becomes a great starting point. It is then highly recommended to analyse delivery revenue to delivery costs to ensure you are achieving the break even target.
You can conduct an analysis like this monthly and change the flat rate each month to suit.
Incorporate Free Delivery with Flat Rate
The ideal scenario is to incorporate a free delivery offer with a flat rate pricing policy. In other words provide incentives for consumers to spend over a certain limit in order for them to be rewarded with free shipping. If they know what the flat rate is, they have a sense of savings when they spend more money.
If you have a clear view of your landed costs and margins, this tactic works and helps in dramatically lifting average order value.
The same UPS study (mentioned above) has shown 58% of consumers added extra items in their basket to qualify for free shipping.
Conduct an analysis of your average order values; find a value that lifts purchases to another level to benefit the business. Caution: do not make it too unrealistic.
When determining a delivery pricing policy there is a lot to consider. Retailers must manage the balance of costs and service delivery to ensure customers are satisfied with what they are paying and the service they receive post sale.