Free shipping is a pricing decision, not a gift
Shipping is one of the easiest costs to hide inside an ecommerce offer. Whether the customer pays it directly or the merchant absorbs it, the economics still have to work.
Separate shipping cost from shipping revenue
The fulfillment cost paid by the merchant and the shipping amount paid by the customer are different economic lines. Treating them separately makes it easier to see who is absorbing the cost and what happens when the offer changes.
Percentage-based transaction fees may also apply to the shipping amount collected from the customer, depending on the payment and marketplace structure.
Model the main shipping strategies
- Merchant-paid shipping: the business absorbs the full outbound shipping cost.
- Customer-paid shipping: the customer contributes directly to fulfillment cost.
- Price-offset shipping: product price increases to absorb some or all shipping.
- Free-shipping threshold: shipping is absorbed only when the basket reaches a target value.
- Hybrid approach: the merchant subsidizes part of shipping while the customer pays the remainder.
A threshold should improve economics, not only conversion
A free-shipping threshold can raise average order value, but it can also compress margin if customers add low-margin items or if shipping cost rises sharply with basket weight.
Before publishing a threshold, model the likely basket, expected shipping cost, incremental gross profit and transaction fees. The threshold should create enough additional contribution to justify the subsidy.
Treat shipping changes as scenarios
- Compare current shipping with at least one customer-paid and one subsidized scenario.
- Recalculate net profit and margin for each scenario.
- Check how the result changes at different basket values or product combinations.
- Define the operating limit beyond which the offer should be revised.
Decision takeaway
Shipping can be free to the customer, but it is never free to the business. The question is where the cost sits and whether the resulting order remains profitable.
Educational guidance only. Use your own verified costs, fees, taxes, channel rules and operating data before making material business decisions.