This month has been a whirlwind with business owners trying to get clarity on their focus for the year, while navigating everything that’s going on in the world.
I’ve been having so many conversations with lounge members about their business planning, and there’s one topic in particular that kept coming up across multiple different businesses – average order value and free shipping thresholds.
Prefer to listen to the episode? Click here.
Why Average Order Value Matters
Average order value is one of the main levers you have when growing your eCommerce business. It’s why I talk about it so much. We know it’s a lot easier to sell more to someone who is already shopping vs. trying to get new customers or even bringing back an existing customer to place another order.
While this can be a highly nuanced topic depending on your unique business and the products you sell, there are some general rules you can follow to optimize your AOV.
How to Set Goals for Your AOV
In one of these conversations a student asked, what’s a realistic AOV target. It makes sense that when you’re planning your year the way I teach in the Lounge, you have to set KPI targets so you know what you’re going after. And while generally it’s safe to say that most stores won’t necessarily be able to hit higher than a 60% gross margin, the same isn’t true for AOV.
It’s not really about what’s achievable in a general sense, but how your product assortment and prices influence what’s possible.
For example, when we’re talking about using cross-sells and upsells to increase your average order value, you have to be realistic about what you’re asking of the customer.
In my experience I’ve found that cross-sells work best when they’re no more than 30-40% of the original product price the customer was buying. For example, if they’re buying a $100 pair of jeans, it’s a lot easier to get them to buy a $30-40 shirt than another $100 pair of jeans.
Now this too will vary widely with different product assortments, lower priced, products, etc. but it’s a good general rule for perspective.
Using Your Free Shipping Threshold to Increase Your AOV
If I’m trying to use a free shipping threshold to encourage additional spending, I like to look at the average price of the products and figure out what should the number be if the customer only had to add one more item to the cart.
Look at what lower-priced add-on items you might have that you can leverage for this purpose? If you’ve got some items that are $5-10, well then maybe that’s how much you raise your threshold by.
If all your products are the same price, well then maybe you do need to ask them to double what they were planning to spend. If that’s the case you might want to look at implementing some bundles or by X number of items for X price. Kind of like the Victoria’s Secret 5/$30 panty deal.
This way you’re focusing on getting them the deal through the bundle vs. asking them to buy another item for free shipping. The outcome is the same, but the psychology behind it is different.
The most important thing is you don’t want your free shipping threshold to be lower than your current average order value. In that case, you’re just giving shipping away and might be putting yourself in the hole.
Again, this is going to be unique to the business based on what you sell and the price of shipping. It’s possible your item is super small and lightweight and it isn’t an issue. Maybe almost everyone getting free shipping is something you’ve decided to lean on for differentiation reasons.
Protecting Yourself From Rising Shipping Costs
You do want to make sure you have cushion in there though so you can absorb increasing shipping costs.
I was just on a call the other day with a student who learned USPS was raising their rates. She offered free shipping on all orders for a long time, just recently adding a free shipping threshold. Unfortunately, that threshold was still under her AOV, so with that increase in shipping costs there was really no way around it having to raise either her prices, that threshold, or possibly both. She’s got some math to do.
While it’s unlikely you’ll ever make money on shipping like you could in the good old days, the goal is to get as close to break even as possible.
But even then, the truth is, the law of diminishing returns will always kick-in. At some point, your shipping costs, or free shipping threshold will be so high that you actually lose business.
Here’s the trick though, you can’t make judgements based on revenue alone. Sure, maybe you have lower revenue, but because you’re not giving as much away in shipping costs, you might walk away with more profit dollars… and that matters more.
And not to get too off-track, but a couple of years ago I had a product-based business owner Ellie on the show. Her situation wasn’t specifically related to shipping, but she talked about her business before and after COVID. She cut her business in half, but ended up taking home more profit and is a lot less stressed.
Making Adjustments to Your Free Shipping Strategy
Ultimately, exactly how you implement your free shipping strategy is going to be unique to your business. And it might not be universal across your entire business. For example, I have a student who does local delivery.
As she was planning for the year she realized the math wasn’t mathin’ for her current structure. As a zero-waste company who collects empty bottles from her customers for re-use, having that local delivery does actually work out cheaper for the customer and more profitable for her, because it’s fewer return labels she needs to shell out for.
While I won’t take you down the entire rabbit hole we traveled, my main recommendation was if they didn’t have refillable products in their cart, she shouldn’t offer local delivery; that would be shipping only.
When we were figuring out the best way to implement that, spoiler alert it’s not Shopify’s shipping profiles because those stack together if someone buys products from more than one profile, it reminded me of an app I had found not that long ago called Smart Checkout Rules. I feel like I’ve talked about this app on the podcast before, maybe it was somewhere else, more in the terms of being able to rearrange shipping methods at checkout. That’s available on the free version. But the paid version, actually allows you to hide shipping methods based on certain conditions like specific products or collections being in the cart.
In case you have a similar situation where you want a little extra control over the shipping methods you offer on your Shopify store, I just wanted to mention it.
Your Next Steps
So, what’s the most important takeaway from today’s episode? Your free shipping threshold should be higher than your current AOV. And yes that means when you hit that new AOV target you raise it again. And that you want to be mindful and strategic about how to market products together when implementing cross-sells, upsells, and bundles.
If you haven’t already reviewed these numbers for last year and made adjustments for the new year then let this be your sign.
