Free Shipping vs Paid Shipping: The Real Profit Impact
Free shipping can raise conversion and still reduce profit. It can also outperform paid shipping if the additional demand is large enough. The answer depends on how much contribution remains per order and how many orders the policy creates.
Which shipping policy creates the most contribution from the same traffic and acquisition budget?
Shipping recovery supports the order economics.
At 2% conversion, 50,000 visits produce 1,000 orders. The average basket contains €60 of products and the customer pays €5 shipping. Product cost is €24, carrier cost €7 and handling €2.
Payment fees are 3% × €65 collected. Across 1,000 orders, €30,050 less €15,000 acquisition spend leaves €15,050.
The €5 shipping charge is included as revenue in this decision model. It is not a reduction in carrier expense. Keeping both visible makes the policy comparison easier to audit.
A modest conversion lift does not recover the subsidy.
Removing the €5 charge raises conversion to 2.2% in the first modeled response, producing 1,100 orders. The product basket and physical costs stay unchanged.
| Measure | Paid | Free: modest lift |
|---|---|---|
| Visits | 50,000 | 50,000 |
| Conversion | 2.0% | 2.2% |
| Orders | 1,000 | 1,100 |
| Product AOV | €60 | €60 |
| Shipping charge collected | €5 | €0 |
| Payment fees/order | €1.95 | €1.80 |
| Contribution before acquisition/order | €30.05 | €25.20 |
| Contribution after €15,000 acquisition | €15,050 | €12,720 |
Free shipping loses €4.85 per original order after the €0.15 fee saving: €4,850 across the original 1,000 orders. The extra 100 orders contribute €2,520, leaving a net decline of €2,330.
Free shipping wins when enough incremental orders appear.
The free-shipping order retains €25.20 before acquisition. With the same €15,000 spend, it must replace the paid baseline’s €30,050 pre-acquisition contribution.
At least 1,193 orders are required, equivalent to 2.386% conversion on 50,000 visits: approximately 19.3% more orders than the paid baseline.
Weak response
At 1,100 orders, the conversion lift is only 10%. It does not clear the contribution hurdle.
Strong response
At 2.5% conversion, 1,250 orders contribute €31,500 before acquisition and €16,500 after it. Free shipping then beats the paid baseline by €1,450.
A threshold changes both the basket and the shipping mix.
Consider free shipping above €75. In this modeled response, conversion is 2.1%, average product revenue is €68 and 60% of orders qualify. The remaining 40% pay €5, so average collected shipping is €2.
| Component | Amount |
|---|---|
| Average product revenue | €68.00 |
| Average shipping collected | €2.00 |
| COGS | (€28.00) |
| Payment fees: 3% × €70 | (€2.10) |
| Carrier cost | (€8.00) |
| Handling | (€2.00) |
| Contribution before acquisition | €29.90 |
A €68 average basket can coexist with a €75 threshold because some customers remain below it. For example, 60% at €80 and 40% at €50 average €68. The higher €8 carrier cost recognizes the heavier qualifying mix.
The threshold wins the moderate-response comparison.
At 1,050 orders, the threshold produces €31,395 contribution before acquisition and €16,395 after acquisition. It exceeds paid shipping by €1,345 and modest-response free shipping by €3,675.
| Policy | Orders | Product AOV | Contribution after acquisition |
|---|---|---|---|
| Paid shipping | 1,000 | €60 | €15,050 |
| Free, modest response | 1,100 | €60 | €12,720 |
| €75 threshold | 1,050 | €68 | €16,395 |
| Free, strong response | 1,250 | €60 | €16,500 |
The strongest free-shipping response is €105 ahead of the threshold. That small advantage could disappear with a small cost change or sampling uncertainty. The result supports testing the policies rather than declaring a universal winner.
Measure shipping recovery, conversion and basket cost together.
Randomize comparable visitors where practical and keep marketing, geography and timing balanced. Shipping policies can change both order behavior and the delivery cost mix.
- Track all collected shipping
Include below-threshold charges and any refunded charges. Do not count free-shipping eligibility as a cost by itself.
- Price the actual parcel mix
Record weight, zones, split shipments and handling. The average basket increase may trigger a disproportionate carrier charge.
- Let returns mature
Threshold-seeking customers may later return the added item. Extend the comparison to the contribution remaining after those returns.
- Check capacity and uncertainty
A result near the decision boundary requires adequate evidence. Include new staffing or capacity costs if the policy causes them.
The order fulfillment cost calculator helps establish the physical delivery burden. Combine it with observed conversion rather than optimizing shipping charges separately.
Free shipping creates value only when the whole order system improves.
The modest conversion response destroys €2,330 of contribution, while the stronger response creates €1,450. The threshold creates €1,345 under its own basket and cost assumptions.
Blanket free shipping needs at least 1,193 orders.
That replaces the paid baseline’s contribution at €25.20 per free-shipping order and unchanged acquisition spend.
The threshold is competitive, not automatically superior.
Its €16,395 result beats the moderate free-shipping response but trails the stronger response by €105.
Connect basket economics with conversion
Rebuild profit per order for each policy, then multiply by the orders generated from the same traffic base.