How Can I Increase My Average Order Value to Cover the Cost of Shipping?

How Can I Increase My Average Order Value to Cover the Cost of Shipping?

How can I cover shipping costs by increasing my average order value?Welcome to Ask Shopify, a series where ecommerce experts tackle real questions and challenges from store owners who are trying to launch, build, and scale their stores. We’re here to help with every aspect of your store, from marketing to HR to accounting.

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Question:

I’d love to offer free shipping, but the economics of it just aren’t working for my business right now. My average order size isn’t big enough to cover the cost of shipping—but I think that offering free shipping would help me convert more customers. Do you have any suggestions about how I can bump up my average order value to absorb the cost of shipping?

Answer:

Increasing your average order value is one of the key ways you can grow your ecommerce business without dramatically increasing traffic, and if larger orders increase your margins or reduce your shipping costs, you’re right that it can help you cover the cost of shipping.

Most of the commonly recommended tactics to increase your average order value focus primarily on the total order value because it’s the key metric. But in your case, you’ll also need to focus on two other underlying numbers: your margins and your shipping costs.

See, many of the ways you can increase your average order value assume you’re OK with sacrificing a bit of margin to score a higher order value. In this case, that’s true, but you’re doing it by absorbing the shipping costs—so you need to pay extra attention to how each tactic will impact your profit on an order after you account for shipping costs.

That doesn’t mean all is lost, though. There are ways to increase your average order value and still maintain your margins after covering the cost of shipping. You’ll just need to a bit more strategic when you do it.

Things to know before choosing a strategy

It sounds like you’ve got a good handle on the key financial numbers, like your margins, but just in case, here’s what anyone would need to know before pursuing these strategies.

  • Average order value (AOV). What is it currently?
  • Average shipping cost. How much does your average order cost you to ship?
  • Weight and shipping cost of each product. How much does each product cost to ship on its own?
  • Weight and shipping cost of each bundle (if choosing a bundle strategy). How much does a bundle of products cost to ship together?
  • Margin for each product. What is your profit margin on each product?

When you’re trying to figure out how to increase your AOV to cover the cost of shipping, you’ll need to know what that cost is, and what your margin will be on the higher order value.

That seems obvious, but it’s especially important given that many of the strategies used to increase average order value can have a direct impact on your total shipping costs, your margins, or both.

These four tried-and-true strategies can help you offer the free shipping of your dreams, while still making a profit on each sale.

Offer a free shipping cutoff

This is the easy, obvious answer.

One of the evergreen strategies to increase your average order value is to offer free shipping as an incentive for orders over a certain amount. Aaron Zakowski’s team recommends that you should take your current average order, and bump it up by about 30% to find your free-shipping cutoff, but that approach doesn’t guarantee that you’ll still be profiting after covering the cost of shipping.

Instead, work backwards and figure out what size of order would allow you to comfortably offer free shipping and still make a profit. This is where all of those numbers come in—you’ll need to focus on your individual products’ margins, as well as how much it would cost to ship different groupings of items together. To narrow that list down, check your past order history to see if there are any common groups of items that people tend to buy together, and start there.

Once you’ve got a number, it’s time to test it out. You can add a free shipping cutoff, and related prompts, to your store using an app like Free Shipping and Discount Bar.

Set up your free shipping offer in the Free Shipping and Discount Bar app by Pixel Union
Photo courtesy of: Free Shipping and Discount Bar

Once your offer is live, pay attention to how many people are hitting the cutoff, how much they’re ordering, and most importantly, how your profit margins are doing after absorbing the cost of shipping.

Showcase related products

When someone adds a product to their cart, you know they’re already interested in what you have to offer. That’s a great time to play matchmaker and showcase a few other products that you think they’d like, based on their current selection.

You can do this with an app like Cross Sell, which can recommend related products on your product page, your cart page, and more.

Pick recommended products with good margins to display using the Cross Sell app
Photo courtesy of: Cross Sell

While you can rely on the app to recommend products based on each buyer’s behaviour, you can also hand-select items to recommend. Taking a more active role in your recommendations can help ensure your upsells are helping you cover your shipping costs.

You should focus on recommending products that have a high enough margin, or a low enough shipping cost when combined with other items, to allow you to pay for the order’s shipping and still have money left over.

As an example, if someone’s already ordered a sweater, consider recommending them a t-shirt to wear under it, or a bracelet that would match it nicely. Both of those items could likely fit within the same packaging as the sweater, and shipping them together is probably more cost-effective than sending them separately.

Offer bundles

Instead of relying on your customers to pick and choose a cart of related items, you can set one up that’s ready to go for them. It gives you more control over your margins and shipping costs, and relieves some of the decision fatigue your customers might be feeling.

To create a bundle, install an app like Bundles. You can add a few products that make sense together, figure out what your total margins are after you account for shipping, and price the bundle attractively from there.

Most of the time, bundles are marketed with discounts to entice the customer to buy all of the items, not just the one they originally wanted. All you need to do to make this work for you is to ensure your discounted price still gives you room to cover shipping and make a profit.

Promote your gift cards

This is a doubly-effective strategy to increase your average order value while decreasing your shipping costs.

Especially around a gifting occasion or holiday, gift cards can be a great upsell. They’re lightweight (or weightless, if you offer digital gift cards) and they all but guarantee that someone is going to place an order at your store in the future.

To set this up, create a gift card in Shopify, and then add it as a product upsell in your Cross Sell app. You could even offer a discounted gift card as an upsell in a bundle, with a discount on the total value of the card since they’re already buying something.

The most important thing to remember

Many of the strategies that can help you increase your average order value rely on taking a small hit on your margins to make it work.

Sometimes it’s offering discounts, but in this case you’re looking to cover the shipping cost. You’re already taking a significant chunk of profit out of the equation, so you just need to be very careful that you don’t eliminate profit entirely as you test out these strategies.

Do you have a question you want to Ask Shopify? Send it over to ask@shopify.com—we'd love to help you with it.

About the Author

Desirae is a content creator at Shopify, and has zero chill when it comes to helping entrepreneurs grow their businesses.

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