Sellevate

Profit & margins

Free shipping vs flat rate shipping

Free shipping vs flat rate shipping is a choice between absorbing shipping costs yourself and charging every customer the same fee. Free shipping tends to win more orders but comes straight out of your margin, while flat rate recovers some or all of the cost predictably. Many stores combine them with a free shipping threshold.

Free shipping vs flat rate shipping vs other models

ModelCustomer paysYou payTypical trade-off
Calculated ratesActual carrier costNothing extraAccurate, but surprise costs at checkout can lose sales
Flat rateA fixed fee per orderThe difference when shipping costs moreSimple and predictable; some orders lose money on shipping
Free shippingNothingFull shipping costCan lift conversion; cost comes out of margin
Free over a thresholdFee below the threshold, nothing above itFull cost on qualifying ordersEncourages bigger baskets that help cover the cost

What each model does to your margin

Worked example: 1,000 orders a monthExample numbers

InputValue
Orders per month1,000
Average order value$60
Gross margin45%
Your average shipping cost$6.00 per order
Flat rate charged$4.95 per order

Gross profit per order before shipping = $60 × 45% = $27.

ModelProfit per orderMonthly profit
Customer pays actual cost$27.00$27,000
Flat rate $4.95 (you cover $1.05)$25.95$25,950
Free shipping on every order$21.00$21,000

Free shipping on every order costs this store $6,000 a month. To earn it back at $21 per order, it needs about 286 extra orders a month (6,000 ÷ 21), or bigger orders. That's why most stores make free shipping conditional.

Setting a free shipping threshold from AOV and margin

A threshold works when the bigger baskets it creates cover the shipping cost you take on. The break-even point is:

Formula

Break-even AOV = (Profit per order today + Shipping cost) ÷ Gross margin

Profit per order today
current AOV × gross margin, when customers pay for shipping
Shipping cost
your average cost to ship one order

Using the example: ($27 + $6) ÷ 45% = $73.33. If offering free shipping above, say, $75 lifts qualifying orders' AOV to at least $73.33, you come out ahead.

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Building shipping into your prices

Instead of absorbing shipping, some stores raise product prices by roughly the shipping cost and advertise free shipping.

Using the example store, raising the $60 average order by $6 to $66, with product costs unchanged at $33:

Profit per order is unchanged, as long as the higher prices don't put customers off. It works best for light, similar-sized products where shipping costs are predictable. It's riskier when competitors list the same products at lower prices.

Testing a free shipping threshold

  1. Record a baseline: orders, AOV, conversion rate and profit per order over a few normal weeks.
  2. Set the threshold just above your current AOV, and at or above the break-even AOV.
  3. Promote it in a site-wide banner and in the cart, with a "you're $X away" message.
  4. Run it for at least a few weeks, avoiding major sales or holidays.
  5. Compare profit per order and total profit, not just AOV. Revenue can rise while profit falls.

If AOV doesn't rise enough to clear break-even, raise the threshold or limit free shipping to certain products.

Choosing the right approach

Tips for any shipping model

For more ways to grow basket size, see the guide to average order value.

FAQ

What does flat rate shipping mean?

Every order pays the same shipping charge, regardless of size, weight or destination, for example $4.95. Some orders cost you more to ship than the charge and some cost less; it averages out if you set the rate well.

Is free shipping really free for the store?

No. The carrier still charges you, so the cost comes out of your margin, or you build it into your product prices. Free shipping pays off only if it brings in enough extra orders or bigger orders to cover that cost.

Should I raise prices to cover free shipping?

It's a common approach, especially for light, consistent products. It works if customers still see your prices as fair. For heavy or bulky items, a threshold is usually safer than building shipping into every price.

What's a good free shipping threshold?

Somewhere a little above your current average order value, and at or above the break-even AOV for your margin and shipping cost. Then measure what actually happens to AOV and order count, and adjust.