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
| Model | Customer pays | You pay | Typical trade-off |
|---|---|---|---|
| Calculated rates | Actual carrier cost | Nothing extra | Accurate, but surprise costs at checkout can lose sales |
| Flat rate | A fixed fee per order | The difference when shipping costs more | Simple and predictable; some orders lose money on shipping |
| Free shipping | Nothing | Full shipping cost | Can lift conversion; cost comes out of margin |
| Free over a threshold | Fee below the threshold, nothing above it | Full cost on qualifying orders | Encourages bigger baskets that help cover the cost |
What each model does to your margin
Worked example: 1,000 orders a monthExample numbers
| Input | Value |
|---|---|
| Orders per month | 1,000 |
| Average order value | $60 |
| Gross margin | 45% |
| Your average shipping cost | $6.00 per order |
| Flat rate charged | $4.95 per order |
Gross profit per order before shipping = $60 × 45% = $27.
| Model | Profit per order | Monthly 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:
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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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:
- Gross profit per order = $66 − $33 = $33
- Minus $6 shipping = $27 per order, the same as when customers paid for shipping
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
- Record a baseline: orders, AOV, conversion rate and profit per order over a few normal weeks.
- Set the threshold just above your current AOV, and at or above the break-even AOV.
- Promote it in a site-wide banner and in the cart, with a "you're $X away" message.
- Run it for at least a few weeks, avoiding major sales or holidays.
- 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
- Light, low-cost-to-ship products: free shipping or a low threshold is often affordable.
- Heavy or bulky products: calculated or flat rates, or a high threshold, protect margin.
- Low AOV stores: a threshold just above AOV pushes baskets up; free shipping on everything is rarely affordable.
- High AOV stores: shipping is a small share of each order, so free shipping is easier to absorb.
Tips for any shipping model
- Know your real average shipping cost, including packaging, before setting any rate or threshold.
- Show shipping costs early, on product pages or in a banner, so they aren't a surprise at checkout.
- Suggest add-ons near the threshold in the cart, so customers can qualify easily.
- Revisit it twice a year, as carrier rates and your AOV change.
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.