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Ebiz 1 Strategy – Up-selling vs Free Shipping

February 11th, 2008 by Kenric

This week’s dilemma is how to maximize profits out of each sale.  We know that upselling adds more dollars to the customer’s total order but is it always more profitable?  In my case, it is not.  I have to strategically calculated each offered upsale to make sure that I’m not losing money by upselling.

How can this possibly happen?   How can getting a customer to purchase more lead to less profit?

The answer is due to free shipping.  My store offers free shipping on orders over $175.00.  Prior to that I charge $12.99 shipping.  I actually lose about $2.00 in shipping on each sale, but I can’t really charge $14.99 for shipping.  I feel that $12.99 is shipping ceiling for my product.

Most of my products sold range from $140.00 to $155.00.  It is not an accident that I set my free shipping price to $175.00.  My complimentary products are priced from $25.00 to $40.00.  Simple math tells us that if a customer purchases a primary and a complimentary product that the totals will come close to $175.00.

So here is strategic pricing at work:

Order #1
Primary product $145.00
Complimentary product $25.00
Total $170.00
Shipping $12.99
Total order $182.99

Here is poor strategic pricing:

Order #2
Primary product $145.00
Complimentary product $30.00
Total $175.00
Shipping FREE
Total order $175.00

On both orders, my cost for servicing the customer is the same.  By pricing my complimentary product $5.00 higher I actually lost $7.99 in profit.  In fact, if I price the complimentary product up to $38.00 I still don’t make any more money.  The perfect price for the product would be $29.95.  I don’t think that my customers want to see an order total of $174.95, so I have priced it at $27.95.

I also do not sell any items in the $10.00-$25.00 range.  I do not want customers adding $10.00 to their order to get free shipping and save $12.99.  If a customer’s shopping cart is sitting at $174.95, you better believe that they have to add a product with a profit margin above $12.99 to get free shipping.

There is no way that I can prevent certain combinations of orders to barely reach $175.00.  But I can make the number of those combinations rare.  In fact, I’ve only had a few customers do this.

What happens when you offer free shipping on everything? 

Due to last month’s sale boost when I offered free shipping on almost every order, I’m thinking of doing it permanently.  If I offer free shipping, I will basically be dropping $12.99 off the bottom line of every order. 

With free shipping my pricing strategies would have to change.  How do I recover the $12.99 that I’m giving up?  I certainly cannot increase my prices by $12.99 but I may be able to increase my $140.00 product to $145.00.  It’s pretty clear to me that my profit per order would decrease because most of my orders are one or two item orders.

The question is, will the volume of additional orders make up for the shipping expenses.  I think it’s too early to tell.  $12.99 is alot to give up when your average profit per sale is $50.00.

Time to upsell

If I go to totally free shipping, I would need to start pushing additional products.  I would have to upsell a product with a $12.99 margin just to break even.   In order to make upselling more attractive I would have to offer the complimentary product at a lower price to entice the buyer.  For example, if a customer ordered a $145.00 product and would like the $40.00 complimentary product, I would discount it to $30.00 for this order only.

If I could get my customers to purchase one additional small product, it would cover my free shipping costs.  I would have to redo my pricing and I could add $10.00 to $25.00 products into my store.

Trial and Error

This is all new territory for me.  I think I have a fairly established site now within the industry.  Many customers tell me that my site looks reputable and the prices are good.  I just need to figure out how to get more sales.

Posted in Ebiz | 2 Comments »
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