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Free shipping: how to calculate a profitable threshold for your store
Contents 7 sections
A profitable free shipping threshold is calculated from the margin available on the basket and the order’s variable costs. Average order value tells you something about buying habits, but not how much you can spend on shipping. Two $100 orders can leave very different margins.
Before choosing $75, $100 or any other amount, gather product costs, payment fees, preparation, packaging, shipping and a realistic allowance for returns or incidents. Use a consistent basis, such as Canadian dollars before tax and after discounts.
Calculate an order’s contribution
Contribution is what remains after the variable costs you have chosen to include. It must then fund expenses excluded from the calculation: customer acquisition, fixed costs, salaries or other business expenses.
Contribution = net product revenue + shipping charged to the customer − product cost − payment fees − preparation − packaging − shipping − other included variable costs.
With free shipping, the customer’s contribution to transport is zero. If your threshold increases the basket size, check that the added products provide enough margin to cover the expense. A heavy, low-margin item can increase revenue while reducing contribution.
Example: an $80 order with free shipping
Educational example in Canadian dollars. These amounts are neither Kolineo’s price list nor universal payment processing fees.
| Item | Assumption | Amount |
|---|---|---|
| Product revenue | $80 before tax, after discounts. | $80.00 |
| Product cost | 45% of revenue, leaving a 55% product margin. | −$36.00 |
| Payment fees | Simplified assumption of 2.5%, with no fixed fee. | −$2.00 |
| Preparation | Illustrative cost per order. | −$3.50 |
| Packaging | Illustrative cost per order. | −$1.00 |
| Shipping | Hypothetical full cost for the zone being assessed. | −$12.00 |
| Allowance for returns and incidents | Average assumption, without double-counting. | −$2.00 |
| Remaining contribution | Before customer acquisition and fixed costs. | $23.50 |
A formula for an initial threshold
When the product margin rate and percentage-based fees remain stable, you can use a simplified formula: threshold = (per-order variable costs that are fixed in amount + target contribution) ÷ (product margin rate − percentage-based fee rate).
In this example, per-order costs excluding the product and payment fees are $18.50: $3.50 for preparation, $1 for packaging, $12 for shipping and a $2 allowance. To retain a $20 contribution with a 55% product margin and 2.5% percentage-based fees, the theoretical threshold is ($18.50 + $20) ÷ (0.55 − 0.025) = approximately $73.33.
You could then test a $75 threshold, which leaves a $20.88 contribution under these assumptions. This result only holds while adding products does not change preparation costs, package dimensions, weight or average margin. The denominator must be positive; otherwise, increasing the basket value does not solve the problem in this model.
Set rules by delivery zone and product
A national average shipping cost can hide large differences. Analyse destinations in meaningful zones and check surcharges. UPS, for example, publishes rate zones and surcharges for certain destinations. Use invoiced costs to define the relevant groups.
You could assess a threshold for your main service area, a shipping contribution for certain destinations and a separate rule for bulky products. Any restriction should be understandable before payment and correctly applied by your store.
For the US, also specify whether the offer covers transport alone or other charges. “Free shipping” does not resolve customs duties or the choice between DDP and DAP. Price this market separately.
Check the baskets that actually cross the threshold
Simulate the most likely product combinations: one unit, two units, a bundle and a basket with a promotion. Calculate their contribution after packaging and shipping. Pay particular attention to the point where an order needs a larger box or a second parcel.
Apply the threshold after discounts if that is the advertised rule. An $82 order before a 15% discount produces only $69.70 in product revenue. Keeping free shipping in this case may be a commercial choice, but its cost must be included in the simulation.
Product margin should be calculated on the selling price: a product sold for $100 and purchased for $45 has a margin of 55% of revenue. Do not substitute a markup calculated on purchase cost; it would produce a different threshold.
Test the offer beyond average order value
Measure conversion rate, order value after discounts, contribution per order and total contribution over a comparable period. Also track the share of eligible orders, parcels per order and average shipping cost by zone.
A threshold that increases average order value can still reduce total contribution if purchases become less frequent. Conversely, a slightly lower contribution per order may be offset by more orders, provided the additional volume covers its associated costs. You need to observe both dimensions.
Document the period, promotions and product range changes so you can interpret the results. Shipping rates, packaging formats and purchase prices change: review the threshold whenever one of these factors changes.
To improve the reliability of your logistics data, break down your fulfillment costs and B2C order preparation rules. A sound threshold depends on the actual cost of an order, not a shipping invoice alone.
Frequently asked questions
Should the threshold sit just above average order value?
That is a commercial hypothesis to test, not a profitability formula. First calculate the margins and costs of the baskets involved, then measure whether the threshold improves total contribution.
Should the threshold be calculated before or after tax?
For profitability analysis, use a consistent basis before tax and after discounts. Then tell customers clearly how eligibility for the offer is calculated in your store.
Can you set different thresholds for Canada and the US?
Yes, as a commercial option, if the conditions are clearly displayed and correctly applied. Shipping, customs and returns costs justify analysing the two markets separately.
Price the logistics behind your shipping offer
Share your typical baskets, package formats and destinations. We will help identify the preparation, packaging and transport costs to include in your calculation.