Conversion · Offer economics
Free shipping or 10% off: which offer can your margin support?
Choose the offer that produces enough contribution per eligible visitor to cover its cost, while keeping your contribution margin above the floor your business needs. Start by pricing both offers on the same basket. Then calculate the conversion lift each would need to match a no-offer control. A promotion that wins on orders can still leave less money to run the business.
For the hypothetical $80 basket below, waiving a $6 shipping charge costs less than giving 10% off. Free shipping needs roughly an 18% relative conversion lift to preserve contribution dollars at the same traffic and media cost; 10% off needs roughly 26%. Those are calculated hurdles, not forecasts of how shoppers will respond.
Price the shipping charge you waive
The store pays the carrier whether the shopper pays for shipping or receives it free. If the parcel, destination and delivery service stay the same, the extra cost of free shipping is the customer shipping revenue you give up, adjusted for any payment-fee change. Subtracting the carrier bill only from the free-shipping offer makes the comparison wrong.
Keep three amounts separate: merchandise receipts after discounts, shipping charged to the customer, and shipping paid to the carrier. Shopify's net sales excludes shipping charges and taxes; its shipping finance report records customer shipping charges and refunds, not shipping-label purchases. Use the carrier or fulfillment bill for the cost side. Shopify finance report definitions.
For this decision, define contribution before media as merchandise receipts plus customer shipping receipts, less product cost, pick/pack and packaging, carrier cost, payment fees, and the included allowance for returns. Contribution after media also subtracts the media spend assigned to that traffic. Neither measure is net profit: overhead, salaries and other fixed costs still have to be paid.
Work through one basket before changing the offer
This example is entirely hypothetical, in USD, for first orders during one 14-day offer test. It assumes an $80 merchandise basket, $32 product cost, $3 pick/pack and packaging, $8 carrier cost, and a payment fee of 3% of customer receipts plus $0.30. The $2 allowance per order is an assumed net cost of later returns and refunds after recoveries. It is a planning input, not recorded returns or a benchmark. Taxes are excluded throughout. There are no other variable costs in this simplified example; add yours before using the model.
The baseline charges $6 shipping. The two alternatives waive that charge or take 10% off all merchandise while retaining $6 shipping. They deliberately provide different dollar savings: $6 versus $8 on this basket.
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| Per first order | No offer | Free shipping | 10% off |
|---|---|---|---|
| Merchandise after discount | $80.00 | $80.00 | $72.00 |
| Customer shipping charge | $6.00 | $0.00 | $6.00 |
| Customer receipts, excluding tax | $86.00 | $80.00 | $78.00 |
| Product cost | $32.00 | $32.00 | $32.00 |
| Pick/pack and packaging | $3.00 | $3.00 | $3.00 |
| Carrier cost | $8.00 | $8.00 | $8.00 |
| Payment fee | $2.88 | $2.70 | $2.64 |
| Assumed net returns/refunds cost | $2.00 | $2.00 | $2.00 |
| Contribution before media | $38.12 | $32.30 | $30.36 |
| Contribution margin before media | 44.3% | 40.4% | 38.9% |
The margin denominator is customer receipts excluding tax, before the modeled returns allowance: for free shipping, $32.30 ÷ $80 = 40.4%. Keep that denominator when comparing the offers. If using settled results instead, reconcile actual refunds and recoveries and remove the allowance so the same cost is not counted twice.
Free shipping reduces contribution by $5.82 per order; 10% off reduces it by $7.76. The payment-fee savings make both reductions slightly smaller than the advertised customer saving. For a separate media-budget calculation, use the break-even ROAS worked example, keeping revenue and cost definitions consistent.
Convert the cost into a conversion hurdle
Assume the no-offer purchase rate is 2.5% of eligible visitors, with at most one counted first order per visitor. When contribution per order and media cost per visitor stay fixed:
Required offer purchase rate = baseline purchase rate × baseline contribution before media per order ÷ offer contribution before media per order.
Free shipping therefore needs 2.5% × $38.12 ÷ $32.30 = approximately 2.95%, an 18.0% relative lift. The discount needs approximately 3.14%, a 25.6% relative lift. These are dollar break-even points against the control, not margin targets. If the offer leaves zero or negative contribution before media, this positive-contribution model cannot supply a viable conversion hurdle.
Suppose each offer instead reaches a 3.0% purchase rate. For 1,000 eligible visitors per arm and an assumed $500 of media spend per arm over the same 14 days:
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| Modeled result per 1,000 visitors | No offer | Free shipping | 10% off |
|---|---|---|---|
| First-order purchase rate | 2.5% | 3.0% | 3.0% |
| First orders | 25 | 30 | 30 |
| Customer receipts, excluding tax | $2,150 | $2,400 | $2,340 |
| Contribution before media | $953.00 | $969.00 | $910.80 |
| Media spend | $500.00 | $500.00 | $500.00 |
| Contribution after media | $453.00 | $469.00 | $410.80 |
| Contribution margin after media | 21.1% | 19.5% | 17.6% |
Both offers produce five more orders in this scenario. Free shipping adds just $16 of contribution after media; the discount loses $42.20 versus the control. Free shipping also lowers the margin from 21.1% to 19.5%. A business requiring a 20% margin after media would reject both offers at these modeled rates. The 20% floor is an illustrative policy choice, not a recommendation for every store.
This is sensitivity analysis, not test evidence. It assumes the offer does not change product mix, returns, shipping cost or visitor acquisition cost. The small $16 advantage could disappear if any of those inputs worsen.
Check smaller baskets and expensive parcels
A percentage discount scales with merchandise value. A waived $6 shipping charge stays $6 only within the stated shipping rules. At a $60 basket, 10% off and free $6 shipping give the same immediate dollar saving. That does not imply the same response from shoppers.
Holding the earlier assumptions fixed except product cost at 40% of the undiscounted basket:
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| Merchandise basket | Contribution before media: free shipping | Contribution before media: 10% off |
|---|---|---|
| $40 | $9.50 | $11.44 |
| $80 | $32.30 | $30.36 |
| $120 | $55.10 | $49.28 |
The cheaper offer changes at smaller baskets. In a real store, also recalculate by shipping zone, parcel weight and product margin. Raising a basket to qualify for free shipping can add an item with poor margin or push the parcel into a more expensive service. A higher average order value alone does not establish a better result.
Check the threshold in checkout. Shopify calculates a free-shipping minimum from product prices after applicable combinable discounts, excluding taxes. A hypothetical $85 basket with 10% off becomes $76.50 and misses an $80 minimum. Verify the permitted countries and maximum eligible shipping rate too. Shopify free-shipping discount settings.
Test the actual checkout offer
Keep a no-offer control where feasible. Randomly assign eligible visitors to the control, free shipping or 10% off, and keep each visitor's assignment consistent on return visits. Define eligibility before assignment, including geography and customer type; include nonbuyers in the denominator. Use completed store orders for this purchase rate, with the same definition in each arm.
Before launch, write down:
- The decision rule. Compare contribution after media per assigned eligible visitor, alongside the contribution-margin floor. Use the same media-cost allocation method in every arm. If allocation is unreliable, say so and compare contribution before media per visitor while reporting spend separately.
- The guardrails. Record basket mix, carrier cost, discount combinations, cancellations and refunds. Confirm how welcome and loyalty offers interact with the test. Shopify requires compatible combination settings for discounts to stack; test each permitted path through checkout before taking payment. Shopify discount combinations.
- The observation plan. Choose sample size and duration from the smallest contribution change worth acting on, expected variability and the return window. The example's 14 days and 1,000 visitors are arithmetic assumptions, not a claim that either is enough to choose a winner. Report uncertainty and revisit the result when returns have matured.
For a test that assigns the offer after the click, use ads that do not promise a specific promotion. If each offer needs its own ad, treat the result as an ad-and-offer comparison. Keep each destination consistent with the promise. The product-page versus landing-page decision helps when one offer needs more explanation. A before/after promotion comparison can also reflect traffic or seasonal changes; it cannot isolate the offer's effect by itself.
Start with your most common basket and your most expensive eligible shipping zone. Price both offers, write down the required purchase rate and margin floor, then decide whether the possible gain is large enough to justify a test.
Build an offer test around the contribution it needs to earn.
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