In fashion e-commerce, free shipping is a lever many retailers pull to increase conversion, boost average basket sizes, and improve customer satisfaction. However, free shipping can quietly erode your profitability, especially when offered unconditionally and without a strategically refined threshold based on customer behavior and purchasing patterns.
At the latest Dynamic Pricing Community gathering, I shared findings from the research of Cachon, G. P., Gallino, S., & Xu, J. (2018) and experimentation with their data-driven model with various shipping threshold strategies. Our goal was to understand how these policies influence order behavior, return rates, and overall profit margins. What we uncovered challenges conventional wisdom and points toward a smarter, data-informed approach to shipping incentives.
The free shipping threshold trap
Many retailers use shipping thresholds, such as “Free shipping on orders over €50,” as a psychological incentive. The idea is simple: nudge customers to add more items to their cart to qualify for free shipping. This strategy works, as customers do add more.
However, what are they adding?
The model and real-world experiments revealed that these extra items often aren’t “wanted” items; they’re padding. Products added just to tip the order over the free shipping line.
Yet despite the larger baskets, the data showed that the additional revenue rarely covered the full cost of shipping, and padded orders were more likely to be returned. This meant that not only did free shipping erode profit margins, but it also increased return costs—making the overall strategy unsustainable.
Take, for example, a U.S. apparel retailer we studied. By removing the free shipping threshold and charging a fee on all orders, the company initially feared smaller baskets and reduced profits. However, lowering the threshold by 66% had already led to a 20% drop in profit, and the model showed that fully free shipping offered no sales boost, remaining unprofitable even in best-case scenarios.
With price increases deemed unrealistic, the model ultimately recommended charging shipping on all orders. This approach led customers to buy only what they truly wanted, reduced returns, and proved more sustainable and profitable than threshold-based free shipping strategies.
Modeling order behavior and profitability
The model simulated thousands of order scenarios using inputs like:
- Order and purchase data to estimate the model parameters
- Shipping and return costs
What we saw consistently was that:
- Order padding grew as thresholds rose, reaching a peak at an optimal point before decreasing beyond that.
- Padded items were far more likely to be returned.
- A 3% profit increase was achievable by adjusting thresholds strategically.
Crucially, the model emphasized the need to think beyond surface-level KPIs like average order value (AOV). While AOV might look great when thresholds are applied, a deeper analysis focusing on contribution margin per order reveals the true impact on profitability, especially once returns and shipping costs are accounted for.
Retailers should evaluate how thresholds affect net profit per shipment rather than just customer spend, and consider segment-specific strategies such as removing thresholds for loyal or low-return customers. Modeling the full order lifecycle, including the costs of returns and inventory management, is essential to designing smarter, personalized incentives that drive sustainable profit growth.
What about promotional periods?
The behavior shifts even more dramatically during promotional periods. Customers are already primed to buy more, and when free shipping is layered on top, many see it as a free pass to over-order. This is especially problematic in fashion retail, where size and style uncertainty are high.
In experiments we conducted during promotional campaigns:
- Order volumes increased – but so did multi-size purchases.
- Return rates spiked, often wiping out the value of increased sales.
- Offering free returns alongside free shipping made the issue worse.
Customers ordered more not because they wanted more, but because it cost them nothing to try and return. The key lesson? Without proper controls, shipping promotions become a returns accelerator.
Recommendations for retailers
- Shift your focus from AOV to contribution margin per order.
Analyze how shipping thresholds impact the net profit of each order, not just how much customers spend. - Test eliminating thresholds for key customer segments.
Consider A/B testing free shipping for high-frequency or low-return customers. Our data shows that loyalty-based models outperform one-size-fits-all approaches. - Model the entire lifecycle of an order, including returns.
Every padded item has a cost, not just in reverse logistics, but also in inventory management, restocking, and resale delays. - Avoid stacking promotions and free shipping.
Free shipping during sales events may seem like a conversion booster, but the compound impact on returns can be substantial. - Design smarter incentives.
Offer personalized shipping benefits based on customer behavior—for example, free shipping for products with low return rates or high-margin categories.
Smarter, data-driven logistics
The instinct to offer free shipping is rooted in a desire to compete, convert, and please customers. While it remains a powerful tool, the mechanics of how and when it’s applied must change.
Today’s pricing and logistics leaders must balance psychology with profitability. It’s no longer about “free shipping or not” but when, for whom, and at what cost to your bottom line.
By rethinking shipping thresholds and experimenting with data-backed models, fashion retailers can unlock smarter growth and delight customers without sacrificing margin.
About the author
Maria Beiner is a highly skilled pricing professional with over 5 years of hands-on experience in developing data-driven pricing strategies and optimizing profitability for leading companies in the automotive and energy sectors. She has consistently leveraged advanced pricing methodologies to drive growth and improve operational efficiencies.
Maria is currently the Product Manager Pricing at thermondo, where she leads pricing initiatives in the sustainable energy sector. Prior to this, she worked as a Pricing Analyst at kfzteile24 GmbH, Germany’s leading digital platform for car parts and accessories, where her work directly contributed to significant revenue and margin increases.
