Shipping Subsidy Calculator

Setting it out

Shipping subsidy is what the business absorbs: shipping cost − shipping revenue, per order and in total. It is the single clearest measure of what a free or discounted shipping policy actually costs.

Expressed as a share of contribution it becomes comparable against other spending: a subsidy of 20% of contribution is a marketing budget, and it should be judged against what the same money would do in advertising.

A concrete case

1,240 orders in a month, $12,710 of carrier cost, $4,830 collected from customers. The subsidy is $7,880, or $6.35 an order.

Contribution before shipping averages $31.90, so the subsidy is 20% of contribution. Across a year it is $94,560.

The comparison worth making: that $94,560 spent on paid acquisition at a $32 cost per order would buy roughly 2,950 additional orders. Whether free shipping generates more than 2,950 incremental orders a year is a question with an answer, and very few businesses have asked it.

What the number hides

The subsidy is real and the alternative is not free either. Removing free shipping loses conversions, and the lost contribution from those has to be netted off before the subsidy looks like recoverable money.

It also varies enormously across the order book. The subsidy on a light order to a near zone might be $2; on a heavy order to a far zone it can exceed the entire contribution, and the average conceals both.

Where to go from here

Report it monthly as a single line alongside advertising spend. Treating it as a marketing cost rather than as a shipping problem puts it in the right conversation, which is about what the money buys.

Then find the orders where the subsidy exceeds contribution and deal with those specifically. It is nearly always a small set of heavy or far-zone products, and excluding them from the free shipping policy usually removes most of the loss without touching the customer experience for anyone else.

Deciding whether the subsidy is worth it

The test is incrementality: how many orders exist because shipping was free that would not have existed otherwise. That is measurable with a split test: free shipping for half of traffic, a charge for the other half, run for long enough to see both conversion and basket size.

Most businesses that run it find the conversion effect is real but smaller than assumed, and that a threshold captures most of the benefit at a fraction of the cost. The gap between free shipping on everything and free shipping above a threshold is usually large in money and small in conversion.

The businesses for which a full subsidy genuinely pays are those with high margins, light products and strong repeat rates, where the shipping cost is a small share of contribution and the customer acquired comes back. Outside that profile, the honest answer is usually a threshold, and the reluctance to move to one is normally about competitor comparison rather than about anything the data says.

Free shipping thresholds are usually set at a round number and are better set from the order value distribution. A threshold placed just above the largest cluster of orders moves the most baskets for the least subsidy, where a round number either sits below the cluster and gives the discount away, or well above it and moves nobody.