Free shipping threshold: how to set one that pays

A free shipping threshold pays when the gross margin on an order at that threshold covers your true shipping cost and still leaves the profit you need. The quick formula is: (true shipping cost + target profit per order) ÷ gross margin %. Set it too low and you give away shipping on orders that were going to happen anyway; set it too high and nobody bothers to reach it.

This guide shows how to work out that number, why it should be GST-aware in Australia, and the less obvious trap: orders that only just reach the threshold can earn you less than they would have without it.

What a free shipping threshold actually does to your margin

"Free shipping over $X" changes three groups of orders differently:

Order type	What changes	Effect on margin
Already above the threshold	Customer stops paying for shipping	You lose the whole shipping charge
Nudged up to the threshold	Customer adds items to qualify	Depends on the margin on what they add
New orders that wouldn't have happened	Customer buys because shipping is free	The real upside

The first group is a pure cost. The third group is why stores do it at all, and it's the hardest to measure. A good threshold keeps the first group's cost small and makes sure the second group at least breaks even.

Step 1: know your true shipping cost near the threshold

Postage alone isn't your cost. Add packaging, handling time and an allowance for parcels you have to resend. Our guide to working out your true shipping cost per order goes through each line.

Use the cost for an order at the threshold, not your average order. Orders that reach a free shipping threshold tend to be bigger and heavier, and bulky baskets can end up charged on cubic weight rather than actual weight. At the time of writing, Australia Post says parcel prices depend on weight, dimensions, delivery zone and speed of service, as set out on its business postage costs page.

Step 2: work out the break-even threshold

You need three numbers:

• C = true shipping cost of an order at the threshold
• P = the minimum profit you want from an order after shipping
• m = your gross margin on products, as a percentage of the ex-GST price

Threshold (ex GST) = (C + P) ÷ m

If you'd rather not do it by hand, our free shipping threshold calculator runs the same maths with your own numbers. The worked example below shows each step so you can check it.

Worked example: a metro order

A made-up homewares store. All figures are illustrative and exclude GST.

Cost line	How it's worked out	Cost
Postage	Say Parcel Post for a typical threshold-sized parcel costs	$13.40
Packaging	Bigger box, void fill, tape and label	$1.80
Handling	4.5 minutes × $0.60 per minute ($36 an hour)	$2.70
Reship allowance	3% × ($13.40 + $1.80 + $2.70 = $17.90)	$0.54
True shipping cost (C)	$13.40 + $1.80 + $2.70 + $0.54	$18.44

There's no payment fee line here because the customer pays $0 for shipping on these orders.

The store wants at least $20 profit per order after shipping (P), and its average gross margin is 45% (m).

Threshold (ex GST) = ($18.44 + $20.00) ÷ 0.45
                   = $38.44 ÷ 0.45
                   = $85.42

Don't forget GST

Australian stores usually show prices including GST, so the threshold customers see is GST-inclusive. If you're registered for GST, the product margin you keep is on the ex-GST price. Convert before you publish the number:

Threshold (inc GST) = $85.42 × 1.1 = $93.96  →  round up to $95

Check it works at $95:

Ex-GST order value = $95.00 ÷ 1.1 = $86.36
Gross margin       = $86.36 × 0.45 = $38.86
After shipping     = $38.86 − $18.44 = $20.42 profit

That clears the $20 target. A common mistake is to run the maths ex GST and then publish $85 as the threshold, which quietly costs about $3.67 of margin on every order sitting right at it: $85 inc GST is only $77.27 ex GST, $8.15 short of $85.42, and $8.15 × 0.45 = $3.67. Your accountant can confirm how GST applies to your business; the ATO's GST guidance covers the basics.

Step 3: check the nudged orders

This is where thresholds go wrong. Picture a customer with $72 ex GST in their cart. Without free shipping they'd pay $10 ex GST for shipping. With a threshold, they add a $15 item to qualify.

Illustrative, ex GST. Say their original parcel would have had a true cost of $17.90, rising to $18.44 with the extra item.

Without free shipping:
  Product margin  = $72.00 × 0.45 = $32.40
  Shipping margin = $10.00 − $17.90 = −$7.90
  Order profit    = $32.40 − $7.90 = $24.50

With free shipping (adds a $15 item, order now $87):
  Product margin  = $87.00 × 0.45 = $39.15
  Shipping margin = $0.00 − $18.44 = −$18.44
  Order profit    = $39.15 − $18.44 = $20.71

The customer spent more and the store made $3.79 less. The extra item added $6.75 of margin ($15 × 0.45), but the store gave up a $10 shipping charge and paid $0.54 more to post it.

The decision rule:

Break-even add-on (ex GST) = (shipping charge given up + extra shipping cost) ÷ m
                           = ($10.00 + $0.54) ÷ 0.45
                           = $23.42

A nudged order only pays if the customer adds more than about $23.42 ex GST (about $25.76 inc GST). So look at where your carts naturally cluster. If lots of orders land just under your threshold and the cheapest way to qualify is a low-margin add-on, the threshold is costing you on exactly the orders it's meant to help.

Two fixes: set the threshold far enough above the cluster that customers have to add something substantial, or make sure the "add one more thing" products shown near checkout carry decent margin.

Keep the free option to your standard service, too. If free shipping also covers Express Post, the cost of each free order jumps; our guide to Parcel Post vs Express Post covers how to price the upgrade instead.

Step 4: test your most expensive zone

The metro maths can fall apart for far-away and remote postcodes. Run the same check with your most expensive delivery zone.

Illustrative, ex GST. Say Parcel Post for the same parcel to a remote postcode costs $24.00.

C = $24.00 + $1.80 + $2.70 + 3% × $28.50 ($0.86) = $29.36

At the $95 threshold:
  Gross margin = $86.36 × 0.45 = $38.86
  Profit       = $38.86 − $29.36 = $9.50

Still positive, but well short of the $20 target. The threshold for that zone would be:

($29.36 + $20.00) ÷ 0.45 = $109.69 ex GST
$109.69 × 1.1 = $120.66 inc GST  →  round up to $125

You then have a choice: one threshold everywhere and accept thinner margin on remote orders, a higher threshold for those areas, or free shipping only to metro and nearby zones. All three are fine if you've chosen them on purpose.

Setting it up in Shopify

Shopify gives you two main ways to do this, according to its guide to setting up shipping rates:

• Add free shipping to an existing rate. Select Offer free shipping on a rate and enter the minimum order amount that qualifies. This option is available on carrier-calculated rates as well as flat rates.
• Use order-value tiers. Create a rate based on order amount, with a paid tier below your threshold and a $0 tier from the threshold up, leaving the top tier's maximum empty so large orders still get a rate.

Shopify is moving some stores from shipping profiles to shipping options by market, so the menu names on your store may differ slightly.

Before you announce it, place test orders just below and just above the threshold, one with a discount code applied, so you can see exactly which orders qualify. Do the same for your most remote postcode.

Calculated rates need Shopify's carrier-calculated shipping, which not every plan includes; our guide to live Australia Post rates without Shopify Advanced explains your options.

If you use calculated Australia Post rates, you need real postage figures for threshold-sized orders to plug into C. TrkShp lets Australian Shopify stores preview the domestic Australia Post services and prices checkout will return, so you can check postage for a bigger basket or a remote postcode before customers do. The setup docs cover how the preview works. It's an estimate of what checkout will charge, not your Australia Post invoice.

How to tell if it's working

Free shipping doesn't have to break even on every order; the new customers it brings in are the point. But check that the trade is worth it. Before you launch, note:

• average order value (ex GST)
• conversion rate
• the share of orders already above the threshold
• your total shipping margin per month (shipping charged minus true shipping cost; our guide to blended shipping margin shows how to work it out across every order)

Run the threshold for a few weeks, ideally outside sale periods, then compare. If AOV and conversion barely moved but shipping margin dropped, the threshold is mostly giving shipping away to the first group of orders. Raise it, or narrow which zones it covers. For how shipping margin fits into the profit on a whole order, see our guide to shipping profitability.

Key takeaways

• Break-even threshold (ex GST) = (true shipping cost at the threshold + target profit) ÷ gross margin %.
• Multiply by 1.1 for the GST-inclusive figure customers see, then round up.
• An order nudged over the threshold only pays if the add-on's margin covers the shipping charge you gave up plus extra postage.
• Run the maths for your most expensive zone, not just metro.
• Measure AOV, conversion and shipping margin before and after, then adjust.

Want to see what your checkout quotes for a threshold-sized order? Find out how TrkShp works.