Pricing
Free delivery above HK$300: profitable for whom?
By Prof. Alessandro Buffoli, PhD
A larger basket can leave the retailer with less contribution. Here is the calculation I would check before celebrating it.
“You are only HK$40 away from free delivery.” The message can make adding another item feel like a sensible saving. From the retailer’s side, I want to know who pays for that saving.
Consider a hypothetical HK$260 basket with a 35% product contribution margin before delivery. It contributes HK$91. Assume the customer would complete the order and pay a HK$30 delivery charge, which exactly covers the retailer’s HK$30 delivery cost.
Now offer free delivery at HK$300. The customer adds HK$40 of goods at the same margin. Product contribution becomes HK$105, but the retailer absorbs the HK$30 delivery cost. HK$75 remains. The basket is HK$40 bigger and contribution is HK$16 lower.
This example holds other costs constant. It is not a prediction about a particular shop. Its purpose is to identify the assumption doing the commercial work: would the customer have bought the original basket and paid for delivery?
The abandoned order changes the answer
If the customer would otherwise have abandoned the purchase entirely, HK$75 may be an attractive result. If they would have paid for delivery, the retailer has subsidised a sale it could have retained on different terms.
That is why I dislike average order value as the main verdict on a delivery threshold. It describes the baskets that were completed. It does not tell me about abandoned baskets or the contribution given up on orders that would have happened anyway.
For a trial, I would compare contribution per eligible shopping session or customer, using a consistent assignment to the delivery offer. That allows both conversion and basket size to matter. Returns, extra picking and packaging also belong in the calculation where they change.
The product added at the threshold matters too. Another HK$40 of low-margin goods does not pay for the same delivery subsidy as HK$40 of high-margin goods. A threshold based only on sales value can hide that difference.
Keep the message honest and simple
The customer should be able to see the delivery price before investing effort in checkout. Show how the threshold is calculated, including whether discounts affect it. A last-minute surprise may produce abandonment for a reason the business could have avoided.
I would test a small number of clearly communicated offers and follow what happens after purchase. A customer who adds an unwanted item only to return it has made the bigger basket particularly misleading.
There may be a good threshold for the business. Finding it requires asking how much additional contribution the offer creates after delivery costs. “Customers spend more” is the beginning of that analysis, not the answer.
Prof. Alessandro Buffoli, PhD
Assistant Professor of Marketing at The Hang Seng University of Hong Kong.