The direct answer
A free-shipping threshold should be high enough that the additional contribution from a larger basket pays for the seller-funded delivery while preserving your required profit. Do not set it by copying a competitor or adding the shipping charge directly to current AOV. Revenue lift is not profit lift because extra items bring product cost, payment fees, picking and sometimes a heavier parcel.
Required net revenue = (fixed order costs + shipping subsidy + target profit) ÷ (1 − variable fee rate − product cost rate)The equation is a planning shortcut when product cost and variable fees can be represented as percentages of revenue. A SKU-level basket model is stronger when mix, weight or fulfillment cost changes materially around the threshold.
Build the order cost stack first
Start with the contribution generated by the current basket. Include product cost, payment and platform fees, pick-and-pack, packaging, expected returns and acquisition cost. Then add the shipping subsidy created by the offer.
- Use net merchandise revenue. Exclude pass-through tax and account for typical discounts.
- Use actual carrier invoices. The displayed customer rate is not necessarily your cost.
- Model fixed and variable payment fees. A larger order changes percentage fees but not necessarily the fixed component.
- Include fulfillment step-ups. An extra item may add pick fees, packaging or dimensional weight.
- Include expected return loss. Threshold shoppers can have a different basket and return pattern.
- Choose a target contribution. “Still positive” is weaker than the profit the order must retain.
Decide whether the offer is “free standard shipping,” a fixed shipping credit or free shipping only within defined zones. A blanket promise can expose the business to remote-area and oversized-order economics that the threshold never modeled.
Illustrative $45 AOV order
Assume a $45 order, product cost equal to 35% of revenue, a 3% payment rate plus $0.30, $2.50 fulfillment, $1 packaging and $8 acquisition cost. Before seller-funded shipping, modeled contribution is $16.10.
| Seller-paid shipping | Modeled contribution | Contribution margin |
|---|---|---|
| $0 | $16.10 | 35.8% |
| $4 | $12.10 | 26.9% |
| $7 | $9.10 | 20.2% |
$45 × 35% = $15.75$45 × 3% + $0.30 = $1.65$2.50 + $1.00 + $8.00 = $11.50$45 − $15.75 − $1.65 − $11.50 = $16.10A $7 subsidy removes 43.5% of the original $16.10 contribution. The order remains positive in this simplified example, but “positive” may not be enough to cover overhead, tax and reinvestment. The relevant target is the contribution the business needs after shipping.
Solve the minimum threshold
Using the same cost structure, the contribution equation is:
Contribution = revenue × (1 − 35% − 3%) − ($0.30 + $2.50 + $1 + $8 + shipping)With a $7 shipping subsidy and a target contribution of $12, fixed costs plus target contribution equal $30.80. Divide by 62%, the share of revenue remaining after product cost and variable payment fee:
$30.80 ÷ 62% = $49.68($0.30 + $2.50 + $1 + $8 + $7 + $16.10) ÷ 62% = $56.29That difference shows why the decision rule matters. A threshold near $50 would fund shipping while retaining $12 in this model. A threshold near $56.29 would preserve the original $16.10 contribution, assuming basket economics do not change. Round to a customer-facing amount only after checking the SKU combinations that can reach it.
Also model the orders already above the threshold. They receive the subsidy without producing any threshold-induced lift. A profitable test needs enough incremental basket contribution from influenced orders to cover the shipping given away to naturally high-AOV orders.
Basket mix, split shipments and margin traps
A threshold is not a single-order equation when product mix changes. Customers may add the cheapest item, choose a low-margin bundle or create a parcel that moves into a higher shipping zone or dimensional-weight tier.
Low-margin add-on
An extra $12 of revenue may contribute only a few dollars after product cost and fees. Measure contribution from the add-on, not its price.
Split shipment
Inventory in different locations can create two parcels. The threshold must not assume one shipment when operations often produce two.
Heavy or oversized item
A basket that crosses a carrier tier can cost more to ship than the incremental product contribution.
Discount stacking
A percentage promotion plus free shipping can remove contribution twice. Test the combined offer in the Discount Profitability Calculator.
Create a threshold basket table using recent orders. For each candidate threshold, count naturally qualifying orders, orders close enough to influence, expected add-on contribution, shipping subsidy and operational exceptions. This reveals whether the offer is a conversion tool, an AOV tool or simply a blanket margin transfer.
Design a controlled test around contribution
Do not judge the change by AOV alone. Predefine a control and measure at least conversion rate, contribution per visitor, contribution per order, shipping cost per order, items per order, cancellation rate, return loss and percentage of orders qualifying.
- Choose one candidate threshold from actual basket economics.
- Exclude or separately model regions and products with materially different shipping cost.
- Keep the message, promotion calendar and acquisition mix stable where possible.
- Run long enough to include normal weekday and weekend behavior plus the return window needed for a provisional estimate.
- Decide using contribution per visitor or acquired customer, not revenue alone.
A threshold can reduce checkout friction even without large AOV lift, but the conversion gain must pay for subsidies on all qualifying orders. Conversely, a higher AOV is not a win when the basket’s gross margin and shipping cost deteriorate.
Connect the threshold to monthly economics
After testing at order level, carry the new AOV, shipping subsidy and order volume into the Shopify Profit Calculator. Revisit the Product Margin Calculator for representative baskets and the Discount Profitability Calculator for stacked offers.
The optional Profit Action Report can preserve one product-margin scenario, rank the binding assumptions and produce a five-step test plan. The free calculation should be reviewed before purchase.
Frequently asked questions
Should the threshold be current AOV plus shipping cost?
No. Additional revenue carries product cost and fees, and some orders already qualify without changing behavior. Solve from contribution and validate against basket mix.
Should free shipping apply to every destination?
Only when the economics support it. Many operators define standard-service zones, product exclusions or a shipping credit, subject to clear customer communication and applicable rules.
What metric should determine success?
Contribution per visitor or acquired customer is usually more complete than AOV or conversion alone because it includes both demand and order economics.
How should returns be included?
Use expected net return loss by basket or cohort where possible. A threshold that increases low-quality or high-return orders can look attractive before the return window closes.
All figures above are illustrative. Replace them with current carrier invoices, payment fees, product margin, fulfillment costs and observed basket behavior. Recheck after rate, zone, packaging or promotion changes.