How to (and How Not to) Increase Free-Shipping Thresholds: Evidence from Online Retail

Contingent free shipping (CFS) policies are widely used by e-commerce platforms to encourage larger cart values, yet platforms increasingly struggle with how to adjust these thresholds in response to rising fulfillment costs. This paper examines how increasing the CFS threshold affects consumer behaviour and derives conditions under which such an increase is optimal for the platform.

Using detailed transaction and clickstream data from a North American online grocery platform, we analyse a threshold increase from $80 to $100 by employing a difference-in-differences design. We find that raising the CFS threshold results in a 19.4% decline in consumer spending, driven primarily by a reduction in average cart value and, to a lesser extent, a decline in purchase frequency. Consumers also purchase fewer distinct products, shift to lower-priced items, and reduce their share of spending on popular products. We identify two mechanisms underlying these responses. First, the original threshold serves as a reference point, making the new threshold feel less attainable and weakening top-up behaviour. Second, consumers with high search effort face disproportionate difficulty reaching the higher threshold and are more likely to reduce or abandon their basket.

To assess the implications for optimal policy design, we develop a stylised analytical model that captures both cost-and demand-side factors associated with increasing the CFS threshold. We find that it is optimal to increase the CFS threshold only when the average cart value is sufficiently close to the original threshold. This result aligns closely with our empirical findings and remains robust to extensions that incorporate consumer heterogeneity.