The Invisible Cost
When you offer free shipping, the cost doesn't disappear. It transfers from the customer's cart to your P&L. But here's the problem: Google Ads doesn't see this transfer.
Your PMax campaign reports a £75 conversion. What it doesn't report is the £6.50 shipping cost that reduced your actual revenue to £68.50. That's 8.7% of reported revenue that never existed as margin.
Free shipping isn't free. It's a margin transfer that Google Ads can't see, which means Smart Bidding optimises for phantom profit.
How PMax Optimises Around Free Shipping
Performance Max sees conversion value. When free shipping increases conversion rates, PMax celebrates: more conversions, more revenue, better ROAS. It allocates more budget to what appears to be working.
What PMax Sees
Conversion rate up 25%. Revenue per visitor up. Campaign performing well. Increase budget allocation.
What Actually Happened
Margin per order down 15%. Contribution per visitor flat or declining. The campaign is scaling into lower profitability.
The algorithm isn't wrong. It's optimising perfectly for the signal you're giving it. The problem is the signal doesn't reflect reality.
The Margin Maths
Let's trace a typical order through both scenarios:
Scenario A: Paid Shipping (£4.99)
Product Revenue
£50.00
Shipping Revenue
£4.99
Shipping Cost
-£5.50
Net Shipping
-£0.51
Net Revenue for ROAS
£49.49
Scenario B: Free Shipping
Product Revenue
£50.00
Shipping Revenue
£0.00
Shipping Cost
-£5.50
Net Shipping
-£5.50
Actual Net Revenue
£44.50
Google Ads reports both as £50 revenue. But one order contributes £49.49 to margin, the other £44.50. That's 10% less contribution per order that's invisible to your campaign metrics.
The AOV Trap
"But free shipping increases AOV!" True, sometimes. Customers add items to reach the free shipping threshold. But this often creates its own margin problems:
Low-Margin Add-Ons
Items added to hit free shipping thresholds are often low-margin accessories or sale items. They increase AOV but not contribution.
Return Rate Increase
Customers who order "extra" items to qualify for free shipping return more. They bought speculatively, not intentionally.
Heavier Parcels
Higher AOV often means heavier parcels with higher shipping costs. The shipping cost increases with the AOV, sometimes outpacing the margin gain.
The Threshold Problem
Free shipping thresholds create a binary: orders below threshold (paid shipping, reasonable margin) and orders at threshold (free shipping, compressed margin).
PMax will optimise toward customers most likely to convert. Often these are customers who hit the free shipping threshold exactly-they were incentivised to complete the purchase. These are your lowest-margin orders.
Setting a £50 threshold means customers at £45 add a £5-10 item to qualify. Your highest-converting segment becomes your lowest-margin segment, and PMax scales into it.
Strategies That Work
1. Import Profit-Adjusted Conversion Values
Feed PMax conversion values that subtract shipping costs. A £50 order with £5.50 shipping cost becomes a £44.50 conversion value. Smart Bidding learns real contribution.
2. Segment by Shipping Tier
Use custom labels to segment products by typical shipping cost (lightweight vs heavyweight). Apply different POAS targets to account for shipping cost variance.
3. Test Threshold Profitability
Run contribution analysis at different AOV bands. You may find that £40-50 orders (just below threshold) are more profitable than £50-60 orders (at threshold).
4. Consider Minimum-Order Free Shipping
Set thresholds high enough that shipping cost is covered by margin. If shipping costs £5.50 and margin is 35%, threshold should be at least £16 above average order value to break even.
Integrating Shipping into Feed Strategy
Your product feed can carry shipping cost data that informs bidding decisions:
Custom Label Strategy
This allows you to create asset groups or campaigns that treat high-shipping-cost products differently, protecting margin where it's most at risk.
Free shipping is a marketing decision that affects margin. Treat it as a cost centre in your Google Ads strategy, not an invisible conversion booster.
Frequently Asked Questions
How does free shipping affect Google Ads profitability?
Free shipping reduces gross margin on every order but is invisible to Google Ads. The platform optimises for revenue, not profit. A £50 order with £5 free shipping costs you 10% of revenue before any other costs. At scale, this hidden margin compression can turn profitable campaigns into loss-makers.
Should I include shipping costs in conversion value for Performance Max?
If you offer free shipping, your conversion value should reflect net revenue after shipping costs. Feeding profit-adjusted values (revenue minus shipping cost minus COGS) to PMax trains Smart Bidding to optimise for actual contribution margin rather than inflated revenue figures.
Is free shipping worth it for Performance Max campaigns?
Free shipping can increase conversion rates by 20-30%, but only delivers profit if the margin increase from additional conversions exceeds the shipping cost absorbed. Calculate your break-even: if free shipping costs £5/order and increases conversion rate by 25%, you need at least £20 additional profit per converted visitor to break even.
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