Should you offer free returns?

Should your eCommerce brand offer free returns?

Objective:

This resource aims to help eCommerce brands make an informed decision on whether to offer free returns to their customers.


Table of Contents


What does offering free returns mean?

Offering Free Returns allows customers to return purchased items for a refund or credit, with your business covering the return shipping costs.

Why should you consider offering free returns?

Offering free returns has the potential to increase your sales more than the cost of paying for returns.

This can be achieved by improving two primary metrics:

1. Sites Conversion Rate

2. Customer Life Time Value

But does offering free returns really improve these metrics?

For the vast majority of DTC eCommerce brands, the short answer is YES; here is why:

Conversion Rate

79% of customers say they want free returns, and 67% of customers check the returns page before finalising their purchases

Now, take these with a pinch of salt, as they are averages for all online shoppers, and your customers may have different expectations.

But even with that in mind and using this as a baseline, you can see how offering free returns could have a massive impact on your site conversions.

Take an industry like fashion for example, where a large amount of abandoned carts are due to sizing concerns. By offering free returns a customers worry about if an item will fit can be alleviated, with some studies finding that, on average a business will decrease abandoned cart rates by 12% offering free returns.

It all boils down to eliminating risk in the customer's buying decision, which increases your conversion rate.

Customer Life Time Value

92% of customers will repurchase something from a brand if the returns are easy.

Assuming that you have an excellent product and you are NOT misleading people on your product pages, the vast majority of customers return products for two main reasons:

1. They got the wrong variant, like size

2. Or there was an issue with the product itself (being damaged during shipping, etc.)

Very few people buy products and get exactly what they want, only to change their minds later. By making returns easy for these customers, you can see how most will shop again and vice versa. If returns are a pain, they will likely never buy from you again.

A great quote from Winston Churchill that shows this is:

Never let a good crisis go to waste

Your brand's best advocates will often come after there was an issue and it was resolved quickly and easily.

But on the other hand, your most vocal haters will be customers who had a bad experience, followed by a bad customer service experience that rubbed salt in the wound.

 

 

What are the negatives of having a free returns policy?

As discussed above, the main reason to have a free returns policy is that it should be able to bring in more money than it costs.

So, what are the associated costs of having free returns?

1. Paying for return shipping  

2. Increased amount of Product Returns

3. Increased chance of fraud

Cost of Return Shipping

Let's start with the easy one: paying for customers' return shipping.

For example, suppose you currently get 100 monthly returns, each costing $10 in shipping to return. In that case, you have instantly added $1,000 of expenses to your business.

But that's assuming all things stay the same, which they will not.

Increased Amount of Returns

That brings us to the next issue, which is that if you offer to pay for people's return shipping, more people will return products.

This not only means you have more returns which you have to pay for shipping and handling, but it also means lost revenue from products that people may not have bothered to return.

For example, if you offer free returns on a $50 product and this leads to an extra 10 returns per month, assuming a $10 return shipping cost, that would only cost you $100 however, it would also cost you $500 in lost revenue.

Now, this assumes that they won't buy anything else from you, when the vast majority of customers who return a product will actually repurchase it again. However, I still want to highlight this as many brands don't factor lost revenue in enough when deciding if they should offer free returns to their customers.

Increased Chance of Fraud

Another significant cost is the increased chance of fraud, as offering free returns removes the financial barrier of having to pay for return shipping for scammers.

But what is return fraud?

It is when someone exploits your returns policy to steal from your store or gain some unintended benefit.

There are hundreds of different scams people use to screw businesses over, but here are some of the more popular ones:

> Buying brand-name products and swapping them with fakes

> Buying clothing, wearing them, then returning them after an event called "Wardrobing."

> Buying electrical goods and removing components, then returning the item as a faulty product

> Buying boxed products, removing the item from the box, and returning the box

> Buy a consumable product like makeup using half of it and then try returning the other half.

And unfortunately, there are many, many more.

So, how do you protect your business from return fraud?

Although not perfect, here are a few ways to combat return fraud:

> Have a clear return policy detailing time frames and item return conditions

> Get an Order & Customer ID before issuing a return (don't include return postage labels in with the order)

> Take photos of each order before shipping it out

> Delay giving a refund until you have physically inspected the items

> Use product tags or breakaway films to identify open or used items

> Eliminate cash refunds in exchange for store credit

> Using fraud detection software

> Analysing customer return and order history to catch repeat offenders

Implementing all or some of these strategies can significantly reduce the risk of return fraud. Even if it's not 100%, remember it's a numbers game. Are you making more money from having free returns than it is costing you? If you are making more money than it costs, having some bad actors abuse your policy might be the cost of doing business.

eCommerce Free Returns Profit Calculator

Ok, now you should have a pretty good idea of the pros and cons of offering free returns. As we said a few times, it's just a numbers game.

Does offering free returns make your business more money than it costs?

So, with that in mind, we have created a free calculator that you can use to help you make a decision:

The objective of this calculator is not to be perfect but to give you a baseline to work from and a way to test different scenarios.

Keep in mind, the calculator is missing two variables: The impact on your business LTV and the cost of fraud. This is because it is almost impossible to make a robust and educated estimate before you have rolled out the policy.

Remember, our job as leaders is to make the best decisions we can with incomplete information, and this is a tool in your tool belt to help you make the best decision possible.

How to use this Calculator

Step 1

The first step is to gather the following and add it to the corresponding area in the calculator

  1. How many returns do you currently get per month
  2. An estimate of your average return shipping
  3. The wages and other costs associated with processing returns
  4. Average product value
  5. Average Order Value
  6. Average profit margin:

    Example: $50 COGS / $100 retail price = 50% Profit Margin

    (Use GST/VATs exclusive pricing)

  7. Average amount of abandoned carts per month

Step 2

Secondly, adjust the two following variables:

  1. How much do you expect returns to increase by
  2. How many of your current abandoned carts are due to you not having free returns

You can run surveys to gather feedback from your customers to try to gauge the impact that offering free returns might have.

Though it is okay for these to be your educated guesses, remember, the objective of this calculator is not to be perfect but to help you test the impact of different scenarios and make a directionally correct decision.

Next Steps

At this point, hopefully, you should now have a much better idea if offering free returns is right for your business and will probably fall into one of the below buckets:

You decided that free returns are not suitable for your business:

If that's the case, I'm glad I could help you even a little to clarify that decision for you.

If you think that offering free returns has potential for your business

The next step for you is to run a free returns experiment. Even if you are certain that you want to offer free returns, framing it as an experiment is a great way to present it to your team and customers. It gives you leeway to change as you gather more data and measure the impact on your business, both positive and negative, as you roll it out.

But be careful how you present it to your customers until you are certain you are going to do it because when you start giving someone something, they are going to start to expect it.

Remember that while you want to keep your free returns policy simple, you can still be creative and test new ideas to see what works for your business.

Here are some free returns policy examples that you could test for your business:

> Only offering free returns on exchanges or for store credit

> Don't offer free returns on sales items

> Make only certain products available to return for free or for products over a specific value

> Offer free returns only for VIP customers or customers with more than X number of orders.

Conclusion

Whether you decide to do free returns or not, I really hope this resource helped. It's a big decision and should not be made lightly.

As with everything though, context is king, so if you want some personalized advice, we would be happy to help. Just click the button below to get a free consultation with one of our awesome team members.

We look forward to helping you take your eCommerce brand to the next level.

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by Zachary Kohler – May 02, 2024