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Charging for e-commerce returns: Pros and cons

illustration of a person opening a cardboard box with a water bottle inside next to the word ‘returns’ and a dollar sign. to the right is another illustration of a person scanning boxes on a conveyor belt with the word ‘charge?’ next to them

Let’s start out with a controversial question: Should brands start charging customers for returns?

If you’re a shopper, your response to this question is obvious. But if you’re a merchant, the idea certainly has its merits.

After all, returns are costing retailers more revenue with each passing year. Growing competition is forcing merchants to sweeten the deal with perks like generous return policies and free shipping. -and it all adds up.

In 2021, consumers returned a total of $761 billion in merchandise, according to the National Retail Federation – or 20% of total D2C e-commerce sales.

But returns cost merchants more than just lost revenue. Every item that gets returned requires processing, inspection, and possible reconditioning before it’s ready for resale. These operational costs cut into already narrow profit margins.

Charging for returns allows a brand to recoup some of these costs, while also investing in a better reverse logistics workflow to avoid missing out on valuable resale opportunities. 

But here’s the thing: Anything other than a free, frictionless return experience isn’t going to strike a chord with some shoppers. The likes of Amazon have conditioned consumers to see free, no-questions-asked returns as the norm in e-commerce and retail. This means that going against the grain involves a lot of risk – but also rewards if you play your cards right.

In this blog, we’re going to dive into the cases for and against retailers charging for returns. Spoiler: It’s not as clear-cut as you might think!

The case for charging for returns

Return processing costs are rising

The cost of processing and reconditioning returned merchandise causes merchants to take a hit, especially in return-heavy product categories like apparel and footwear. So long as order volumes remain high, brands have traditionally been able to offset these costs and continue making a profit – even with perks like free return shipping thrown into the mix.

But many retailers are finding out the hard way that this fast and loose approach to returns management is no longer paying dividends. 

For example, pure-play e-commerce fashion brands such as Missguided and Boohoo have seen a change in fortunes since their better-resourced multichannel competitors reopened their doors. Boohoo has experienced a whopping 94% drop in profits in the year to the end of February 2022, while Missguided has collapsed and left customers and suppliers in the lurch.

This is due to a toxic storm of conditions; high inflation that’s increasing operational costs, shoppers’ willingness to go back to physical stores, and rising living costs causing consumers to tighten their spending.

After two years of consumers boosting healthy bank balances and pursuing more casual, loose-fit clothing suited for spending more time at home, people are now venturing back into the office and socializing. This has increased demand for more fitted, formal apparel that’s trickier to buy online, resulting in more returns – and in the current climate, much higher processing costs.

According to a study by Pitney Bowes from February 2022, online returns are now costing retailers 21% of their average order value. Unsurprisingly, two-thirds of retailers are taking action to try and lower the cost of returns. 

But with fuel surcharges and labor costs continuing to rise, retailers will face a major challenge in trying to reduce their costs this way. By charging customers a nominal fee for each return, you can ensure you’re maintaining the return experience they expect.

Bracketing is becoming a widespread problem

Bracketing, also known as ‘try before you buy’, was already a widespread practice before the pandemic took hold. But with people unable or unwilling to try items in-person during stay-at-home orders, many shoppers turned to buying multiple versions of the same item to test and try at home. As a result, rates of bracketing in e-commerce have soared. According to a survey by Narvar, nearly 60% of online shoppers say they struggle to find the right items online without resorting to bracketing

While bracketing is entirely understandable from the customer’s perspective, it causes a lot of problems for retailers by artificially inflating e-commerce return rates. 

For example, if a customer buys a garment in three different sizes with the intention of only keeping one, that equals a return rate of 66%. Add in the returns that aren’t pre-meditated by the customer and suddenly, you’re looking at a whole load of merchandise that needs processing. 

Practices like bracketing are tricky for retailers to navigate. It’s overly simplistic to classify it as fraudulent when the customer has a genuine intention to purchase. Yet bracketing can also be harmful to your bottom line if it isn’t controlled. 

Trying to identify and block orders where bracketing is taking place is easier said than done, and may cause more harm than good. Charging for returns offers a more measured alternative that discourages bracketing behaviors – though you should still be looking for ways to refine the online shopping experience so that bracketing isn’t necessary. 

The case against charging for returns

Return culture is an inevitable part of e-commerce

For all the talk about whether brands should be liable for impulse purchases gone wrong, the fact remains that easy returns are tightly bound to the quality of the e-commerce experience (stats). 

Given how major e-commerce players like Amazon, Walmart and Target have made free returns the norm, fighting this is somewhat of an uphill battle. In such a competitive sector, you don’t want to give potential customers any more reasons not to shop with your brand.

It’s also important to note that your customer isn’t going to see their need to return an item as their fault. After all, it’s the brand, not the customer, that’s meant to be responsible for creating a stress-free shopping process. If the lack of comprehensive sizing charts or high-quality product imagery is causing customers to order the wrong size or color, they’re going to hold you to blame. Penalizing them for wanting to make a return, then, is just adding insult to injury.

In sum, trying to fight return culture head-on through fees is unlikely to endear shoppers to your business. It’s simply too easy for them to choose to shop elsewhere, given how many vendors are available online.

There are automated return solutions to help streamline the process

Processing returns might have gotten more expensive, but there are also far more tools available to assist brands with speedy, cost-effective return processing. 

Online returns management software such as Loop and Happy Returns make use of powerful automation to streamline return workflows and make the process as painless as possible for both merchants and shoppers. This includes one-click exchanges, aggregated return shipping to your facilities, and automatic enforcement of your chosen return policy. 

The use of systems like these massively reduces the amount of labor and customer service representatives you require to handle returns, resulting in significant cost savings for your business. By refining your return management strategy, you may well find that charging for returns is not necessary to get your operational costs under control.

The middle ground: Using return fees to shape customer behavior

There’s much more to charging for returns than levying a fee against every product that comes into your warehouse. Such an approach is punitive and hardly going to encourage customers to engage in profitable behaviors. 

Instead, brands should consider how charging for returns can be used to positively reinforce consumer habits that are beneficial to their business:

Free in-store returns

In-store returns, also known as Buy Online, Return In-Store (BORIS) have been rising in popularity as more shoppers feel comfortable returning to shop in physical stores. In-store offer a range of benefits – for both customers and brands.

For one, BORIS neatly resolves the problem of who should be responsible for return shipping on online orders. All the customer has to do is present the returned merchandise at the nearest store, and they can obtain a refund in that one session. The retailer has the benefit of either shipping returned merchandise in bulk to their distribution center, or choosing to resell it from that store location.

As well as reduced return processing costs, BORIS presents a valuable opportunity to kickstart a fresh shopping journey. By coming into your store to return items, customers can be inspired by fresh products and immersive displays. With a little help from store associates, a refund can become an exchange for a more suitable product, or even a multi-item sale thanks to some clever cross-selling.

With this in mind, it’s easy to understand why global fashion retailer Zara has taken the step of making in-store returns free while charging for online returns. This leaves open an avenue for customers to access free returns, while still covering the costs of more expensive returns processing. By incentivizing more shoppers to return in-store, this means cheaper returns – and a higher likelihood of retaining revenue. In fact,  75% of shoppers using click and collect services end up buying additional items!

Free shipping for exchanges

Free return shipping is a growing expectation amongst online shoppers, but very costly for merchants. Paying for both inbound and outbound shipping dramatically reduces profit margins, while also fuelling higher return rates.

Charging for return shipping is an alternative way of charging for e-commerce returns that may be more palatable for the customer, rather than charging them for the return itself. Moreover, when and how you choose to charge for return shipping is a valuable tool to incentivize positive return behaviors.

For example, it makes little sense to charge a customer for the privilege of exchanging an item when this has a better financial outcome for your business. Instead, it makes far more to charge customers for return shipping if they are pursuing a refund. This will make your customer think more carefully about their decision –  and whether an exchange might be appropriate instead.

You can learn more about the pros and cons of offering free return shipping by checking out our full guide on the topic.

Free returns for loyalty program members

Every retailer knows that not all customers are equal. Some customers will only shop with you once before disappearing to a competitor, while others boast high levels of lifetime value. So, why does it make sense to offer to same return policy to all of your customers?

Customers who demonstrated loyalty to your brand through successive purchases will expect to be rewarded for what they spend. Yet many loyalty programs fail in this regard because they don’t offer meaningful rewards that remove friction from the shopping journey. 

Instead of giving them the occasional $20 voucher, consider a more valuable alternative; the more your customer spends, the more flexible and generous the return policy.

Offering free returns and/or free return shipping to your most loyal customers makes sense because your brand is likely to recoup this investment from future purchases. The happier they are with the return experience, the more likely they are to purchase again – and on it goes.

table showing DSW’s return policy according to VIP member status

DSW offers a great example of how retailers can ensure that free returns are going to the right customers. Customers in their Gold and Elite loyalty program tiers have access to free returns both online and in-store. Brand can set the price for access to these perks according to average spend and average returns, ensuring that they don’t make a loss.

Charging for returns is not ideal outcome for either customers or retailers, but rising operational costs and return fraud may mean that brands have little choice if they want to reign in undesirable behavior and maintain positive return experiences. 

So, the question is perhaps isn’t whether or not retailers should charge for returns, but how they can charge for returns in ways that avoid losing their most valuable customers.

As retail and e-commerce sellers are taking bigger financial hits in the name of creating an easy return experience, this discussion marks a significant turning point in how the sector at large is navigating profitability and nurturing customer relationships. As more large and influential retailers like Zara make moves to end liberal, one-size-fits-all return policies, this opens up more space for creative solution to the ‘returns problem’. 

As we covered above, there are many alternatives to putting a blanket fee on returned merchandise. Free in-store returns, conditional free return shipping, and reserving free returns for customers with the best lifetime value are all ways that retailers can soften the impact of return fees on valuable shoppers while managing operational costs more effectively.

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