Why you should offer free returns

Free returns aren’t profitable in the short-term, but they are the cost of doing business if you want customers to buy from you again.

Jun 28, 2022

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📝 Intro

Most ecommerce sellers offer free product returns by now.

Why? In large part, this is “The Amazon Effect”: customers benchmark you against Amazon’s hassle-free service.

And easy, problem-free returns and product exchanges are the number one area in which non-Amazon ecommerce sellers are found lacking.

Free product returns are the obvious answer to that problem. They have become the cost of doing business.

But what actually happens when you offer them, compared to paid returns?

P.S.: Speaking of Amazon. An effective strategy for new online sellers to grow fast is to sell products on Amazon, then gradually ‘peel away’ customers to their own website.

Customer acquisition costs are lower on Amazon, especially for new brands, and 1 out of 71 sales on Amazon generate a new sale on your own channel.

Previous insight: Ask “How many?” not “Want one”? (100+ more insights here)

Free returns are costly in the short-term but necessary for the long-term

Channels: Ecommerce | Shipping | Returns
For: B2C
Research date: March 2021

📈 Recommendation

Let customers return your products for free if they want (no questions asked, shipping included). Allow a reasonable timeframe, accounting for possible shipping delays (e.g. 30 days).

In the long-term, customers who return a product will be more likely to buy from you again. They are much less likely to do so if they have to pay.

In the short term, don’t expect an increase in immediate profits. They may even slightly fall due to the higher costs of more returns (e.g. shipping, processing).

🎓 Findings

Free returns increase spending per order and the variety of products bought. On the other hand, they also increase product returns (not by as much, but almost) which increases shipping and processing costs.
This study analyzed a Swedish online fashion retailer that started offering free returns in Denmark but not in other markets (e.g. Sweden, Norway, France). They found that free returns increased:
- 9.15% (54.95 SEK) spending per order
- 9.71% (29.90 SEK) gross margin per order
- 8.74% product variety per order
- 7.87% (0.195) item returns per order
However, previous research into the long-term effects of free vs paid returns found that:
- Customers that had to pay for a return spent 75% to 100% less than before in the next two years
- Customers that experienced returning an item for free spent 158% to 457% more after that

🧠 Why it works

We perceive a generous return policy - such as free no questions asked returns - as a signal of quality that makes us more likely to buy. Extraordinary warranties work in a similar way.
If we know we can easily return a product at no cost we’re more likely to buy it even if we’re not sure we’ll keep it, or that it fits. Some may even be inclined to fraud. All of this costs the company money.
We prefer a company that offers a better experience and lower cost to us, than a competitor that doesn’t - especially when we’ve come to expect free returns as the norm of buying online.

✋ Limitations

This study focused on one specific fashion retailer. Returns could be higher or lower for other product types.
Previous studies mostly support this evidence, but some found that free returns are unprofitable even in the long term.

🏢 Companies using this

Amazon, Asos, Zara, are all examples of retailers that offer free, no questions asked returns.
Retail product returns in the U.S. in 2019 reached $309 billion, 8% of total sales (data from the National Retail Federation).

⚡ Steps to implement

Give the option to customers to return your product within a reasonable timeframe (e.g. 30 days, 45 days).
Partner with logistics providers that offer convenient dropoff points. You can find available providers in different countries on Google Market Finder (a platform I helped develop when I was at Google).
If possible, include a return label and allow returns in the same packaging the product was delivered in.
If you are a retailer with physical locations you can make it even more convenient by offering in-store returns.
Communicate clearly in your marketing communications and product pages that returns are free.

🔍 Study type

Market observations (analysis of 1,035,374 orders of an anonymous Swedish, europe-focused, fashion retailer between January 1, 2017 and December 31, 2018)

📖 Research

The impact of free returns on online purchase behavior: Evidence from an intervention at an online retailer. Journal of Operations Management (March 2021).

🏫 Researchers

Pankaj C. Patel. Villanova School of Business, Villanova University
Christoph Baldauf. Stockholm Business School, Stockholm University
Stefan Karlsson. Lund University
Pejvak Oghazi. Södertörn University

Remember: This is a scientific discovery. In the future it will probably be better understood and could even be proven wrong (that’s how science works). It may also not be generalizable to your situation. If it’s a risky change, always test it on a small scale before rolling it out widely.

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