Shipping charges are the main driver of abandoned carts, and free shipping has been a proven sales closer since long before the Internet came around. Moreover, from big-box stores to niche merchants, myriad retailers made free delivery a centerpiece of their holiday marketing efforts last year.
Shipping costs aren't the only factor consumers consider when making purchase decisions, though. Retailers' returns policies are now facing greater scrutiny.
Moreover, before shoppers decide to buy items online, they are looking into whether a retailer makes the customer pay return shipping fees and/or allows in-store returns.
Those factors make good business sense from the customers' perspective. Online purchases are inherently riskier than those made in stores, simply because testing, trying on, or even touching something through a computer screen is impossible. Shoppers can't be sure they'll get exactly what they want until an order arrives, which typically occurs several days after they've paid for it.
The Online Returns Process: Time-Consuming and Exasperating
If consumers aren't satisfied with a purchase, the online returns process is much more complicated and time-consuming than just taking an item back to a store.
Even worse, the vast majority of retailers—about 90% as of January 2014, according to an Internet Retailer study of Top 500 retailers—make customers pay for return shipping, either upfront or on the back end, via refund deductions, restocking fees, or charges for "prepaid" shipping labels.
Online shoppers find these returns processes unsatisfying, to say the least. Their discontent with the purchase is heightened by the fact that they'll have to shell out more money just to send it back—a demand they've probably never encountered during their brick-and-mortar transactions. Worse, if customers also paid to have the original order delivered, paying for shipping on the back end will only compound their dissatisfaction with the shopping experience.
Given the various potential hits to their wallets, it's easy to see why two-thirds of online shoppers check a retailer's returns policy before making a purchase.
The returns process is the primary reason why people who shop only in stores refuse to shop online, according to recent Endicia survey. Of the vast majority of consumers who do shop online, 49% say shipping costs are the most "exasperating" part of the returns process. When asked what they want in retailers' returns policies, 51% select "free return shipping."
Some 88% of respondents rated free return shipping as an "important" or "very important" factor in their purchase decisions, according to a FreeShipping.com survey.
Unfortunately for consumers, retailers have legitimate concerns about generous returns policies. For one thing, return fraud remains a growing threat. The National Retail Federation estimated that it would cost retailers $10.9 billion in 2014, including $3.8 billion during the holiday season alone.
A customer-friendly returns policy also increases the likelihood of other hits to the bottom line. On top of absorbing return shipping costs, retailers have to deal with refund payouts and, depending on the category and condition of the returned product, the loss of sellable merchandise. If a retailer is already operating on a razor-thin margin, a surge of returns in a single month or quarter could be devastating, at least in the short term.
A Return Policy That Benefits Both the Company and the Consumer
Nevertheless, retailers are in the business of pleasing their audience, and creating returns policies that appeal to online shoppers will benefit both parties. The advantages for customers are obvious—less risk to their budgets; greater confidence that their purchase decisions will ultimately pay off; and better shopping experiences.
Greater customer satisfaction also rewards retailers. Evidence shows that online shoppers respond positively to easy, convenient returns policies. Amazon, for instance, last month began issuing cash refunds on many of its customers' returns within two days—even before the returns had arrived. It did so partly because, unlike Wal-Mart, Target, and other rivals, Amazon's online-only nature prevents it from offering quick, in-store refunds, but also because Amazon knows that happy customers are more likely to come back. Indeed, more than a few holiday shoppers used those refunds to buy other gifts at Amazon.com.
That sort of response to a pleasant returns process isn't surprising. The Endicia survey found that 89% will shop again at retail sites where they've had a positive return experience. Beyond that, according to a comScore study, 82% of consumers will complete an online purchase if the retailer offers free return shipping or in-store returns.
More importantly, free return shipping can drive greater purchase activity. Washington & Lee professor Amanda Bower conducted a 49-month study of the issue with two top online retailers. Over the course of the study period, customers who received free return shipping increased their purchases at those retailers by 58-357%. Customers who had to pay to ship items back, on the other hand, reduced their purchases by 74-100%.
The study also found that free return shipping doesn't necessarily result in greater return fraud. As Bower noted, "[F]or the two years after they returned a product, not one of the customers in our study returned another product. It's fairly easy to quickly find people who are abusing the system. But punishing everybody because of a couple of people is not good for the retailer in the long run."
Retailers, however, continue to employ what Bower calls an "equity-based" policy: They pay for return shipping when orders and/or items are flawed but require customers to do so in virtually all other cases. This may seem fair, but it overlooks the fact that customers have been taught for decades to believe that they're always right. Ignoring this long-held tenet isn't good business, regardless of the reasons behind it. In fact, a Harris Interactive study showed that 81% of consumers are less likely to make additional purchases at retail sites that charge shoppers for return shipping.
What Savvy Online Retailers Know About Returns
This customer-averse approach creates a great opportunity, though. Savvy retailers can craft free return shipping offers that treat shoppers as valued customers and give them the confidence to purchase whatever they want, knowing that they can send back items that don't meet their expectations—without paying a price for doing so. In addition to generating more repeat business, these retailers will also enhance their brands, simply by demonstrating that they stand behind the products they sell.
There are also alternative methods for offering free return shipping to customers. Programs such as Return Saver, for instance, offer shoppers an unlimited number of free returns, via FedEx Ground, for just $49 a year, regardless of where the purchase was made online. Retailers that promote the program can benefit from the convenience and savings of a free return shipping offer while avoiding any hits to their finances.
Return shipping charges are clearly a point of contention in e-commerce these days. Retailers that are concerned with the short-term effects of covering those charges for their customers risk greater revenue loss down the road as shoppers find more consumer-friendly outlets for the products they want. By embracing online returns policies that include free return shipping, retailers can build their audience and their bottom lines.
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