Five years ago, online footwear brand Paul Evans made what at the time was a radical decision to start making customers pay for returns.
The men’s dress shoe maker had previously viewed free return shipping as a necessary cost to acquire customers and grow sales. But the expense of paying for customers’ fickle behaviour was adding up. By requiring customers to arrange their own shipping, the return rate dropped 20 percent, saving Paul Evans over $100,000 a year. The brand, which generates less than $10 million in annual sales, is now profitable from a customer’s first order.
The company “had to be profitable to stay in business,” said Evan Fript, founder and CEO of Paul Evans. “When you subsidise shipping and returns, you get more shipping and returns.”
Historically, free returns have been non-negotiable for direct-to-consumer brands in order to compete with Amazon and other large retailers. Now, many are reconsidering their approach.
With inflation squeezing discretionary spending, online return rates went up more than five percent in 2022, according to data from supply chain software firm Narvar. E-commerce growth has also slowed while the costs of freight and labour needed to assess and restock items in warehouses have gone up, making returns — always a logistical headache — an even more costly expense for companies.
Under pressure to improve their bottom lines — and cut expenses where they can — brands are opening up to the idea of charging customers to ship their purchases back. It’s not just small start-ups, either: In 2022, 41 percent of the top 200 brands and retailers in the US charged a fee for customers to make returns by mail, up from 33 percent the previous year, according to Narvar.
“Retailers have to respond to these pressures and challenges,” said Amit Sharma, founder and CEO of Narvar, which helps brands manage their customers’ post-purchase shopping experience. “They have to share the burden of the costs with consumers.”
But though abruptly cutting off free returns worked out for Paul Evans, that approach may not work for every brand. A recent study by marketing software platform SAP Emarsys found that 34 percent of 2,000 consumers surveyed stopped shopping with a brand after it started charging for returns.
“Taking away free returns as a blanket policy is not something I would advise merchants to do,” said Tasha Reasor, senior vice president of marketing at post-purchase software provider Loop Returns. “It is jarring and you ultimately want to make your shoppers happy.”
To retain customer loyalty while easing the financial burden, some start-ups are embracing measures to reduce returns costs beyond adding a fee. Brands have introduced features in the purchase journey to increase the likelihood of customers keeping what they bought or encourage shoppers to buy more items rather than ask for a straight refund.
Give a Little, Take a Little
Brands can cushion the blow of charging for returns by offering incentives for customers to exchange their goods instead.
Last August, activewear seller Vitality introduced a $6 handling fee that would be deducted from customers’ refunds after making a return. That same month, the company increased the credit it offered customers who returned an item but bought something new in the same transaction. Customers could now get a 5 percent credit on top of their refund to use for a new purchase, reducing the sting of the handling fee.
In the six months after implementing the new policy, the brand was able to keep 33 percent of the revenue it would have lost in returns, up from 16 percent prior to the change. Vitality’s customer retention rate has also remained at around 70 percent even with the new fee.
“I was expecting some major roadblocks when I implemented this. I was ready for pitchforks and fires,” said Steve Dilk, co-founder and chief operating officer of Vitality. “There was minimal, if any impact.”
Vitality considers the costs of the Shop Now credit as a lower marketing expense used to drive loyalty.
“It’s putting our best foot forward to stand behind our product,” he said. “Anything we can do to get people to stay in our network.”
Beyond the Fee
Brands that are in the position to keep free returns are still looking to reduce the rate orders are shipped back.
Jewellery maker Brilliant Earth, for example, has been offering free returns for the past 10 years and has no plans to change its policy. The brand, which sells engagement rings and other fine jewellery, is already profitable but saw sales growth slow to 16 percent in 2022, down from a 50 percent increase the previous year.
“I don’t want to do anything right now to impact conversion,” said Beth Gerstein, Brilliant Earth’s co-founder and CEO. “Free returns is additive for conversion.”
Brilliant Earth has introduced features aimed at keeping the return rate down. Last year, the company increased the number of photos for select items on its product pages to six versus the usual two or three, and added videos to better display dimensions and an item’s look and feel. Also, the majority of Brilliant Earth’s business is done through made-to-order sales. While customers are able to return those items, those purchases tend to be more considered, and therefore less likely to be sent back, Gerstein said.
“We’re homing in on the right item for them,” she said.
Other start-ups that still offer free returns are being transparent about the fact that the perk has a limited shelf life.
Loungewear brand Losano, which launched in October 2022, currently displays a nearly $10 return fee on its site. But the company is waiving the fee to help grow its customer base in its first year in business. Displaying the fee is a warning that in the next year the brand will most likely start charging for returns, said Malinda Behrens, chief operating officer of Losano.
“We want [customers] to see … what it will cost,” Behrens said. “I don’t want customers to get the impression that it will always be free.”