90% of all major retailers now offer free returns
Including Amazon and Zalando, two of the biggest e-commerce destinations in Europe. On the other hand, only 10% of smaller businesses offer the same service for free.
Why is there such a big difference?
Smaller retailers fear the high cost of returns
Naturally, every retailer fears the high cost of returns. Retail profit margins are very low and returns can make a big difference in whether the business is profitable or not.
Offering free return shipping costs retailers an average of €5.67 more per return. Not to mention the fact that online retailers expect 20% more returns when return shipping is free for customers.
It is easy to understand that retailers try to save these costs by charging customers for the return shipment. Researchers even believe that large retailers accept these additional costs and offer free returns just in order to build up higher barriers to entry for potential competitors. This would suggest that smaller businesses are simply not able to bear the additional costs.
Free returns are an opportunity to drive business growth
If you look at the facts and start to consider the impact that a free return offer has on consumer behaviour, the outcome is actually quite different. You will see that it has immediate benefits that can far outweigh the cost of returns.
Why? The facts are as follow, according to a 2019 research by Klarna:
- Consumers are more likely to buy (higher Conversion Rate): three quarters (75%) of customers say free returns are an essential factor in their choice of retailer. Most of them will check the return policy before ordering.
- They buy more (higher Average Order Value): over three quarters (78%) of customers say free returns mean they would buy more.
- They are more likely to buy again (higher Customer Lifetime Value): 86% of customers say the option of free returns will make them loyal and more likely to keep coming back to a brand
Is a free returns strategy good for your business?
8returns has created a Google Spreadsheet Calculator for you to help you find out how much you could be saving with free returns. Click on 'file' and 'make a copy' or 'download' it to use it with your own values. Here are the most important metrics you need to consider:
1. The Costs of a Return
You have to start with the costs that each individual return causes you. Usually there are two types of costs: transport and handling costs. Obviously, the amount of the costs varies widely between retailers, but on average a returned article costs €11.24 (€5.67 for transport, €5.57 for processing).
2. Conversion Rate (CR)
To make sure that free returns really lead to customers being more likely to shop with you, it is important to find out what the current conversion rate is and how it will change after implementing free returns. In e-commerce, the average conversion rate is 1.8% We have seen that free returns can improve conversion rates by 15% and more.
3. Customer Acquisition Cost (CAC)
According to current studies, the average cost of acquiring new customers is €37.84. This number differs extremely in some cases. For some retailers, it can be much higher, for example, the D2C brand Casper has a CAC of $302.
With an improved conversion rate your customer acquisition costs can be massively reduced, which often more than compensates for the savings made by eliminating the free return label.
4. Average Order Value (AOV)
Free returns increase the likelihood that customers will return their order. However, it also leads to customers being more willing to order more from you. Make sure to track your AOV before and after implementing free returns to measure its effectiveness. The Average Order Value in e-commerce is estimated at €185.
5. Customer Lifetime Value (CLTV)
The top companies excel at retaining customers, even at the start of their business. The most important metric to look at is CLTV. Solid businesses are built on repeat orders. It’s cheaper to get your existing customers to buy again, and if that revenue reaches scale, your store really grows leaps and bounds. Offering a free and seamless return service can be the key to this. On the other hand, if your customers have to go through a bad return experience you risk losing them forever.
Now that you have a feel for how free returns affect consumer behavior, try to calculate it using your own key metrics. Find the template here.