Ever since the launch of Amazon Prime, free returns have been a fixture of the ecommerce customer experience. But with transportation costs rising and margin pressure growing, many brands are reconsidering this once-inviolable policy.
The StartOps Team
TLDR:
Introduction
Ever since the launch of Amazon Prime, free returns have been a fixture of the ecommerce customer experience.
But with transportation costs rising and margin pressure growing, many brands are reconsidering this once-inviolable policy.
During a roundtable discussion among members of the StartOps community, a dozen shippers discussed the various strategies they’ve implemented to offset returns costs.
We’ve summarized the learnings below, as “levers” that brands can pull to reduce costs — along with the pros, cons, and service providers for each.
Lever 1 — Increase revenue
If you think about returns holistically, one of the easiest ways to offset costs is to simply earn more money per sale. A growing number of tools give shippers a chance to upsell the customer at checkout, especially vis-a-vis shipping and returns policies. Here are some of the most common tactics:
1. Add a restocking fee
How it works
Charge customers a fee per item returned (usually in the $1-$10 range, depending on the item). Note: most brands waive these fees for exchanges/store credit.
Pros
Direct revenue to offset costs
May discourage "casual" returns
Surprisingly low customer pushback reported among StartOps members
Cons
Potential invisible impact on conversion
Harder to implement at low price points
Requires customer service training
2. Offer shipping insurance
How it works
Shipping insurance (or shipping protection) is an optional add-on at checkout guaranteeing a refund if the order is lost or damaged in transit. Returns insurance lets
Pros
If pre-selected as a default, opt-out rates can be as low as 5-10%
Like all insurance, most policies won’t be used
Cons
May be seen as gimmicky or exploitative (“ideal CX” might suggest that brands cover the cost of this themselves)
Shopify policies around checkout are changing
Who to check out
See our full list: The Best Shipping Insurance Providers
3. Offer a warranty program
How it works
Offer a premium add-on protecting against defects/issues for an extended period.
Pros
Creates a positive marketing signal that the brand stands behind its products
Can be high margin (StartOps members report a 10-15% attachment rate with <1% redemption on certain high-value products)
Warranty sign-up can double as a way of capturing data from non-D2C customers
Cons
Only works for certain types of products, e.g. electronics and durable goods
Creates an unknown, long-term liability for the brand
Adds some complexity to customer support
Who to check out
Note: StartOps members cautioned that the above 3 options are really a “pick 1” situation. If you start trying to charge customers a return fee AND upsell them on shipping protection or a warranty, they will (rightfully) start to feel nickel-and-dimed. The resulting impact may not just hit your conversion rates, but also your brand image.
4. Segment policies, assortment, and pricing by channel
How it works
With many brands now going omnichannel, there is new flexibility to adapt the CX of each channel. For example, you could apply a stricter return policy to a channel with a higher return rate.
While it’s frowned upon to charge different amounts for the same product across channels, one creative workaround is to create unique bundles that are only available on certain channels (so there is no direct basis for cost-comparison).
Some companies within StartOps have gone so far as to create their own lines of inventory for the consumer characteristics of certain channels.
Pros
Policy customization can help offset the weaknesses or emphasize the strengths of each unique channel
Cons
Not always possible, depending on the items and the channels
Adds complexity and management overhead (especially for CX teams)
Favoring one channel over another can impact brand image
5. Charge more
How it works
Re-adjust pricing to reflect the new economic realities. Consider padding out pricing on items with high shipping costs and return rates, and offsetting it on items with low shipping costs and return rates.
Pros
The most direct route to more revenue
Impact can be A/B tested to an extent
Cons
May impact conversion
Difficult to implement with items already in market at a certain price point
Who to check out
Intelligems for A/B testing
Lever 2 — Reduce transportation costs
Shipping can often be the most expensive part of a return. Many of the same tactics to reduce outbound shipping can be applied to returns; but these are more often overlooked. There are also some unique services out there focused on reducing returns shipping costs. Read on to find out more:
1. Re-negotiate with your existing carriers
How it works
The most obvious one, but it still needs to be said. If your company has grown in the last year, you may be able to leverage volume for better carrier rates or commit to certain volumes.
Pros
Genuine alternatives to the mainline carriers means more leverage than ever
Returns rates are often overlooked in negotiations, so there may be more juice left there than other parts of the rate card.
Cons
Requires meaningful volume, as well as deep knowledge of parcel rate negotiations to come out ahead
Time- and energy-consuming for teams
Who to check out
2. Use a GPO
How it works
Combine your volume with other shippers to drive deeper discounts via a Group Purchasing Organization.
Pros
Can achieve better rates than individual negotiation
No downside — it’s possible to use GPO rates only where lower than your own
Keep your reps and accounts — the best GPOs have transparent agreements with the carriers that allow shippers to keep their own (non-shared) account numbers and their own carrier reps.
Works with enterprise — While often thought of as an option for small shippers only, some enterprise-focused GPOs can still achieve 20-40% savings on shipping volumes of $5M - $50M/year.
Cons
Usually requires switching carriers in order to take advantage of incentives.
Many companies calling themselves “GPOs” are actually gray-market re-sellers. Avoid these by asking if you get to keep your own reps and non-shared account numbers.
Interested in exploring GPOs? StartOps has partnered with the leading transportation GPO to provide special rates for members. If your combined freight and parcel transportation costs are $5M - $50M/year, you can learn more here.
3. Diversify your carrier mix
How it works
In recent years, there has been an explosion of new regional carriers, as well as intra-city courier services, that can offer incredible rates and speeds in their service regions. A growing number of tools can also help shippers optimize their carrier mix, including proactive measures to ensure volume discount bands are hit.
Pros
When regionals have excess capacity, rates can be extremely favorable for shippers.
Added operational complexity can be offset by a growing number of new software tools.
In an increasingly unstable parcel environment, diversification is a good idea from a business continuity perspective, not just cost
Cons
Adds operational complexity, including balancing volume across carriers to maintain incentive tiers and minimums
May require additional technology to manage
Small or new carriers that aren’t profitable have been known to shut down suddenly
Who to check out
Our list of The Best Regional Carriers
Our list of The Best Parcel Couriers
4. Implement drop-off returns
How it works
Partner with a drop-off point provider to unlock customer drop-off as a returns option.
Pros
Customers seem to love having a drop-off option
Can unlock other benefits to you (like fraud prevention) and to the customer (faster refunds)
Cons
Returns consolidation can be hard in inventory, reducing restockability; in-transit damage to inventory can easily offset postage savings for delicate or large items.
Who to check out
Happy Returns for US
ReturnBear for Canada
5. Optimize your parcel returns footprint
How it works
Whether working with a 3PL or their own FCs, shippers should make sure that returns are traveling the shortest possible distance.
When choosing inventory locations, remember to include returns in your calculations. Sometimes it may make sense to segment out fast-moving or high-return-rate items into more facilities, while keeping a central facility for longer-tail items.
Pros
Reduces costs on both the outbound and reverse legs
Greener
Cons
Can create additional complexity, especially if done wrong
6. Experiment with peer-to-peer returns
How it works
A few new services now enable brands to issue a customer return, then enlist the customer to ship their item along to a new buyer.
Some brands have put their own spin on this: Because tried-on undergarments can’t be re-stocked, ThirdLove lets customers auto-list their item on Poshmark by just entering the order number.
Pros
This methodology removes 2 shipping legs from an item’s journey, making it quite green.
Reducing distance traveled also mitigates shipping costs.
Cons
Only applicable to certain kinds of inventory
Requires proper adaptations to customer expectations-setting and CX policies
Who to check out
7. Audit your carriers and 3PL
How it works
Auditing is never a sexy topic, but it can still produce meaningful savings. New, tech-enabled options can help shippers get away from the gain-share model. A couple of new entrants also focus on improving the accuracy of 3PL invoices — some from the 3PL side, and some from the brand side.
Pros
Works for outbound as much as returns
Table stakes for every company
Cons
Fragmented industry with a lot of expensive operators. Choose partners wisely.
Who to check out
Implentio - for 3PL auditing
Capabl - for 3PL benchmarking
Rails - for 3PLs to improve the accuracy of their own invoices
Loop - for tech-enabled, non-gainshare auditing
8. Ship less packaging and air
How it works
When you ship an item, you’re not just paying for the item — you’re also paying for the weight of the packaging, and the volume of the air around it.
Cutting back on these two things can yield
Let’s face it — as SKUs proliferate, keeping a perfectly accurate item master is hard. But it’s also the key to proper cartonization, a.k.a. “Putting stuff in the smallest possible box (or combination of boxes”.
A variety of tools can help your operation pick the right mix of box sizes
How it works
Switching to lighter materials (e.g. poly mailers vs kraft) can have a huge impact for lighter parcels.
For bigger parcels, making sure that default packaging sizes fall below the carrier’s DIM divisor (either by negotiating the divisor up, or by shrinking the packaging down) can make a huge difference. Remember to get your custom DIM divisor applied to inbound as well as outbound.
Can’t compromise on the appearance of the outbound packaging? If your product has a high return rate, check the ROI on including a poly mailer for returns. Sometimes the $0.02 mailer can save you dollars on the return shipping in original packaging.
Pros
Savings can be large (e.g. one StartOps member reported a 67 cents/package savings for a 3oz reduction)
More sustainable
Cons
May cause fights with your marketing team 😂
May not be a viable option for products where packaging is an essential part of the customer experience
USPS changes have mitigated some potential savings in the <1lb range
Who to check out
9. Implement circular returns
How it works
If you’re selling a product that requires regular drop-offs and pick-ups (like a subscription, or grocery service), it may make sense to invest in re-usable packaging — or partner with a company that can help.
Pros
Often can be done in a cost-neutral or cost-saving manner
More sustainable
Cons
Mostly works in dense metros and may not be a possibility for all customers or locations
Lever 3 — Recover more value from inventory
By now, you've offset returns costs with more revenue, and you've taken a bite out of return shipping costs. But your returned items are now sitting in your warehouse, and they may or may not even be restockable. What do you do now? Read on for our best ideas:
1. Ship defect-free product
How it works
The best way to preserve inventory is… to make great inventory. While (hopefully!) only a fraction of your returns are from quality issues, these can be among the most negatively impactful. One viral quality complaint can do years of damage to your brand.
The key to shipping defect-free product is to work with high-quality manufacturers, and to implement a robust quality control program.
Pros
High quality product = happy, safe, returning customers
Cons
Short-term/embodied costs of QC are often more visible on the bottom line than the long-term/external costs of quality issues
Who to check out
Factored Quality — for quality control
Sourcify — for factory sourcing
2. Implement inventory grading and refurbishment
How it works
Here’s the sad truth: most returned inventory that gets marked as “unsellable” or “deadstock” likely could be refurbished in a cost-effective way. A big reason that it doesn’t is that most 3PLs are not equipped to assess or repair items.
A small but growing number of companies provide refurbishment-as-a-service for different types of items. Otherwise, you may have to work with your 3PL to develop a program in-house. One recent changes is that tools like Two Boxes can help 3PLs consistently grade inventory and assess damages for further processing.
Though it’s work to set up, these programs can quickly pay for themselves. A $5 or $10 repair may be all it takes to re-list a $50 or $100 item as Grade A and resell as new.
(Pro tip: When your team is done refurbishing an item, include a QC card, quality sticker, or other identifier. When resell the item, this will help your CX team keep track of which items are restocked and apply more lenient policies to any unhappy customers.)
Systematic process to evaluate and restore returned items
Pros
Huge potential for value recovery
Keeps inventory out of landfills
Cons
Requires meaningful upfront setup and training
3rd party refurb partners are not always easy to find
Adds complexity to supply chain, item tracking and CX
Who to check out
(Re)vive for apparel
3. Resell inventory on secondary marketplaces
How it works
If you have an item that can’t be sold again as like-new, consider listing it on a marketplace like eBay, Poshmark, or Mercari.
Brands have historically shied away from this option to avoid cannibalization and brand degradation. But times have changed. Secondhand shopping has gone upmarket, and shoppers value sustainability. Brands who are leaning into these new channels may include their own special branding and tags to elevate the experience, and even think of it as a way to acquire new customers, driving them back to buy new the next time.
Pros
Much better revenue recovery than inventory disposal
Relatively easy to operationalize
Can help brands reach new markets and demographics
Cons
Less brand control / more dilution risk
Cannibalization risk / channel conflict
Some additional ops overhead
Who to look into
4. Use a liquidator
How it works
If you really can’t get rid of inventory any other way, consider using a liquidator before sending overstock to the landfill. Selling to the tertiary market can still drive meaningful cost recovery.
Pros
Some cost recovery
Fast and simple
Cons
Finding good providers can be difficult
Often impossible to trace inventory downstream
Who to check out
Lever 4 — Combat returns fraud and abuse
Unfortunately, returns fraud is a growth industry, costing US merchants more than $100 billion/year. (One particular flavor of returns fraud is so pernicious that we wrote a whole separate StartOps Guide about it)
On the bright side, a growing array of tools can help ecommerce teams fight fraud.
1. Prevent fraud before checkout
How it works
Fraud prevention systems usually take the form of a software plugin that can interpret user browsing and shopping patterns, and flag them before they can check out.
Pros
Catching problems upstream saves a lot of operational complexity and cost downstream
Cons
Type I errors — Some legitimate customers may get flagged
Type II errors — Never 100% effective, so some fraudsters will inevitably slip through
Who to to check out
Yofi maintains a shared blacklist of fraudulent accounts and can detect the “digital fingerprints” of fraudsters
2. Catch fraud after checkout
How it works
The basic premise behind all return fraud is “get my money back, keep the item” — whether via chargebacks, returning an empty box, FTID fraud, or even social engineering CX teams.
The prevalence of these tactics has increased with the widespread use of returns platforms like Loop, which allow “refund on entry scan”. The most straightforward step to mitigate this kind of fraud is to require your warehouse team to check the box before refunding; but this can lead to other operational and CX challenges if you’re not equipped for fast returns processing.
Pros
Avoidance of refunding items that haven’t been physically returned
Cons
You may still end up paying return postage and other costs fraudulent items
Requires strong returns processing and verification capabilities from your warehouse team
Who to check out
Two Boxes helps brands and 3PLs switch to refund upon receipt and work through returns backlogs quickly
3. Tighten returns policies
Last but not least, the nuclear option to reduce returns is… making things harder to return. Some companies have implemented policies like:
Shorter return windows
Added returns or restocking fees
Requiring a conversation with CX before returns are granted
Requiring customers to pay their own return postage
Adding more site items to final sale
Enforcing returns quality standards more strictly
While coming at a steep cost, tight return policies make returns fraud risker (and therefore less attractive).
Pros
Can deter practices like bracketing, wardrobing, and returns fraud
Cons
May impact conversion rates and deter good customers from shopping
Summary
When it comes to reducing returns costs, brands have a lot of options.
If your brand is struggling with growing returns costs, any of these levers can have a meaningful impact in helping reduce costs (or in the best case, even generate more revenue).
Of course, making changes is never simple. Each of the options above comes with a cost — in risk to the customer experience or conversion rates; in team time and focus; and sometimes, in fees paid to third parties. Tactics that work for some brands may not work for others.
Given this, the best brands take on an experimental mindset. While some things are hard to test (e.g. switching carriers), others aren’t. A strong partnership with your marketing and CX teams is critical when making these decisions.
And of course, it never hurts to talk to other shippers before committing to a new course. If you’re a senior (Director+ level) operator of a midsized or large ($10M = $1B revenue) brand, consider applying to StartOps. The best way to join is through an intro from an existing member; but direct applications are also considered here.
While costs are rising across the board, there is one piece of good news: the insanely high customer expectations around returns — held for more than a decade — are starting to fall. How to lean into these changing norms remains a decision that each brand will have to make for itself.
Special thanks to Andreas Andrea and Sean Agatep for helping us edit and review this article.
