Creating a Fair Return Policy Without Sacrificing Profits: A Guide for DTC Brands
Business is a balancing act. For DTC eCommerce brands, few things are harder than trying to counterbalance a return policy that appeals to customers with a healthy bottom line.
On the one hand, a liberal return policy can act as a USP and significantly increase the number of transactions made on your store. Returns are expensive, however. For some brands, they cut a huge chunk out of profit margins. There is a point of equilibrium for every DTC brand; here’s how you can find it.
A Generous Return Policy Can Boost Your Bottom Line
The current climate of online returns can leave DTC brands feeling like they have no choice but to offer free and easy online returns. Research by eCommerce payment solution Klarna has found that lenient return policies can result in a rise in future sales.
More than three-quarters (78%) of shoppers would buy more from a store over time as a result of free returns. Free returns would also make the overwhelming majority (86%) more loyal to a brand. At the same time, 84% said that a poor returns experience would stop them from returning to a brand.
It’s no surprise, then, that more and more online stores are offering free returns as standard, as Shippo’s 2018 State of E-Commerce Shipping Report points out.
Free returns can be a particularly effective tactic for stores that sell high-ticket items where the cost of shipping is negligible compared to the price of the product, writes Ecomdash’s Nick Maglosky. Even if return rates are incredibly high, these kinds of stores can still make a substantial profit. Maglosky uses Zappos, which has a 50% return rate on expensive items, as an example. The company can afford to lose $20 in delivery costs on every other sale when purchase prices are so high. Further, those delivery costs are ultimately investments in the lifetime values of customers who don’t mind spending lots of money.
Too Much Generosity Can Limit Your Business, Though
Think carefully before committing to an overly generous return policy, however. While some companies can withstand the financial hit of free returns, the vast majority can’t. Even worse is to start with a free-returns policy, then have to walk that back. A reversal like that can be devastating for brands in the long run, says retail consultant Steve Dennis.
One sensible solution is to limit free returns to within a specific timeframe, writes Red Stag Fulfillment’s Jake Rheude. “A clear e-commerce return policy that sets expectations for the time period during which customers can return an item allows your customers to understand what’s required of them in the returns process. They are less likely to blame you for a return that goes wrong if they know your return deadline in advance.”
Deadlines will also help you predict revenue with more confidence, continues Rheude. Any sales older than the return deadline can be guaranteed.
Another option is to personalize returns, write James Abbey, Michael Ketzenberg, and Richard Metters at Texas A&M’s Mays Business School. “Regardless of how generous or restrictive companies are when it comes to returns, they tend to apply a one-size-fits-all approach to their entire customer base. They ignore wide variations in individuals’ behaviors, lumping loyal, compliant customers in with those who game the system.”
The researchers were able to analyze customer data from a leading US store and separate loyal customers from those who would abuse return policies. The predictive model could then be used to customize return policies, providing more lenience for loyal customers and strict policies for customers likely to abuse the system.
Make Your Return Policy Clear and Obvious
The attractiveness of a return policy doesn’t just hinge on the cost of returns. Transparency is also a factor. Whatever policy you ultimately settle on, it should be easy to understand and easy to find so consumers can have confidence in your brand.
Customers look at a huge amount of information before they part with their cash, and that includes your return policy, says ReturnLogic Co-Founder and CEO Peter Sobotta. That’s why having a return policy that is both easy to find and easy to understand so important.
Don’t forget: A lot of customers are choosing to shop online for the convenience, so they aren’t going to bother hunting around for the information they need. If they can’t see it, they’ll go somewhere else.
Sobotta recommends including your return policy as a link in your website’s footer, as well as the following places:
- Product pages
- The home page
- At checkout
- In confirmation emails
Making return information readily available is one of the many things that eCommerce brands can learn from Amazon, says writer Brenda Barron. For instance, Amazon has an entire section of its site for “returns and replacements.” Customers can quickly find the information they need there and don’t need to waste time calling or emailing. Most eCommerce brands don’t need to go as far as Amazon, but customers shouldn’t have to dig for information, either. By making information easy to access, you boost your chances of nurturing a great customer relationship.
In the same vein, your policy should also be as digestible and transparent as possible, says Liquid Web’s Chris Lema. “Even if you have to include some jargon and legalese to protect your interests, keep things as short as possible. Complex details, limitations, and extra fees confuse and anger customers, driving them away from product and checkout pages.” Keeping it short, simple, and easy to read is key if you want to keep customers happy.
Do Your Best to Prevent Returns From Ever Happening
One way DTC brands can support a generous return policy is to cut down the number of products that get returned.
This requires companies to review the entire sales process to identify weak points that may plant the seeds for buyer’s remorse writes the team at Chargebacks911. “Review the product and service descriptions for accuracy and detail. Then, check the product images: Do they zoom-in on details, capture the item from different angles, and accurately portray color options?” Helping customers to get a better idea of what they are buying can minimize the likelihood they will feel misled when the product lands on their doorstep.
Start with your product pages. These are some of the most important pages on your website, yet many eCommerce brands make the same mistakes time and again. Check out our guide to mistake-free product pages to make sure you’re not one of them.
Next, look at your quality assurance. Sometimes, the product just doesn’t arrive as expected. That’s why brands should also look at and address any product quality issues, the team at Braintree writes. “Quality issues can crop up almost anywhere: during the creation of materials, subassemblies, or ingredients; through manufacturing and assembly; or even during delivery.”
The solution is to think like a manufacturer. Order quality testing reports from suppliers, and compare them to set specifications. The greater the difference in characteristics, the more likely you are to have problems with the final product.
Streamline the Returns Process
You can’t prevent all returns, but you can make sure the return process is as smooth and cost-efficient as possible. Any changes that you can make here could significantly improve your DTC brand’s bottom line. That’s because returns are hugely expensive for online stores.
“Returns is one of the key reasons why online retailing tends to make lower profits than bricks and mortar – dealing with this scale, having to move product backwards up the logistics chain, is a costly process,” says industry analyst Richard Hyman.
Thankfully, there are several ways brands can improve margins on returned goods, says the team at Return Magic:
- Use a cross-border returns center to reduce time and costs. These let international retailers resell returned stock in local markets rather than shipping them all the way back to headquarters.
- Track returns closely to cut product orders and increase profits. If you know an item is being returned undamaged, you can sell the product that is being returned, knowing that it will be ready to go straight back out again.
- Look for alternative channels to liquidate returned stock. More and more brands are selling low-quality returned stock on third-party platforms or through their own clearance sections.
Liquidation is exactly the strategy outdoor goods chain REI uses, reports Digiday’s Suman Bhattacharyya. Now when customers return used goods, REI lists them on its separate used goods eCommerce store rather than destroy them. It’s a win-win for the brand.
“Beyond cost-saving, the used goods store also fulfills an important brand promise for REI, a membership-based cooperative that promotes environmental sustainability,” Bhattacharyya writes.
Regularly auditing your warehouse can also pinpoint areas where improvements can be made and money saved, adds Logiwa’s Ruthie Bowles. “Look for deviations or bottlenecks that increase the cost of handling returns like mishandled or misplaced products coming back into stock, packaging delays, interruptive workflows, etc.”
A lot of adjustments can be made to help you find that perfect balance between enticing returns and strong, stable profits. Wobbles are to be expected, but don’t let them stop you from finding equilibrium.