Creating a Fair Return Policy Without Sacrificing Profits: A Guide for DTC Brands

A fair return policy promotes goodwill and doesn’t necessarily have to mean tiny profit margins. Here’s how a DTC brand can have both.

Table of Contents

We can help
To learn more about optimizing your eCommerce site to improve customer experience, just reach out to us or schedule a demo. We are here to help.

Updated April 25, 2022

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 2021 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 product’s price. “It’s almost more important with luxury items or higher-priced items that there’s a good amount of flexibility,” says Sarah Willersdorf, partner and managing director at the Boston Consulting Group, in an interview with Vogue Business. “Enabling consumers to return across multiple channels is a real advantage.”

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.

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 analyzed customer data from a leading US store and separated loyal customers from those who would abuse return policies. Brands could use this predictive model to customize return policies, providing more lenience for loyal customers and strict guidelines 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. For instance, Amazon has an entire section of its site for “returns and replacements.” Customers can quickly find the information they need there and do not need to waste time calling or emailing.

Additionally, Amazon Prime’s Try Before You Buy program allows shoppers to select up to 6 items and only pay for the items they want to keep after the trial period. This generous return policy almost guarantees returns, but the onus is on the customer to send them in. Additionally, with six items shipped at a time, they are more likely to hold on to a couple of extra items if they happen to work out.

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 does not arrive as expected. That is why brands should also look at and address any product quality issues. This process is part of gatekeeping avoidance, a strategy that DTC brands can use to ensure that unhappy customers don’t happen in the first place by creating a quality product and shipping it out quickly.

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.

The average rate of returns for online retailers in 2021 was 20.8% — an increase from 18.1% in 2020. Thankfully, there are several ways brands can improve margins on returned goods:

  • 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 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 returned product 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.

Retailers can also implement a few best practices to improve their return management, including:

  • Appoint an end-to-end owner that can establish key KPIs for every department.
  • Understand the unit economics of returns and analyze cost data to identify the most significant cost reduction opportunities.
  • Collect detailed reason codes to hone in on the root causes of returns and leverage the feedback loop to keep up to date on product design and development.

You can make many adjustments to achieve that perfect balance between enticing returns and strong, stable profits. Wobbles are expected, but do not let them stop you from finding equilibrium.

To find out how your brand can implement smart return policies and liquidation sales, talk to an eCommerce expert at Scalefast.

Images by: Kira auf der HeideJESHOOTS.COMchuttersnap

Don't forget to share this post!

Keep Reading