TSH 25: Amazon are now charging for returns - Should you?

Reading time 2 mins.

In 2023 Amazon in the US announced they would be charging $1 for returns. This follows the likes of Zara and H&M who already added such fees.

You might think $1, big deal - but it is. Amazon is known as the leader in ecommerce logistics, and if they make a move like this, you better believe it’s been researched well, and that it’s something we should study.

So why do they do it?

Put simply, offering free returns costs you money. Not only are you refunding the sale, you’ve also likely incurred outbound and inbound shipping costs, plus the cost of processing a return. 

That’s money you don’t get back. 

In fact, processing returns can cost retailers as much as 39% of the original price, according to Optoro, a tech company that researched this in 2023. 

I’m not sure I quite see how it reaches 39%, however the point is made - it’s expensive. If you have an AOV (average order value) under $100, you might even be better off letting the customer keep the product, instead of paying to ship it back and process the return.

Let’s digress into refunds. Here’s my two cents on the whole refund thing.

I think refunding is the way to go if your margin on your product is greater than 70%, and your refund rate is sub 5%. You should still be left with a 50%+ gross profit margin, which ticks the box on my 50/30/20 rule. If you’re coming in with a 50% margin on your products, you’re going to start getting into trouble if you’re refunding too often, as your gross profit margin is likely to be low 40’s or even in the 30% range, which means your business will lose money.

Tip: 

Globally, apparel has the highest return rate. If you’re looking to go into that category, be sure to bake at least 5% returns into your business model. If you’re currently under 2%, you’re doing well. If you’re thinking about starting a business and you don’t know what to do, think about keeping it simple, the less variants you have (size being a variant), the less returns you will likely get.

Image courtesy of Narvar, Consumer Report Returns Report. 

Remember:

Product margin = difference between landed cost of goods and retail price (less tax), whereas gross profit margin is the same, but with the added expenses of other COS - cost of sales, like outbound shipping and merchant fees.

But lot’s of stores don’t refund!

Now, there’s plenty of retailers that don’t refund, that are incredibly successful, although there’s plenty of occasions where those companies have been bitten on the rear end by negative reviews, and if you think good news travels fast…

There’s data to support both arguments, and we have to look at who is asking the question, as much as what the respondents are saying. As always, you should run your own tests on refund and non refund scenarios.

My feelings on refunds remind me of the late great Tony Hiseh, founder of billion dollar empire Zappos.com, who would “make every customer as happy as possible, even at the expense of sales - in the short term”.

When it comes to return shipping fees, here’s a test I ran:

I was once offered $30,000  in free shipping to go towards free returns from a prominent shipping company. The deal was, they would fund $30,000 worth of shipping costs for returns only, if we (the online retailer) offered free shipping on returns for customers, for at least 30 days, or until the money was exhausted. Our returns policy pre-test requested the customer to pay for their own returns, through our returns portal where they could print a label. The idea was that we would test whether conversion rate would go up by offering free shipping on returns. 

It didn’t. There was no impact on conversion rate at all. In fact, when we read our reviews, there were more negative reviews related to the speed in which returns were processed, rather than the cost of shipping a return.

Remember

When it comes to customer satisfaction, speed is one of the most important factors in a positive experience. Whether it be shipping, picking and packing, or customer service response times. Whatever you do, do it fast.

In summary

When offering free shipping on returns, I don’t think it matters that much. Just make it a good fast experience. When it comes to refunds, think about your margins, and think about your competitive landscape. If your gross profit margin is sitting at a healthy 50-55% and you expect to have a 2% refund rate, you’re probably fine to refund, and keep that customer experience great. If your gross profit margin is in the 35-45% range, I would think twice (and then not refund).

The choice is yours friends, choose wisely!

Until next week,

Paul

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