Online retailers are always offering deals and discounts to draw in customers, and two of the most popular are free shipping and free returns. Adding one or the other without considering how it affects your business from all angles can quickly gobble up your revenue and leave you in the lurch.
Let’s consider the five big dilemmas you may have with offering free returns or free shipping.
1. Which Option Benefits My Customers and My Business?
The first dilemma you’ll face as an online retailer is how to make customers happy while protecting your bottom line. Free returns typically only help a small portion of your audience, so the cost can make sense if they’re your best shoppers. Nearly every shopper will benefit from free shipping, but it can increase expenses dramatically. That means not every ecommerce shop will benefit from offering free shipping. This is a decision about your business first and customers second.
For instance, studies tell us that generous return policies are linked to increases in sales but not to an increase in returns. They strengthen the bond between you and repeat customers. Our customers note that free returns perform especially well for luxury goods. It’s also a big draw in for customers who need a specific fit, such as clothes and shoes.
So, if your customers are going to use it and improve relationships, free returns might be the most lucrative. However, if people don’t return your products often or they can’t (i.e., perishable goods), then free shipping may be your best bet.
From a customer standpoint, free shipping is often a winner, but making that blanket offer leads to the next dilemma.
2. Can I Afford It?
Free returns and shipping come with increased product, warehouse, and labor costs. You’ll need warehouse teams to handle more orders and returns, but sales and marketing need to spend time creating and sharing these offers as well. Customer service teams will face increased labor to explain the processes and restrictions. You might even need a chatbot to help customers on your site and avoid overloading service agents.
The most straightforward option is determining how much it costs to ship an average order of different values and increase prices to cover shipping. Say your average $25 order of three products ships for $9. That’s an additional $3 you’ll need to increase each product’s sales price.
A/B test new prices. You’ll want to monitor how much more people are willing to spend if they get free shipping. It’s also a good idea to A/B test your shipping. Can you adjust packaging, carrier choice, or other elements to reduce shipping costs? If you can reduce those expenses, you won’t need to raise prices as much to cover the cost of offering free shipping. Use a DIM weight calculator to ensure that you’re getting the best shipping estimates for each option.
Unfortunately, there’s not a blanket winner. You’ll want to test each in small batches to see how customers respond.
3. Can I Handle It?
Costs aren’t the only things that could skyrocket with either offer.
If you decide to offer free returns, remember that you’re going to need to scale up your workforce to handle these returns. It might be one additional hire, or many and a new inventory management tool that supports scanning returns and adding them back to inventory counts. You need people, systems, and even physical space to process returns. That increases demands on your management, leadership, HR, and other business units.
Free shipping creates a different shift to consider. In some cases, it can encourage people to buy more often, but in smaller orders. Along with increased labor for picking and packing orders, your overall shipping costs may also rise as your volume grows. If you see a spike but don’t get big enough to negotiate for volume-based discounts from carriers, shipping will eat into more of your revenue.
In this dilemma, the winner depends on what your warehouse and team can handle. Look at associated costs and see what makes sense.
4. When Doesn’t It Apply?
Speaking of making sense, free shipping and free returns don’t always work for certain businesses or products. Some chief considerations are:
- Is it right for all product categories?
- Do you need to set minimum order values?
- Should sale items or holiday items be included?
- When is a return not acceptable?
Here’s a quick example. A standard safe can weigh up to 150 lbs. and has high shipping costs. Free shipping or paying for free returns will eat into your profit margins significantly. It may be better in terms of revenue to not offer either, even if it costs you a few customers each year.
Free shipping is likely your safest option to control costs and keep people happy because it is predictable. Products with many options, such as clothes, are a big draw for free returns. However, you might not want to cover returns for sales items or any products that are hard to resell because that may be inventory that gathers dust on your shelves.
5. Will I Lose Customers If I Don’t Offer It?
Amazon can easily afford to offer both free options via its Prime program, and it keeps customers happy. The majority of other online retailers aren’t that large. So, instead of looking at Amazon, turn to your competitors.
Are they offering free shipping on everything, or is there a minimum order value threshold?
Are free returns standard for your product categories?
One of the best places to start is customer reviews and comments. See if people respond positively to the returns and shipping policies of your competitors. Look for what they don’t like. What expectations are customers stating that they have and what do they say they want?
You can also directly ask your customers with newsletters and on-site polls. You might learn that you don’t need to offer anything because people don’t expect it.
The Final Choice
The winner of free shipping versus free returns is determined by you. Ask yourself, what can I afford, and does the offer meet customer expectations? Will it give you a competitive advantage? Ask your customers and let them guide your decisions. Weigh your options and see which one benefits your online store most!
About the Author – Jake Rheude is the Director of Marketing for Red Stag Fulfillment, an ecommerce fulfillment warehouse that was born out of ecommerce. He has years of experience in ecommerce and business development. In his free time, Jake enjoys reading about business and sharing his own experience with others.