Artjom Bruch, CEO of Trusted Returns, sheds light on the true cost of free returns and why things may soon change.

The economy is slowing, supply chains are unstable and new regulations such as the right to repair or the EU Eco-Design Directive are leading to additional costs that retailers must consider during pricing. Many are also being forced to pay more attention to profitability, which will inevitably lead to cost saving measures. Returns, from a cost view point alone, naturally offer great potential for savings, and according to EHI data, returns shipping alone is the second largest cost driver for online retailers within after-sales. Free returns are therefore not really free of charge - neither for consumers nor for retailers.

The costs incurred by retailers as a result of returns are easy to understand: Returned goods have to be transported, stored and checked. All of these steps trigger costs and tie up resources - employee time, storage space and more. In extreme cases, the returns process for a product can even lead to an overall loss after selling the item. A particular eyesore for anyone involved are instances in which the returned product is checked in the warehouse, found to be unsuitable for resale, and thus disposed of - which in itself incurs only costs. Retailers anticipate these costs and react accordingly. Although not many consumers are aware of this, the risk of returns, including their costs, has of course been priced in.

Free Returns: Is the Notion of Customer Centricity an Illusion?

The risk that shipping a product may trigger downstream costs if it is later returned by the customer has generally been taken into account by the retailer during pricing. As a result, customers collectively bear the hidden costs of free returns: The product price is the same for everyone, even if not everyone resorts to returns - from clothing ordered in different sizes only to keep the one that fits, to products purchased only to make the actual purchasing decision upon receiving the item. In this model, customers who return products frequently are rewarded. Those who think carefully about every purchase and only return products if there is a real problem are effectively paying extra.

The fact that this returns model was so well received is largely due to a kind of peer pressure: of the 100 largest online stores in Germany, almost 87% offer free returns. In times of absolute customer centricity, when customer loyalty and gaining new customers is more important than efficiency and profitability, this is completely legitimate. However, now that it is becoming apparent that the economic conditions are deteriorating and profitability is the number one measurement for online retailers, it is worth reevaluating this strategy. This is because there already is a strong trend away from free shipping: only 4 percent of online retailers in the DACH region still offer it. Shipping costs have always been viewed in a more differentiated way than returns costs, but it may be advisable to reconsider this dichotomy if a strategic change with a focus on profitability is imminent anyway.

Repositioning returns and their importance could go over well with customers. True to the motto "what costs nothing is worth nothing", returns today offer few services as an interface to the customer. Whereas in the past, lifetime guarantees, and first-class customer service were USPs. Although a complete change of course is not necessarily the only way forward, selective and targeted diversification of return policies based on criteria such as returns from the domestic market or abroad, returns as a gesture of goodwill in contrast to legal reasons such as returns due to withdrawal, or even segmentation according to customer groups, are all possibilities . As soon as not every return is categorically free of charge for consumers, the returns rate will fall, and online retailers can save themselves many of the downstream costs. Furthermore, returns are not necessarily the optimal solution for every problem a customer might have with a product. And especially if the EU Ecodesign Directive prohibits the destruction of returned goods in some product categories, retailers could find themselves in a dilemma if they are stuck with the returned goods in the event of a high returns rate.

Diversifying the Returns Strategy: A Step towards Fairness and Efficiency

The changes in the returns strategies of online giants such as Amazon last year may well have been a test run and, together with the trend reversal in who pays shipping costs, signal a real paradigm shift for online retail - at least in the DACH region. This is because peer pressure is being loosened by Amazon's change alone.

Customer centricity needs to be rethought. Diversifying returns policies makes economic sense and also allows retailers to respond to customer needs more precisely. Understanding and using returns as an interface to the customer could make a real difference to how a customer perceives a retailer in the future. Because if the returns strategy offers a choice of options, the service feels more individual, and problems can be solved with more care than the current one-size-fits-all approach allows for. Even extreme cases, such as a missing screw that still results in the entire product having to be returned, could be a thing of the past. The simple fact of offering more than one returns option gives consumers more room to maneuver their individual dilemma. If it even saves costs, well thought-out returns management is a powerful tool for profitability and customer satisfaction at the same time.