Are “Free Returns” right for your DTC business? →

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Customers want and feel entitled to “free returns”. Some brands have committed to the practice while other brands struggle with the cost of returns and making free returns work. And the question remains, are “Free Returns” right for your DTC business?

If you are feeling uncertain about offering free returns in your business, or even, perhaps, are seeing that free returns are getting out of control and really taking a toll, read on. I want to share with you a critical returns KPI that will help you clearly define what works best for YOUR unique business model.

Over a year and a half ago, I took on an operations lead role with a premium DTC fashion brand. One of the areas under my domain was returns. Very quickly I observed a few things around the concept of “free returns”:

  1. Customers want free returns.

  2. Returns and exchanges are quite costly.

  3. Offering free returns feels counter-intuitive to reducing return rates, but opinions on the web believe that free returns generate customer confidence and conversions.

It’s true unchecked return rates compounded by free returns are a major problem to the long-term success of a DTC brand. The data and the math prove it - high return rates will:

  1. Cost you money - Even when you charge customers for return shipping and restocking fees, returns will take away from your bottom line. Are you specifically factoring return costs into your operating margin? Are you able to support free returns?

  2. Cost you customers - Multiple surveys show that customers who make a return after their first purchase are anywhere from 30% to 70% least likely to purchase again from that brand. This missed opportunity to generate repeat customers will have an impact on your order frequency. Will offering free returns make a real difference here?

  3. Further compromise your margins and ad spend - Let’s say you have a high-converting ad - have you ever taken the time to analyze whether or not those conversions are resulting in high return rates? If not, you may be doubly throwing money into ads that are ultimately costing you more money in free returns.

Here are the top three things to take into consideration when contemplating offering free returns in your DTC business.

ONE: How much are returns costing you?

Seems logical, but unfortunately, many DTC operators don’t have an accurate pulse on how much their returns are costing them. Basically, you want to add up all the costs related to processing and completing returns in your business and divide them by total returns within that time frame.

Hot tip: There is a “hidden” cost that often goes unreported with exchanges. If you offer free exchanges (an industry best practice to retain revenue), you are not only paying for the return shipping and restocking costs, but also an additional shipping and pick cost. It can really add up!

TWO: What is your average return rate?

One of the biggest mistakes many DTC businesses do is toe quantifying our return rate based on refunds:revenue per month. This is soo incredibly not helpful because not all returns result in a refund and not all refunds are the result of a return. Returns range from exchanges, to store credit, to damages, and mis-ships. These expanded returns are not captured in the “refund amount” alone. Quantifying your return rate by volume (units or orders with returns), presents a far more accurate and strategic KPI as to the health of your business.

Hot tip: Make sure you are consistently rolling up your return rate by units returned or orders with a return. Moreover, to capture a more accurate average return rate, you may want to consider calculating your average return rate based on a rolling 3-month window instead of a strictly monthly basis (read more why here.)

THREE: How much are returns taking from your margin?

Once you know how much you are spending on returns and what your average return rate is, you can go on to figure out how much returns are costing you on average per order.

For example, using the following KPIs:

AOV $147.52

RR 18.2%

AVG Cost/Return $13.74

AVG Total Orders 910

Some quick math will tell me that for each order, I can expect $2.49 will be allocated towards estimated return costs.

Hot tip: Roll the $2.49 into your operating margin to see if this is an added expense your brand can take on. If you need more help here - learn more about me here and sign up for early access to my Return Rate Optimization Workshop for Premium DTC Brands and Fashion Businesses.

All-in-all, offering free returns to your customer is 100% up to you and what works best for your business. If, in exploring free returns, you’ve discovered that perhaps you need to zoom out and take on a bigger project to reduce your return rate and related return costs, I invite you to learn more about Return Rate Optimization Workshop.

Actively reduce your ecommerce returns now.

Get in on the Return Rate Optimization Workshop engineered exclusively for premium DTC brands. Having spent over a year developing this framework with real clients and using real data generated by real customer experiences, the RRO workshop delivers proven best practices to help brand entrepreneurs overcome out-of-control return rates, increase profitability, and strengthen customer retention. Learn more.