The True Costs of Free Shipping and Free Returns

Mark Samson, Managing Director, Getzler Henrich & Associates finds retailers just aren’t ‘doing the math’ when it comes to free shipping and returns.

the retail industry might’ve initially blamed Amazon for spoiling consumers on free shipping and returns, but lately, they only have themselves to blame. As online shopping exploded during pandemic lockdowns, retailers followed Amazon’s lead (without the membership fees, mind you), and did whatever it took to keep consumers happy.

And they paid the price.

In 2023, retail returns totaled $743 billion, reaching 14.5 percent of sales. Stated more simply: for every $1 billion sold, the average retailer incurred $145 million in merchandise returns. The C-suite often accepts that rate as “the normal cost of doing business,” but they shouldn’t. Online returns are approximately 23%.

“There’s nothing wrong with wanting to provide your customers with shipping and returns, but you have to do the math,” said Mark Samson, managing director, Getzler Henrich & Associates. “And for the most part, the math just doesn’t add up.”

There’s not a one-size-fits-all approach to shipping and returns calculations, either. Giant Direct to Consumer (D2C) brands with 70 percent margins can afford to offer such customer service amenities, while small companies on tighter margins, or with lower AUR, are taking a larger percentage hit per item.

“Online companies that only do $50 or $100 million a year—and give free shipping—think they’re buying customers, but it's really just going straight to the bottom line as losses,” said Samson.

Retailers need to educate themselves about the “true cost” of free shipping and loose return policies. Samson presented this scenario:

“Say a middle-market $100 million online revenue company sells 1 million units at average transaction of $100. If 25 percent is returned, that totals $25 million (assume 250,000 units for simplicity). It costs $2/per unit to pick and pack; $12 to ship it out; $3 credit card merchant fee (3 percent); $12 to return ship it back; $2 to restock or repackage; and another $3 credit card transaction fee to refund the item. So now the total per unit cost is $34. On $25 million dollars’ worth of returns, that equals 34 percent or $8.5 million. And that doesn’t include the 20 percent digital marketing spend to generate that $25 million in sales in the first place, which is $5 million.

“Tally that up and it’s a $13.5 million cost,” he said. “And whichever way you look at it, it's a hard cost straight off the bottom line.” In the past year or so, some retailers have begun to retake control.

According to reverse logistics company Happy Returns, 81 percent of retailers now charge for at least some method of return. Target, Zara, and Lululemon, “who was so inundated with returns they had to suspend them for a month just to catch up!” as well as Kohl’s and many others announced stricter return policies. Even Amazon.

“Amazon announced a $1 fee, and their algorithms are canceling customers who exploit the system,” said Samson. “On $500 billion revenue, that’s probably more than a billion transactions that they could recover from that dollar a unit.”

Amid worries that consumers would bail if their free returns were stripped away, retailers just needed to enact some psychological strategy. One solution is to continue offering free shipping, but raise the threshold of what qualifies, a savvy action that often drives higher-ticket purchases and add-on sales. Of course, that could backfire to more returns, but that hasn’t necessarily played out, said Samson.

“We had several clients that raised their free shipping threshold between 50 and 75 percent with absolutely no resistance,” he said. Another move that “faced absolutely no resistance” was adding a $5 to $10 restocking fee on returns for a $100 item.

Intellectually, consumers understand the situation. Nationwide news channels have prominently featured retail return pain points and inflation, which is at a 40-year high. Consumers may never move away from “bracketing” online purchases in various sizes and styles for at-home try-ons, but at least they’ll be shouldering some of the burden to get those items back into retail circulation.