The Shadow Cost of Free Returns: E-Commerce and the Reverse Logistics Crisis
It’s not uncommon to receive a product ordered online, such as through Amazon or Walmart, that just does not fit our needs. Perhaps the product that arrived on our doorstep was different than described, maybe the quality was insufficient, or it’s possible that our needs changed between our click to order and the product’s arrival. Whatever the case, we love to see that our seller offers “free returns.” Often, major retailers allow us to conveniently send the product back by scheduling it through their app, including creating a return label that can be printed at home.
The Economics Behind Offering Free Returns
Allowing free returns obviously costs the seller money, so why offer the service? The seller already has the revenue from the buyer, so allowing a free return seems like a loss. However, offering services that cost money can generate even greater revenue, meaning a net profit, in the long run.
Enhancing Demand
Free returns are highly popular with consumers, as we get our money back and do not have to figure out what to do with a product we no longer want. This builds trust and gratitude toward the seller. Although that first sale may have been returned, the satisfied customer is likely to make additional purchases from the seller. Thus, free returns create customer loyalty that can lead to long run profits. Research backs this up: customers buy more from sellers that offer free returns than sellers who do not.
Improving Product Quality
Although it may be tempting for sellers to say “all sales are final” and keep the revenue from the sale, regardless of customer satisfaction, engaging with buyers on their opinions can lead to improved products in the long run. If a seller does not offer free returns, customers may simply trash the undesired product and provide no insight as to why they are dissatisfied, leaving the seller churning up sub-par goods. Over time, customers stop buying the goods and the seller runs out of business, perhaps confused until the end as to why sales are dropping.
Accepting the cost of free returns, but gaining valuable data as to why the customers no longer want the product, can therefore be seen as an investment in product research and redevelopment. The costs may be painful at first, but the consumer input can lead to better products that are rarely returned, generating greater revenue. This consumer input can improve the company and help it out-perform rivals.
Economic Costs of Free Returns
Unfortunately, free returns may only be feasible for large producers, with small companies struggling to cover the costs. This creates tension between large online retailers, such as Amazon, Walmart, and Target, that force small sellers to accept the generous return policies of the retailers. Fees can be applied to sellers who are considered to be flooding online retailers with low-quality goods, and sellers deemed low-quality can have their products moved far down the search results. The proliferation of free return policies of large online retailers, which are now expected by most consumers, have unintended economic consequences.
Reduced Competition in the Long Run by Harming Small Producers
Small businesses have many struggles in the business environment. A generation ago, it was the arrival of big-box retail stores that offered lower prices. Today, it’s competing online against those same large sellers. The competition has simply moved from the streets to the Internet. Free return policies expected by today’s online shoppers can drive small businesses under, resulting in fewer of them. As small sellers exit the marketplace, there is less competition - which often leads to higher prices.
Increased Incidence of Fraud and Abuse
Abuse of free return policies is common, with almost 15 percent of returns being considered fraudulent today. This often means that the product was used and returned anyway, with the customer hoping to get its use for free. As this abuse increases, which it has over the past several years, costs to sellers will rise, potentially driving more small sellers out of business. Despite the increase in return fraud, small businesses are under constant pressure to match the free return policies of larger competitors, which they may be unable to afford.
One policy that may increase the incidence of return fraud is returnless refunds, where the seller decides it is easier to refund the purchase than recollect the item. Fraudsters may order an item, collect it, and then insist that it never arrived and demand a refund. When the major online retailer grants the refund, the fraudster has gotten the product for free. There is the likelihood that increased return fraud will embolden fraudsters to commit other types of crimes, potentially leading to a higher incidence of fraud as a whole.
Increased Environmental and Waste Management Costs
Convenient return policies, even when not used fraudulently, can burden sellers with high volumes of returned goods. These need to be cataloged and stored, increasing business costs. Sometimes, the product cannot be resold, leading to environmental and waste management costs as the product - perhaps unused - is disposed of. As of 2019, about 25 percent of all returned items from online sales were immediately disposed of, with the remaining three-quarters stored for at least some period of time.
Worldwide, the high volume of returned products leads to substantial environmental costs due to carbon emissions generated in transportation.
Ethical Implications: Costs of Returns Affect Low-Income Groups More Heavily
Negative externalities like pollution and crime affect those with lower income more heavily, subjecting them to greater costs. For example, the pollution caused by excessive returns of products ordered online will be felt more acutely by those who cannot afford mitigating technologies like air conditioning, filtration systems, etc. People with lower income are more likely to live near landfills where tons of returned online orders are junked. On a global scale, climate change influenced by carbon emissions is considered to have a greater impact on poorer countries, subjecting them to harms caused by free online returns in which they never participated.
There is also the ethical concern of waste of unused goods. Online sellers are trashing millions of tons of goods and resources annually due to it being easier to dispose of them than to resell. Much of this comes from fast fashion, though plenty of other items are junked due to sellers not wanting the hassle of repackaging. How many impoverished people would benefit substantially from receiving these unwanted goods? Fortunately, some large companies are donating returned items to charities and nonprofits. In 2023, nonprofit Good360 donated $3 billion worth of returned items from major retailers to those in need - but this is only a fraction of the amount that ends up in landfills.
