Shipping & Returns, Paid & Free – Configuring International Shipping

In eCommerce, the buyer and seller are like two opposing forces, gravitating to different directions. We look into the different configurations of shipping & returns to find out which is the most sensible for both parties.

For anyone in the eCommerce space (well, except Amazon) the whole ordeal of shipping and returns is a big headache, and understandably so.

Putting logistics aside, there are four possible configurations to consider:

  1. Paid shipping - Paid returns
  2. Free shipping - Free returns
  3. Free shipping - Paid returns
  4. Paid shipping - Free returns

Each of these configurations has its merits and faults, for the seller and buyer alike, but those merits and faults don’t align. In eCommerce, the buyer and seller are like two opposing forces, gravitating to different directions.

The One-Sided-Risk Configurations

#1 - Paid shipping - Paid returns

Puts all the risk on the buyer. The buyer pays for the product, pays for the shipping and takes the risk of not liking the product, or have it not fit as it should, and paying to return it to the seller.

That’s a lot of paying to do for being left without a product.

#2 - Free shipping - Free returns

Puts all the risk on the seller. The seller pays for the shipping and takes the risk of having to pay for the return in case the buyer doesn’t like it or regrets buying it; and of course refunds the buyer for the cost of the product.

That’s a harsh reality for online sellers. Not only you didn’t make a sale, but you also need to pay a round trip ticket. That’s pure loss.

The Shared-Risk Configurations

Configurations #3 and #4 split the risk between the seller and the buyer, but in each the scales tilt differently.

#3 - Free shipping - Paid returns

Favors the buyer by letting the seller shoulder the cost of the initial shipment. It made sense, and still does, for removing the cost obstacle from online shopping. Once the item is delivered (the seller has completed his part of the bargain), the risk shifts sides to the buyer.

It’s a nice arrangement for the buyer, a problematic one for sellers with low-cost or low-margin items; if the shipping costs more than your margin of profit (or even more than the product itself) it will never make financial sense.

#4 - Paid shipping - Free returns

Demands of the buyer a higher commitment to the purchase decision. As ‘a show of gratitude’ for this commitment, the seller takes a fuller responsibility for the product sold.

In a way, that’s the most fair of the configurations, an almost-equal shared risk. Still, this configuration is the least popular one.

So where do we go from here?

Amazon Prime popularized the Free shipping-Paid Returns configuration in the US (with free returns in some cases.) It is now what consumers expect when shopping online domestically. But even the mighty Amazon doesn’t offer free shipping for cross-border purchases. If the numbers don’t add up for Amazon, they won’t add up for anyone else. Shipping across or above oceans is, plain and simple, expensive.

So the option of free shipping for international orders is off the table, at least for the foreseeable future.

(It’s true, order online from China, even an HDMI cable that costs 99 cents, and it will be shipped for free across the globe. We won’t get into it, but let’s just say that it’s not seller fhtt667 that pays for the shipping.)

That leaves us with Paid shipping - Free returns as the most viable and fair configuration for international online shopping. So why is it so unpopular?

Because it makes no sense for sellers to voluntarily risk their profitability by ‘encouraging’ or at least allowing a buyer at the other side of the world to return his purchase without any ‘consequences’. If returns were indeed offered for free, theoretically, I could have ordered the same shirt in six different shades of blue, choose the one I like and return the other five. I did pay for the shipping, but the cost difference between one and six shirts is negligible.

(I use the term “sellers” on purpose. Nike isn’t a seller, nor is Loreal; they are brands that already crossed all borders. They don’t sell internationally, they sell locally, simply everywhere. Sellers are small to medium to large operators of online shops, whether inside marketplaces or standalone.)

Online sellers that as it is build a business around slim margins and lots of logistics, can’t afford, quite literally, to risk their profitability by offering free returns for cross-border purchases. So how can this configuration be put into action? Only if a third-party takes the risk upon itself and away from the seller, ensuring deal profitability for each and every international sale.

That third-party can and should be the shipping company. Having another entity involved will just complicate things. The shipping company is already deeply involved in the transaction - getting the product from the seller to the buyer - and obviously can make the return trip, if necessary, in the most cost-effective and friction-less way.

What’s the incentive for a shipping company to offer free returns?

The only answer is, to incentivize cross-border ecommerce. Everybody wins.

The buyers get to purchase whatever they want, regardless of the product’s place of origin. The sellers get to expand their audience, from a domestic amphitheater to a global arena. And the shipping company gets to grow its own business - more orders to ship, more dollars at the bottom line.

We did the numbers. They add up. We actually did more than add some numbers. We’ve put it into action and set it free into the wild. One year in, bootstrap and all, we’ve got close to 800 marketplace sellers using our service, selling globally and turning a profit.

It all comes down to us ensuring deal profitability for every international order. We’ve got a few more tricks up our sleeve - allowing sellers to actually make a profit from the shipping itself, vehemently protecting sellers ratings ‘against’ the marketplace and relieving sellers from customer service by providing dedicated shipment tracking for buyers, complete with online, live support - but these are all secondary.

If the seller isn’t guaranteed to make a profit from every purchase, everything else doesn’t really matter.