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May 9, 2016

PayPal Canada aims to boost sales with free return shipping

PayPal's headquarters in San Jose, California

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It’s a perk that many online retailers have resisted offering for fear it will bruise their bottom line.

But free return shipping is starting to be touted by a growing number of cybermerchants in a bid to ease reluctant consumers into online shopping. And as more big players, including Amazon.ca, offer free returns, rivals feel the pressure to follow suit.

“You’re going to see a lot more retailers that are doing it in Canada and certainly in the United States,” predicted Harley Finkelstein, chief operating officer of Shopify, the Ottawa-based tech firm that provides operating platforms for online retailers.

“And eventually you’re going to see most places are going to do free returns.”

On Monday, digital payment specialist PayPal Canada will become the latest player to offer free returns when it starts providing up to 10 refunds a year on online return shipping costs (up to $300 annually,) betting it will offset the extra cost with more e-commerce business.

“People are generally worried about shopping online because they don’t quite feel comfortable with the return process,” said Kerry Reynolds, head of consumer marketing at PayPal Canada. “For us, [free] return shipping is a competitive differentiator... It’s one of those things that’s in line with our strategy of removing those barriers for people to buy online.”

Online retailers struggle over whether to relax their return policy and risk steeper expenses that can pinch their profit. Nevertheless, to keep pace with cyberpowerhouse Amazon.com Inc. they increasingly feel the heat to offer free returns.

Of the top 70 online retailers in Canada, about 28 per cent offered free returns in 2015, up from 22 per cent just a year earlier, Canada Post data show. Amid the change, the volume of returns has doubled in the two years to 2015, it found. (Over that same period, retail e-commerce sales in Canada were forecast to rise 37 per cent to $29.6-billion, according to researcher eMarketer.)

Still, the 28 per cent of top merchants that offered free returns last year lag the rate in the United States, where 49 per cent of the largest online retailers offered free returns, the research found.

Canadian retailers, after having invested in the past few years in improving their e-commerce, “are now turning their focus to returns, recognizing that this is probably where the last great gap exists between consumers’ expectations and what the market is offering,” said Danielle Doiron, director of parcels market development at Canada Post.

Its research found that 84 per cent of shoppers said free return shipping contributes to “the perfect returns experience,” while 52 per cent said a retailer’s providing of a prepaid return label in the original purchase contributes to that perfect experience.

Roger Hardy, chief executive officer of Shoes.com in Vancouver, said its free returns cost an average of $6 to $9 a returned order. The average order consists of two pairs of shoes at a price of close to $200, while each return generally has one pair of shoes, he said.

“We think of it as a small cost in the whole value play for that customer,” he said. “It’s a customer-satisfaction cost.” The retailer’s customer-satisfaction scores are in the high 70-per-cent range, compared with an industry average of 30 per cent to 40 per cent, based on whether a customer would recommend the merchant to others, he said.

Added Ethan Song, CEO of Montreal-based men’s clothier Frank & Oak, which also offers free returns: “Customers want to be able to try products in the comfort of their home and in some ways, it’s just about giving them the opportunity to do so by offering that elevated level of service.”

Rob Martinez, CEO of shipping consultancy Shipware LLC in San Diego, said larger retailers get discounts from delivery companies for their big volumes of business, helping make up for the cost of free returns. He said customer loyalty surges after online retailers provide free returns. Customer spending increases 158 per cent to 457 per cent over the two years following a free return, says a 2012 study published in the Journal of Marketing Research. “The benefits are very high-reaching,” Mr. Martinez said.

Still Antony Karabus, CEO of retail consultancy HRC Advisory, said many retailers view free shipping and free returns as “not a sustainable economic model.” Fulfilment and return costs can be as much as 15 per cent of an entire transaction value, he said.

Retailers can’t always resell returned products at full price, depending on their condition and timing of the return, he said. Merchants often need to send returned products for repairs, he said.

Return rates can range from 5 per cent of sales for “hard lines” such as furniture and hardware to 25 per cent for fashion merchandise, his research shows.

To counter the squeeze, retailers can tighten policies on when products can be returned for full refunds and in what condition, he said. And he suggested retailers provide a subscription charge (such as Amazon’s Prime program) or a high purchase threshold for shoppers to qualify for free shipping.

Ms. Reynolds said PayPal has introduced free return shipping in 40 countries over the past year, including the United States, resulting in a “steep incline” in the number of people signing up for the service.

Free returns also can benefit Canadians who shop from international websites, she said. Of the 10.7 million who do cross-border online shopping, 38 per cent said that if free return shipping were offered, they would be more likely to buy online from another country, according to PayPal’s 2015 research.

High return shipping costs discourage more than half of online shoppers globally from making repeat purchases, its research found. And 40 per cent of Canadians are worried about ordering the wrong item online and not being able to return it, it said.

“Shipping costs, in general, have always been a pain point for Canadians,” she said. “It’s adding that extra level of confidence to people who are shopping online.”