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Offering Free Returns Can Boost Online Purchases 357%

Even though returns of consumer gadgets alone costs companies $17 billion in 2011, the rewards of adopting the Zappos model of free-return shopping can boost customer spending up to 357 percent.

Using surveys and spending data, researchers tracked the habits of customers over 49 months at two leading online retailers. After a free-return shipping policy was instituted at one of the retailers, average spending per customer increased by $620 over two years. At the other, it went up $2, 500.

Online retailers often will offer free shipping if they make a mistake — like if they sent the wrong item, it was defective, or was damaged in shipping. The prevailing wisdom is that if customers are just seeing if they like the hot new videogame, or are just "borrowing" a dress for the night, then the shopper should pay. The belief is that customers will see this as just and accept responsibility without holding it against the company. Fair is fair. But the data shows otherwise.

After customers had to pay for return shipping in the study, "Return Shipping Policies of Online Retailers: Normative Assumptions and the Long-Term Consequences of Fee and Free Returns, " published in the Journal of Marketing, their purchases fell between 74 and 100 percent.

The retailer made sure they didn't get "ripped off, " but they also made sure they missed out on future sales.

A free-return shipping policy creates an escalation effect, lead author of the study, Dr. Amanda Bower, professor of business administration and marketing at Washington and Lee University, told NBC News. As the company gains more trust with the shopper, the customer is willing to take more and bigger purchase risks as they know this is a company that "will let them fail, " she said.

"If I buy something because I think it matches my sweater, and it doesn't, whose fault is that?" said Bower.

Regret, having it, anticipating it turns out to be a huge driver of whether a customer pulls their online shopping cart up to the checkout again. "Consumers are not weighing fair versus unfair, " said Bower. "They're thinking, 'It costs me $7 to get it here, $7 to get it back to you, I've just paid $14 for the privilege of finding out your stuff doesn't work for me. And I don't want to do that again.'" Bummed out, shoppers are less likely to take the risk of clicking "Buy" again.

Bower encourages marketers skeptical of the results, or whether they'll work for their specific product category, to "crack open" their data and see what it says. She's confident they'll reach the same conclusions.

So why haven't they already? How is it that, living in a world where marketers can track our moves online and off like never before, when they can build sophisticated models factoring in what we buy, what we read, what we like, how we sleep, and our favorite song, online retailers are still charging for return shipping when they could be making so much more if they didn't?

For one, offering free return shipping is an investment. When your focus is on cutting short-term costs and pumping next quarter results, cutting down on shipping costs makes sense. Giving faceless online customers a free ride on your mail truck is a harder sell.

Ultimately, though, marketers set fee-based return shipping policies, "because they can, " said Dr. Bower. The marketer controls the store, manages the process, and sets the rules. "But the consumer is in charge of whether they ever come back."

Retail