The Poison Pill of "Returns Insurance" - A Merchant's Perspective
My role in eCommerce-focused SaaS sales gives me a unique vantage point, allowing me to work with a pretty diverse range of merchants, from startups to 9-figure giants, across various industries and geographies. One recurring topic that merchants bring up is returns. Recently, during a sales call, a merchant from a well-established brand made a statement that stuck with me:
“Most software companies don’t truly understand what business owners care about. They might have good features, but they often miss the bigger picture from a merchant’s perspective. When we look at returns on a balance sheet it’s all about the bottom line”.
He was right. Returns are a pain point for most merchants, and while eliminating them altogether might seem like a dream solution, it’s not that simple. Doing so would negatively impact brand loyalty, conversion rates, and ultimately, both the business and the customer. He simply stated his philosophy of “If it's not good for the customer, it's not good for the business.”
Breaking Down the Cost of Single Return
Intrigued by the merchant's honest feedback, I dug deeper with my team. We dissected the cost of a return into four primary components:
- Product cost
- Shipping cost
- Labor (handling the product and customer communication)
- Software cost
We knew that each of these categories affects the merchant’s bottom line, but we wanted to quantify it—meaning let’s simply figure out the total cost of a single return. When we asked the merchant to rank these categories by cost, software came out as the cheapest and naturally the product came out as the most expensive.
But the conversation took an interesting turn when we discussed impact—the potential of each cost category to influence the others.
The merchant acknowledged that while software may be the cheapest, it could have the most significant impact on labor and shipping costs. The right software could streamline operations, reduce labor, and even help lower shipping costs by optimizing logistics. It could also provide data insights to reduce product returns by identifying trends and issues early on.
In short, good software doesn't just manage returns; it minimizes them.
We came to the conclusion that reducing returns was the most impactful thing any merchant could do when looking at the returns like a line item on a P&L.
The Temptation of "Free" Returns Insurance
Things got even more interesting when the merchant mentioned a competitor offering free returns insurance. Naturally, my team and I were skeptical. How could a returns solution be free? We did some research and discovered that it wasn’t "free" in the true sense. It was an example of Returns Insurance, something I had recently encountered with another merchant who shared a horror story about how this approach nearly crippled their business.
That merchant saw their returns rate skyrocket from 5% to 15% in just 30 days. Support tickets increased by 15%, and most complaints revolved around customers feeling forced to pay for insurance in case they "might" return something. When the merchant made the insurance optional, returns rates barely budged. Worse yet, handling the claims became a logistical nightmare.
Returns insurance, in essence, became a poison pill—appearing to save money upfront but costing the business far more in customer dissatisfaction and operational complexity at times as well as a significant cost on the back end.
The Real Cost of Returns Insurance
The more we spoke with merchants, the clearer the picture became. Customers purchasing returns insurance usually fall into one of two categories: they either have no choice as the merchant forces them to purchase it, or it’s optional in which case if they do buy it, they’re highly likely to return the product.
In both cases, it's a lose-lose situation for the business. As one merchant put it, returns insurance was like "clouds on the horizon before the storm." It signals incoming revenue loss, not savings.
At the end of the day, no amount of "free" software or returns insurance is worth the trade-off if it hurts the customer experience and, by extension, the business. It was indeed a poison pill.
The Bottom Line
Returns insurance might sound like a good deal on the surface, but it introduces friction into the customer journey. And as we know, if it’s not good for the customer, it’s not good for the business. At AfterShip, we live by a similar philosophy: “If it’s not good for our merchants, it’s not good for us.”