Returns Shipping: Who Pays and How to Set It Up

Thirty percent of all products ordered online get returned. For clothing, it is closer to forty percent. If you sell anything online, returns are not an edge case to plan for later — they are a fundamental part of your business that affects margins, customer loyalty, and conversion rates.

The biggest decision in your returns policy is not whether to accept returns. It is who pays the return shipping. This one choice cascades through your entire business model, affecting what customers buy, how often they buy, whether they buy from you again, and how much profit you keep on each order.

The Three Models

Free Returns: Seller Pays Everything

You provide a prepaid return shipping label. The customer sticks it on the box and drops it at the nearest carrier location. Zero friction, zero cost to the customer.

This is what Amazon, Zappos, Nordstrom, and most large DTC brands offer, and it sets the baseline expectation for online shoppers. The conversion rate benefit is real — studies consistently show that free returns increase purchase conversion by 8 to 12 percent compared to paid returns, because customers feel safe knowing they can send something back if it does not work out.

The cost is equally real. If your return rate is 25 percent and each return label costs 8 dollars, your blended return shipping cost is 2 dollars per order (8 dollars times 25 percent). On a 50-dollar average order with 55 percent margin, that 2 dollars comes out of 27.50 in gross profit — about 7 percent margin erosion.

Is the 7 percent margin hit worth the 8 to 12 percent conversion lift? For most businesses with decent margins, the math says yes. But it depends on your specific numbers, and you need to run the calculation with your actual return rate, shipping costs, and margin structure.

The hidden cost of free returns is behavioral: it trains customers to order multiple sizes or colors with the intention of returning most of them. Fashion retailers see this extensively — a customer orders three sizes of a dress, keeps one, and returns two. Your return rate rises, your shipping costs rise, and the returned items may not be resalable at full price.

Customer Pays: Deducted from Refund

The customer arranges and pays for their own return shipping, or you provide a label and deduct the cost from their refund. This is the most cost-effective approach for the seller but the most friction-heavy for the customer.

Many small and mid-size businesses use this model because the economics are simpler — you do not absorb return shipping costs at all. The customer knows they are paying to return the item, which discourages frivolous returns and keeps your return rate lower.

The downside is that paid returns can suppress initial purchases. A customer debating between your store and a competitor offering free returns will often choose the competitor, even if your product is better. The fear of being stuck with a product they cannot easily return is a real purchase barrier.

Deducting return shipping from the refund rather than making the customer arrange their own carrier tends to be the better version of this model. You still recover your costs, but the customer gets a prepaid label that makes the return process easy — they just lose 7 to 12 dollars from their refund.

Hybrid: Free Returns with Conditions

This is increasingly the most popular approach for mid-market e-commerce businesses. You offer free returns within a specific window (30 days is standard), for exchanges or store credit but not cash refunds, or above a certain order value. Some businesses offer free returns on the first order from new customers but charge for returns on subsequent orders.

The hybrid model lets you capture most of the conversion benefits of free returns while limiting the cost exposure. Offering free returns for exchanges and store credit but charging for refunds incentivizes customers to keep shopping with you rather than just getting their money back. And putting a time limit on free returns motivates customers to make return decisions quickly rather than letting products sit in their closet for months.

Setting Up Return Shipping Logistics

Prepaid Return Labels

There are two approaches to providing return labels: include a printed label in every outgoing shipment, or generate labels on demand when a customer initiates a return.

Including a label in every box is simple but wasteful — you pay for a label that 70 to 80 percent of customers will never use. Most carriers charge for prepaid labels when they are scanned, not when they are printed, so the shipping cost is only incurred on actual returns. But the label printing and insertion cost adds a few cents to every order regardless.

On-demand label generation is more efficient. When a customer initiates a return through your website or customer service, the system generates a return label and emails it to them. The customer prints the label, attaches it to the package, and drops it off. This approach costs nothing for orders that are not returned and gives you full visibility into which returns are in transit.

Most shipping platforms, including atoship, support automated return label generation through their API or dashboard interface. You can configure the carrier, service level, and who pays (sender or recipient) for each return, and the platform handles the rest.

Return Carrier Selection

The cheapest return shipping option is usually USPS Ground Advantage for packages under five pounds and UPS or FedEx Ground for heavier items. USPS has the advantage of nearly universal drop-off locations — virtually every neighborhood has a post office or mailbox — which makes returns easier for customers.

For returns that need tracking and delivery confirmation, USPS Priority Mail is a good balance of cost and reliability. For high-value returns where you need proof of delivery, add signature confirmation for two to three dollars.

Some businesses negotiate return shipping rates that are lower than their outbound rates, because return shipments are more predictable and can be batched. If your return volume is significant — more than a few hundred packages per month — ask your carrier rep about return-specific pricing.

Reducing Return Rates Without Restricting Returns

The best returns strategy is one that makes returns easy but infrequent. Several tactics reduce return rates without making customers feel restricted.

Better product photography and descriptions reduce returns caused by mismatched expectations. If the customer sees exactly what they are getting, they are less likely to be disappointed. Size charts with actual measurements, material closeups, and photos showing the item in use all reduce the gap between expectation and reality.

Product reviews with photos and size information from real customers are even more effective than your own product content. When a customer reads that the shirt runs small from another buyer who is their size, they order accordingly and do not need to return it.

Post-purchase communication also helps. A quick email after delivery asking whether the customer is happy with their order — with a link to easily initiate a return or exchange if they are not — catches problems early and gives you a chance to resolve issues before they turn into frustration. Sometimes a customer who would have returned an item will keep it after a brief customer service interaction that addresses their concern.

Quality control reduces returns caused by defective products, which should be the lowest-hanging fruit. Every return caused by a defect is a return that cost you the outbound shipping, the return shipping, and the customer's goodwill — triple the cost of getting it right the first time.