Doorman Eugene Amankwah (L) watches as USP delivery man Dion Seaberry delivers packages to the building he works in, at Central Park West in New York November 30, 2012. (Keith Bedford/Reuters)

The big idea: Many online retailers view product returns as an unwieldy cost that drains margins, and several are asking customers to absorb return shipping costs. But consider the upside of free returns: enhanced customer loyalty that could spark more purchases.

The scenario: U.S. firms spend billions annually in the handling, shipping, insuring and processing of returned products. Returns are particularly problematic for online retailers, in part because customers might not know what they’re actually getting. To partially stave off profit losses and control excessive return rates, many retailers have established what they believe to be a “fair” deal in the form of equity-based return shipping policies. If retailers determine that returns are their own fault, they will absorb the return shipping costs; otherwise, responsibility falls to consumers. Yet, the chances that customers and retailers will agree on who’s to blame are fairly low.

The poorest assumption of equity-based return shipping policies may be retailer beliefs that customer perceptions of fairness drive their reactions. Consumers clearly have myriad shopping options in many product categories, and shoppers indicate that online return shipping policies often sway them away from online retailers and toward traditional bricks-and-mortar stores.

The resolution: Working with two online retailers, we conducted studies over 49 months. We coupled responses from two online surveys at key points over the course of customers’ return experiences with their 24-month pre-return and 24-month post-return purchase histories to help managers better understand the long-term revenue consequences of return shipping policies. The results indicate that retailers who require their customers to pay for their own returns are not only doing serious, long-term damage to customer relationships, but also are ignoring the substantial benefits of free returns. Making customers pay for their own returns universally decreased their spending, 74 to 100 percent in the two years after the return. These effects were not reversed by perceptions of fairness. On the other hand, customers who received a free return universally increased their spending 58 to 357 percent.

The lesson: Our findings remind retailers that customers will have their own independent perceptions of blame, reactions to return fees and most important, ability to decide whether they will shop again. Given the number of suppliers for any product, online retailers who fail to recognize the significance of return shipping costs to customers may lose them to competitors. In particular, as the holiday season ramps up, customers may end up with products they did not buy, do not want and are either stuck with or must pay to return. Free returns may encourage future purchases from these gift recipients, while fee returns will, more than likely, guarantee no future purchases. The strong upside resulting from free returns, and strong downside of fee returns, strongly suggests the benefit of universal free returns.

James G. Maxham III and Amanda B. Bower

Maxham is a professor of commerce at the University of Virginia McIntire School of Commerce. Bower is a professor of business administration at Washington and Lee University.