As high-profile retail outlets, like Sears, declare bankruptcy, and others like Lord & Taylor close their flagship stores, it’s becoming increasingly clear that ecommerce is the way forward for retail businesses. In fact, one recent study from Shopify shows that revenues from ecommerce sales are projected to reach $4.5 trillion by 2021.
But, this comes with a catch: Businesses that shift their focus to online sales risk facing more order returns and shipping issues. While return rates for the average brick-and-mortar business typically hover around 8%-10%, an ecommerce-based business may need to refund or exchange up to 20% of their orders during the year. And during the holiday season, this figure could rise to a whopping 30%.
How your business addresses shipping and returns isn’t just important for ensuring a seamless holiday shopping experience for your customers. Businesses that fail to take their shipping and returns policies seriously could run afoul of the Federal Trade Commission’s Mail, Internet, or Telephone Order Merchandise Rule. Doing so could lead to critical sanctions for your business.
Once the FTC files a complaint against your company, it can request fines of up to $41,484 for each violation committed within five years before the complaint’s filing date. The agency can also demand injunctive relief and even force noncompliant organizations to issue refunds to consumers on affected orders that were processed in the three years preceding the complaint’s filing date.
These issues underscore why you should thoroughly analyze your shipping and returns practices. Here are five questions you should consider when vetting your returns and shipping policies to avoid potential problems with the FTC.
1. Are your expected shipping dates too ambitious?
The FTC’s rule states that if you do make representations or claims about when you ship out your products, you must have a “reasonable basis” for publishing those claims.
This means that at the time you provide any anticipated shipment dates to customers for their orders, you must have enough evidence necessary for the average reasonable businessperson to arrive at the same conclusion you did regarding your ability to honor those shipment dates.
If you don’t make specific promises regarding turnaround times, then you are presumed to have a reasonable basis for shipping your customers’ orders within a 30-day timeframe. If you solicited a sale that involved a credit application and made no shipment promises in the process, you are permitted to ship your customer’s order within 50 days instead.
In all of these scenarios, your delivery obligations begin once you receive full or partial payment from the customer and enough details about the order to start preparing it for shipment. If you’re unable to ship on time, you will need to issue full refunds if you fail to notify your customers about the delay in a timely fashion.
To avoid this problem, you or your team should weigh anticipated customer demand for your products, potential inventory issues, and potential shipping and logistics obstacles when determining shipment turnaround times.
2. Are you using clear communication practices and workflows with customers?
The FTC has very specific rules about how business owners must communicate shipment delays to their customers. In order for your business to be compliant, you’ll need to make sure you’re taking the following steps if you face a shipping issue.
If you’re unable to ship a customer’s order within your advertised timeframe or within 30-50 days if you don’t provide shipment turnaround times, you must provide your customers with option notices via email, telephone, fax, or mail that give them the opportunity to cancel their purchases before shipment.
These notices must include a definitive revised shipping date, or a statement explaining that you’re unable to provide a revised shipping date; a statement explaining that customers can cancel their orders and be fully and promptly refunded; as well as instructions describing how customers can cancel their orders at your business’s expense.
If you provide a revised anticipated shipping date of 30 days or less in your initial notice, you must disclose to customers that their orders will not be canceled if they fail to respond before their orders are shipped. If your business is unable to provide a definitive revised shipping date, you must also include sections explaining why the delay occurred and clarifying that if the customer agrees to wait, he or she can cancel the order before it’s shipped and be refunded.
Your business must also promptly submit renewed option notices to customers if subsequent developments cause further shipment delays. If this occurs, you have to notify customers before the initial revised shipment date you provided with either a new or indefinite shipment date, and advise them that their orders will be canceled and refunded if they fail to respond to the notice or consent to the new shipment date.
Any refunds the customer requests must be delivered either within seven business days from cancellation if paid by cash, check, money order, or credit card; or within one billing cycle after the cancellation if the customer has an account on file directly with your business.
3. Are you notifying customers regarding backordered items and product substitution options?
If you find that the product your customer ordered is out of stock, your business is not allowed to send a substituted product without the customer’s permission if it is considered “materially different” than the advertised products they purchased.
A product is considered “materially different” under the FTC rule if it has features expressly mentioned in its promotional and advertising materials that would influence the buyer’s purchase decisions. Factors that would be considered to influence these decisions include the color, style, make, fabric, and advertised end use of the substituted product.
For backordered items, you must either obtain the customer’s permission to ship your item by the delayed date or issue an immediate and full refund.
4. Are your drop-shipping and fulfillment partners honoring your shipping policies?
If you outsource your shipping and fulfillment capabilities to outside partners, you could be in hot water if your partners take longer than expected to ship your orders. This is because the rule considers the person or business that solicits the order—and not business partners that fulfill them at the merchant’s direction—as the true seller. Mostly because the merchant in this instance is considered to have more control over managing shipment partners and shipping representations.
You business, however, will not be liable in this scenario if you can show that you made all reasonable efforts to prevent violations, whether through enforcing pertinent contractual clauses or by overseeing your customer complaints and your partners’ fulfillment activities. You also won’t be liable if the violations were unforeseeable and beyond your control, if you had no objective basis for knowing or having reason to know that a partner was committing violations under the rule, and you took all reasonable steps to promptly resolve the disputed fulfillment issues and rectify the customer’s situation.
5. Are you keeping detailed records of your shipping activities and practices?
Regardless of whether you actually face shipment delays, it’s never a bad strategy to start documenting your fulfillment practices right away so that you’re able to present strong evidence backing up your shipment representations. Ideally, you should record information regarding the details of your delay notices and related telephone scripts, cancellation and option notice response protocols, and customer correspondence.
You should also start documenting and storing records detailing how your fulfillment process, inventory management systems, and fulfillment management programs anticipate and comply with FTC rule requirements.
Although you’re expected to keep your records on file for up to three or five years depending on whether the FTC initiates a civil or criminal action against your company, you may need to store these files for longer periods of time to account for state-level statute of limitations for similar violations.
These are just a few factors for you to consider as you’re setting up your business’s shipping and returns policy, or if you’re reviewing your current policy to make sure that it’s FTC compliant. It’s also always a good idea to consult with a business attorney as you’re considering any policy that potentially has legal ramifications.
Author’s note: This article has been prepared for informational purposes only and not for the purpose of providing legal advice. You should contact your attorney or accountant to obtain advice with respect to any particular issue or problem.