The Business of Returning Things
By Robin Barrett Wilson, Oliver Stocks, Cindy Waxer | 10 min read
It used to be that surly cashiers, crumpled receipts, and lengthy negotiations determined if a customer could return an unwanted item, whether it was a pair of ill-fitting jeans or a malfunctioning toaster.
Those days are long gone. Today, customers demand easy and convenient returns – and in response, some sellers are making returns part of their value pitch to customers. Take Stitch Fix, for example. The online retailer relies on sophisticated algorithms to send clothing to customers based on their style preferences. Customers only pay for what they decide to keep, so there’s no waiting around for a refund or navigating a cumbersome returns process. By integrating returns into its business model, Stitch Fix has found a way to not only please customers but also gain a competitive advantage in a crowded marketplace.
The numbers prove it: although founded only a decade ago, Stitch Fix is now worth US$5 billion and has about four million customers in the United States and United Kingdom. It’s no wonder: according to a survey by Voxware, 97% of consumers “agree or strongly agree” that the way retailers handle returns influences whether they will purchase from that retailer again in the future.
Stitch Fix joins a growing number of retailers, including brick-and-mortar behemoth Home Depot and online eyeglasses outfit Warby Parker, that are discovering the bottom-line benefits of customer-centric return policies.
But the emphasis on returns as a strategic advantage for B2C and B2B companies alike is a relatively recent phenomenon. “No one ever thought about returns until America embraced a satisfaction-guaranteed culture driven by big-box retail stores that use return policies as a competitive sledgehammer,” says Tony Sciarrotta, former director of asset recovery for Philips and current executive director of the Reverse Logistics Association, a global trade association for the returns and reverse logistics industry.
Wielding that sledgehammer takes more than an open-arms returns strategy. Companies must shift their mindsets to stop viewing returns as a necessary evil – and instead start viewing them as an opportunity to create great customer experiences, differentiate themselves from competitors, and protect the planet.
An urgency for change
There couldn’t be a better time for a seismic shift in thinking. COVID-19 continues to reshape the retail landscape, compelling customers to move from brick-and-mortar stores to the safety of stay-at-home online shopping. E-commerce sales reached $792 billion in 2020 – an increase of 32% over the past year, according to the U.S. Department of Commerce.
Customer-friendly return policies lure shoppers and improve market share. But they also can increase the likelihood of returns – and their labor-intensive processes and wasteful costs. This has been compounded by recent changes in customers’ online purchasing behaviors. For instance, many customers now buy multiple items at a time and simply return the ones they don’t want. This increasingly common practice, known as bracketing, is driven by the promise of free shipping and returns as well as customers’ desire to mimic the in-store experience of trying on clothes to find the perfect fit and size.
The steady rise of e-commerce over the past decade has contributed to a 33% increase in the return rate of overall retail sales, reports Deloitte. And last year alone, total returns accounted for over $400 billion in lost sales for U.S. retailers. With e-commerce revenues growing 15% annually, return rates are likely to escalate.
Part of the problem is that once returned goods are back in the hands of a retailer, less than half the units are resold at full price. Some are sent for refurbishing or repackaging, while others are funneled to wholesale channels, where a retailer “might get pennies on the dollar,” says Sciarrotta.
Another ugly aspect of returns is its negative impact on the environment. Transporting returned inventory in the U.S. creates over 15 million metric tons of carbon dioxide emissions annually. What’s worse is that five billion pounds of returned goods end up in U.S. landfills each year, resulting in a huge environmental footprint. At the same time, customers are increasingly weighing companies’ sustainability commitments (or lack thereof) into their buying decisions. That’s all the more reason for companies to treat returns as a key part of a good customer experience.
An ounce of prevention
This new mindset, and the best practices needed to support it, can be divided into two main categories: preventative measures and proactive responses. Together, these steps can help both traditional businesses and e-commerce outfits transform returns into a valuable tool for increased customer engagement and profitability. Here’s how: “The best return is no return,” says Sciarrotta. He would know. During his years at Philips, Sciarrotta made sure that the company’s returns management department focused on how it could stop returns before they entered the reverse supply chain. Strategies included enhancing products’ ease of use, enforcing realistic return policies, and bolstering collaborative customer support networks. The result: the electronics giant reduced its return rate from 12% to 4% over a 10-year period, amounting to savings of $100 million per year.
The first step toward stemming the tide of returns is to design a more customer-friendly Web site. Nearly a quarter (23%) of returns are made because of inaccurate depictions of a product. “What you see on a screen is not always what you get when it arrives at your home,” says Sciarrotta.
Fortunately, there are a number of ways that companies can set more realistic expectations for online shoppers. High-quality visuals, zoom-in capabilities, sizing charts, detailed product descriptions, and even photos of influencers or other customers using a product can go a long way toward building trust and confidence in purchase decisions.
Technologies such as artificial intelligence (AI) and augmented reality (AR) are also playing an increasingly important role in staving off returns. For instance, AI can conduct a real-time assessment of an online shopper’s cart and compare it to their purchase history and preferences, such as fit, to determine the likelihood of the product being returned. Next, these insights can automatically trigger a response, such as offering a product discount or suggesting a more suitable alternative, based on whether it’s better to incentivize or dissuade the sale.
Similarly, AR can prevent returns by allowing a customer to overlay physical objects and images on the screen of a mobile device, creating a three-dimensional, immersive visual experience. Furniture and housewares retailer Crate & Barrel developed a 3D mobile app that lets customers visualize how a product would look in their homes and offices. Users input their room measurements and select from more than 3,000 models of items to transform a digital photo into a 3D virtual room. AR tools not only allow shoppers to examine products in detail before making a purchase but also raise a company’s profile as a tech-savvy brand.
Retailers are also partnering with suppliers and manufacturers to ensure that customers’ buying expectations are being met. “For example, some companies send computer schematics to suppliers and vendors of the items they’re producing at different locations around the world to ensure conformity to a single standard,” says James Stock, a professor of supply chain management at the Muma College of Business, University of South Florida. “You want to make sure that a given shoe size, for example, is exactly the same fit whether it’s a loafer, a tie shoe, a sneaker, or a sandal, which can automatically reduce returns based on size.”
Getting proactive
Despite every effort, however, as long as products are sold, there will always be some returns. To maintain a competitive edge, according to Stock, retailers must look beyond simply minimizing the cost of processing returns. Rather, he says, the real profit potential comes in disposing of those items in a way that generates ROI.
Stock adds that the overall goal is to have as many options as possible to handle a returned item, including repairing, refurbishing, and repackaging it. The more options available, the greater the potential for cost savings. Stock cites a mail order catalogue company where he once worked that had no less than ninety options for handling returns, each one with a specific ROI so that the company would know the best way to handle a particular item.
The good news is that there’s no longer a shortage of ways to proactively manage product returns. Online liquidation market sites, such as B-Stock Solutions and Overstock.com, work by allowing retailers to auction off bulk quantities of products across all categories and conditions. Some retailers, such as Best Buy, are taking matters into their own hands by selling open-box items online and hosting sales events for returned goods after the holiday season. And technologies such as returns management platforms allow retailers to automate workflows and increase visibility into the entire returns process.
In addition to preserving the value of returned goods, these initiatives reduce the amount of waste that winds up in landfills – a critical selling point for a growing contingency of customers. According to a survey by CGS, more than two-thirds of respondents consider sustainability when making a purchase and are willing to pay more for sustainable products. Gen Z shoppers are some of the most planet-conscious buyers – a demographic that is certain to shape the future of retail and return best practices.
Data to the rescue
Drilling deep into how, when, and why customers return products is critical to improving overall customer experience. Data can help. “Companies can use machine learning and AI to determine why returns are happening in the first place,” says Curt Bimschleger, a supply chain leader and managing director at Deloitte.
By analyzing data on returns, companies can identify pain points in the process and determine how best to improve. This can also be helpful in managing partners. Case in point: “With analytics, retailers have powerful data that can be used to negotiate better buying agreements with suppliers,” says Bimschleger. For example, a retailer may negotiate better terms with a supplier whose products are associated with higher return rates.
Data analytics can also help retailers broker better arrangements with customers. Lenient return policies can have the adverse effect of encouraging customers to engage in costly behaviors, such as bracketing or returning products after their market value has diminished.
However, by crunching vast volumes of data, companies can distinguish between overly aggressive returners, legitimate returners, and nonreturners and treat them accordingly with personalized messaging and targeted offers. For example, a data analytics system can flag a customer who repeatedly purchases and returns items by offering them smaller discounts on sale items than those offered to more profitable customers.
But even data-driven insights can’t replace the personal touch of face-to-face interactions when it comes to the returns process. This is an opportunity for the brick-and-mortar store to seem like a feature rather than a bug. That’s why a growing crop of traditional retail brands, such as Saks Fifth Avenue and J. Crew, are turning to Buy Online, Return in Store (BORIS). BORIS offers a win-win situation for retailers and customers. “First, customers can receive credit for a purchase right away,” says Bimschleger. “Second, the retailer has a huge opportunity to find the right size or style for the customer or up-sell them other products.”
Bimschleger predicts a time when businesses will allow customers to return items curbside – a particularly attractive option when dealing with large and heavy purchases. “Customers would be able to pull up and receive a credit right there, without even leaving their car,” says Bimschleger. “I see that coming in the near future.”
A look to tomorrow
Getting to this new world of returns, however, will require many retailers to part with the past. “Sometimes you simply can’t generate more sales to generate profits,” says Stock. “That’s the traditional way of doing business.”
Instead, more and more retailers are making innovative technologies, hybrid business models, and online marketplaces part of a returns strategy that promises not only to minimize costs and waste but, more importantly, to keep customers coming back.
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