Returns can be a logistical nightmare for retailers of all shapes and sizes. However, many brands consider the inconvenience a necessary part of their customer service playbook. Keeping customer satisfaction high and ensuring loyalty can lead to long-term customers and higher customer lifetime value (CLV).
However, rising overhead and inflation are forcing retailers to reevaluate generous returns policies and weigh the cost of returns in the short-term against long-term considerations. Let’s review some current return policy trends and the alternatives to maintaining customer loyalty without a hit to the bottom line.
Pandemic shopping shifts the paradigm
As with most things related to today’s consumer, free returns became the norm as Amazon rose to prominence over the past two decades. Due to their size, the e-commerce giant was able to absorb the cost of returns, as well as offer other incentives such as 2-day shipping. While Amazon has normalized these options in the e-commerce space, it has created major concerns for other retailers.
Before COVID-19, e-commerce was on the rise and direct-to-consumer (DTC) brands were finding success by leveraging social media platforms to get their goods in front of customers and encourage online sales. They also could see that their margins were higher without the added cost of a physical location. It seemed like DTC was the future of online shopping.
COVID-19 only accelerated this trend and confirmed shoppers were more than willing to make purchases online from large and small retailers alike. However, DTC brands were at a distinct disadvantage with returns. With no physical storefront, the only option for customers was to make a return via mail. Returns by mail are an inherently expensive proposition, which has only become more expensive with the recent increases in shipping rates.
Additionally, online purchases are returned at a greater rate than in-store purchases. This exacerbates returns costs and the associated loss due to the higher volume of returns.
Why it’s important to reduce the cost of returns
While free returns were never truly free, the rise in online returns has become so large that the loss is now measurable. The National Retail Federation (NRF) estimates that 16.5% of all online sales will be returned. That amounts to more than $212 billion worth of merchandise.
The total value of returned merchandise is estimated to be $818 billion for U.S. retail sales.
While retail giants may be able to absorb that type of loss, other retailers simply can’t. On top of having to refund the item cost, retailers must also pay the shipping cost for the returned product. Plus, only about half of all returned items can be sold again for full price, and it's been estimated that retailers dispose of up to as much as a quarter of all their returned goods. Thus, lenient retail policies can lead to cost increases across the board as companies look for ways to recoup lost dollars.
5 effective ways to reduce the costs of returns
Fortunately, there are ways to combat the rising costs of returns by implementing some specific steps.
Provide accurate product specs
A primary reason for clothing retailer returns is poorly fitting clothing. As a result, many consumers purchase multiple sizes, resulting in an automatic return to the retailer once they’ve determined the size they feel fits best. For e-commerce purchases, inaccurate, confusing, or hard-to-find sizing information can increase return rates.
E-commerce retailers should ensure their sizing information is easily accessible, well-designed, and accurate for every SKU to reduce the risk of a common reason for returns.
An emerging way to combat this is to encourage user-generated content (UGC) that highlights reviews and encourages buyers to share their experiences with sizing, fit, quality, and more. Having ambassadors for your brand explain sizing and fit in UGC can curb returns on items such as clothing and shoes.
Invest further in product quality
By increasing the quality of products, there is less chance that consumers will be disappointed after they’ve received an item. This increases the likelihood that customers will keep the item, instead of seeking to return it. It’s also important to create accurate product descriptions that explain and describe an item as much as possible.
Consider adopting new technology
Augmented reality and artificial intelligence has made virtual fitting rooms a reality for many consumers.
These technologies make it easier for shoppers to anticipate how an item may fit or how home decor may look in their living space.
Additionally, investing in technology for backend operations, in a warehouse or receiving center, can make returns processing quicker and easier. By streamlining reverse logistics at the source, it’s easy for retailers to mitigate the additional costs associated with returns.
Clearly document return policies
It’s important to clearly communicate your store’s policies relating to returns to consumers and to employees. Especially when employees may be interacting face-to-face, it’s helpful for your employees to have a clear understanding of the policy so they are empowered to enforce it.
It may also be beneficial for your organization to make your policies more flexible for peak times of year. And while this will increase brand trustworthiness, there is a fine line between allowing customers to purchase stress-free and allowing them to abuse a liberal returns policies.
Outsource returns handling
The added cost and time related to reverse logistics simply doesn’t pay off for different types of retailers. As a result, the easiest and most cost-effective solution may be to outsource the entire process to a third-party, such as a third-party logistics (3PL) company. By deferring the responsibility for returns to another company, it’s easier for retailers to refocus their attention back to the areas of their business that will generate the most revenue.
How QuickBooks Enterprise helps you track and control the cost of returns
QuickBooks Enterprise offers functionality that helps retailers maintain accurate inventory counts and streamline order management and fulfillment while providing advanced reporting that measures and tracks reverse logistics.
Returns are considered part of the order fulfillment workflow, so your business management platform must keep the most up-to-date records and sync in real-time to your point-of-sale or ordering system.
With real-time updates and robust reporting features, managing your returns and the associated high costs will be easier for businesses looking to handle returns better.
Reverse logistics, or returns, come with costs that can hurt e-commerce and physical retailers' bottom lines. Getting a handle on your returns management process will help to decrease returns across the board and lead to better margins for retailers.
