Returns: The eCommerce Hangover - FORTNA

Returns: The e-Commerce Hangover

Why You Need to Spend More Time Thinking About Returns

by FORTNA Thought Leader

The pandemic that accelerated the growth of the e-Commerce channel, also created a tsunami of returns. Despite the high costs of processing returns and growing return rates – many companies have yet to invest in a robust returns management process. It’s time to turn the attention that’s been given to outbound logistics to its counterpart – reverse logistics.

A whopping $761 billion of merchandise was returned in 2021. More concerning is the average return rate that rose from 10.6% in 2020 to 16.6% in 2021. Since e-Commerce purchases are returned much more frequently than instore ones, as the e-Commerce channel continues to grow, so will the rate of returns.1

And as we all know, processing returns is costly. According to a report by CBRE and Optoro, the average cost of processing a return equals two-thirds of the original price, after factoring in labor, transportation, and warehousing costs. But there’s pressure to keep returns free. Most customers review return policies before they buy and spend three times more at retailers with free returns.

What is the Opportunity?

Companies need to think of returns as a key part of their strategy. Not only are returns an important customer touchpoint, improving returns can have a substantial impact on the bottom line. It’s more than just cutting costs out of the process. Returns are a goldmine of information that can act as a feedback loop for the entire organization – from buyers to merchandising to warehousing. Returns are also a chance to cross-sell and upsell the customer, leading to more sales. In addition, an accelerated returns process may mean the item can be resold at full value before it depreciates or misses the selling season. And according to Multi-Channel Merchant, an optimized returns process can result in a 20% reduction in inventory.

And there’s one more reason it’s time to invest in improving reverse logistics. A good returns process can be as good for the environment as it is for the bottom line. Up to 25% of returns end up in landfills resulting in 5 billion pounds of waste, according to Optoro. And sustainability, is a matter of increasing importance to today’s consumers.

Think Cross-Functionally

The first step toward improving the returns process is a change in mindset. Reverse logistics is a company-wide process that needs a cross-functional owner. Think about what prompts a return. Sometimes it’s a product quality issue that should be addressed by manufacturing or buyers. Sometimes it is due to an incorrect description and marketing needs to update information on the website. And products returned due to damage, late delivery, or mis-picks indicate a problem in fulfillment.

A cross-functional owner can manage this feedback loop, as well as arbitrate performance goals across the company. For example, they might push for sales commission to be net of returns. And they can drive more strategic data analysis, like the cost per unit of returns by channel, and the rate of returns by product and product group.

Upgrade your Technology

Another way to improve the returns process is by adding technology. The growth in returns has attracted new suppliers and technologies focused on addressing the problem. Returns management software can route returns to the most profitable nodes, by weighing how quickly the item is likely to resold at each node against the costs of getting it there, including transportation, processing, repackaging, and relabeling costs. Some systems even suggest the optimal resale price by analyzing market demand and historical data.

The technologies that have revolutionized outbound logistics – pouch systems, mobile robots, and goods-to-person solutions – can be run in reverse to efficiently restock returns. There are also new fitting technologies to ensure the customer orders the right size. And artificial intelligence solutions can use cameras to help quickly assess the condition of a returned item.

These new technologies not only make the returns process more efficient, but they also accelerate it – making it more likely the item can be resold at full value.

Reduce Returns

Those are all ways to improve the returns process. But an even more cost-effective (and sustainable) solution is to reduce the number of items that get returned in the first place. This is easier than it sounds given that eight of the top ten reasons items are returned are “controllable” – for example, the item didn’t match the website description, or was delivered late.

A relatively easy fix is to maximize what a customer knows about a product before it’s purchased. The website should include thorough descriptions of each item, multiple zoomable images, and fitting guides. Product videos should be added to help the customer imagine the item in their own home and see the item’s relative size. Live chat and customer reviews should be available to guide the customer to buy the right item, eliminating the need for a return.

Another way to reduce returns is to incent customers not to make them. A report from PYMNTS suggest that a discount of 10% could persuade 50% of customers to keep an item they were going to return.

Lastly, if a customer insists on a return, two things should happen. First, the customers should be encouraged, and assisted, to find a substitute product or accept store credits, instead of cash, to hold on to the sale. Second, customers should be incented to use the lowest cost return option – usually return-to-store – which has the added benefit of another chance to cross-sell.

Also, more and more companies are implementing “just keep it” strategies for items where the cost of the return outweighs the resell value. AlixPartners estimates this type of refund costs companies as much as $4.4 billion in 2021.

Need a Place to Start?

If all this seems overwhelming, a Returns Management Audit may be right for you. In a short consulting engagement, FORTNA experts will review your return data, return process, returns handling capacity, return policies, and systems. This information will feed a recommendations report of both short-term and long-term suggested actions to improve the returns process.

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