What Online Retailers Get Wrong About Returns

This year, January 2 was called “National Returns Day”. Sort of like the hangover day to Black Friday. Returns will increase by 26% compared to last year (and well above the 18% growth in e-commerce).

A lot has been written about The Returns Problem, and thought pieces generally rehash Amazon’s impact on customer expectations (huge) and what that is costing everyone else (a lot).

I’ve worked with some of the most innovative companies in e-commerce, and there seems to be a missed opportunity with returns no one is talking about:

Online returns impact the bottom line…but they also drive the topline.

Zappos showed great returns increase sales and attract disproportionately loyal customers. And while Amazon has always embraced logistics as a growth lever, Amazon loses $8 billion a year on logistics alone.

For every other retailer that can’t absorb such enormous losses, this poses a conundrum: how do you keep customers happy without losing your shirt?

Don’t retailers need to offer the most generous return policy they can, just to compete?

As with most things, it depends.

A return policy can have a bigger impact on certain products and customers than others, even at the same retailer.

While return policies de-risk online buying, what drives purchases for one product may be unnecessary for another item. Moreover, processing costs and resale value vary dramatically depending on a bunch of variables, which significantly influence the profit impact of every return.

‍Here is an example:

One study showed that for certain types of apparel anything longer than a 15-day return window offers few incremental benefits; in other words, a 30-day or 60-day return window does little to encourage more sales or repeat purchases.

How does this impact a retailer’s bottom line? Retailers are losing tons of money on inventory sitting in consumers’ closets for 30 or 60 days, since most of these items will sell for <50% of their retail value once they are finally returned.

So retailers should just focus on reducing returns?

Again, it depends. Of course, retailers could tighten policies to curtail returns, but at what cost to future sales?

A great returns experience isn’t just transactional but relational, driving sales through trust and loyalty. And a retailer’s best customers often have a higher-than-average return rate.

More important than “reducing the return rate” is understanding returns’ impact on contribution margin, and looking at that by product, category, geography, and customer.

For example, retailers should reward the best customers with the best returns experience, because their profit contribution over time will more than offset the cost to service them.

And yes, retailers need to focus on reducing returns where it makes sense. Find situations where overly generous return policies don’t add anything to growth — say, by product or customer — and limit the negative impact on a targeted basis.

Retailers will prevent unnecessary erosion to profit, without compromising the benefits of a customer-friendly — and competitive — returns program.

Online returns are an investment, not a cost.

Return policies and return experiences influence 80–90% of online purchasing decisions. Think about that. This means for many online retailers, their returns and return policies are a lot like…well, marketing.

Retailers are spending considerable amounts managing their returns, often in excess of 10% of their revenue. By comparison, e-commerce as a whole spends about 9% of its revenue on marketing.

Retailers would never spend on marketing without understanding what the potential return on investment is, but they are doing that with returns.

Online retailers need to optimize returns, not minimize them.

I’m a big fan of “first principles”, or understanding the fundamental components to a problem.

The first principle of online returns is that they are a form of marketing, and as such they should be optimized like any other marketing investment.

Retailers are well-positioned to maximize the upside of their return programs — and minimize the downside — given today’s unprecedented access to data across the entire e-commerce ecosystem.

There is a huge opportunity for online retailers to understand the effectiveness and ROI of every single return, and take action through better data, better personalization, and better return responses.

Some examples:

Where can retailers strip out unnecessary costs from return policies that don’t positively impact conversion or sales?

Does a generous return policy make sense for every type of product, or only for certain categories?

Should a retailer over-invest in the returns experience for higher value customers (vs. customers they lose money on every time they make a purchase?)

Just like the best marketing, retailers can and should optimize their returns for more sales, better loyalty, and higher profits. This means doing away with a one-size-fits-all return policy and instead empowering retailers to have the right returns response, for each and every transaction.

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Five years ago I was ruminating with another founder that “offline” e-commerce should be just as nimble and responsive as anything online. There has been a ton of progress on the delivery front since then, but due to its complexity and unpredictability, few inroads have been made with returns. I like to think 2020 as the year that changes with Atomic.