Pairs of Levi's jeans hanging from belt loop in a row.
During the pandemic, Levi's was able to turn 30% percentage of potential product returns into product exchanges.  — Levi's

Why it matters:

  • The National Retail Federation estimated that online merchandise returns more than doubled last year, with returns totaling $106 million for every $1 billion in retail sales.
  • Retailers are using returns data to make changes in their product design, assortments and merchandising to minimize returns.
  • New methods of returning products for e-commerce purchases, including in-store drop-off, promise to add efficiencies to the process.

The high cost of product returns for online retailers moved onto the front burner during the past year as e-commerce volumes ramped up dramatically amid the pandemic.

Many retailers were caught unprepared for the sudden surge in reverse logistics (moving goods from the consumer back the seller or manufacturer) that was required to manage all of the products that customers returned or exchanged. That left retailers searching for solutions that are not only cost-effective, but that also satisfy customers at a time when consumers increasingly expect returns to be free and easy.

A survey conducted last year by Narvar, which provides returns management solutions for retailers, found that 76% of consumers who were first-time buyers on an e-commerce site said that if the returns process was easy or very easy, they'd be more likely to purchase with that retailer again.

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Striking a tricky balance: Earning customer loyalty with generous return policies while mitigating costs

Retailers need to strike the tricky balance of earning the customer satisfaction that a generous return policy yields, while mitigating the costs that returns can incur.

Returns that are not managed properly can cost retailers not only in terms of the direct expenses involved, but also in terms of the potential losses in the lifetime value of customers who are dissatisfied with the return service, said Peter Sobotta, founder and CEO of ReturnLogic, which works with brands and retailers to help manage product returns.

“This is probably the biggest and hardest problem to solve in retail right now,” he said.

Consumers returned an estimated $428 billion in merchandise to retailers overall in 2020, according to the National Retail Federation. While the total rate of returns was comparable with recent years, online returns more than doubled last year, compared with 2019 levels, as e-commerce soared to $565 billion.

NRF’s survey data revealed that for every $1 billion in sales, the average retailer incurs $106 million in merchandise returns. Logistics services provider Easyship estimated that the cost of returns eats up about 14% of a product’s retail price, on average.

Data to the rescue: Analyzing returns to optimize product mix and ease process

Increasingly, retailers are analyzing returns data both to optimize their product offerings on the front end in order to minimize returns, but also to make their returns operations more efficient and easier for the customer.

Women’s fashion brand Ecru, for example, has been working with ReturnLogic since before the pandemic and has used data analysis from product returns to implement a range of operational changes. By analyzing data from ReturnLogic, Ecru has been able to evaluate the sales volumes and return rates for products made with different fabrics, which helps inform product development. The company also streamlined its assortment based on high return rates for certain items.

The brand has cut its return rate to 9% on a three-month moving average since it began using ReturnLogic, compared with return rates of 25% to 30% that are common in many types of women’s apparel, according to ReturnLogic. In addition, it was able to reduce so-called “bracketing” or “fitting room” purchases—when consumers buy multiple sizes of an item and return the ones that don’t fit—by 15%.

The company attributed the improvements in part to the additions it made to its online product descriptions, which have helped consumers get a better idea of how products might fit.

Data that includes specific reasons for returns could be used in product design and development, for example, and to optimize merchandising. When the total cost of returns of certain items are factored in, it could lead retailers to focus more resources promoting products that have lower return rates, the report states.

“The feedback in return reasons or comments tells me when a product may need adjustment, or if the product description may need to be altered on the website,” Howard Sheer, managing director at Design Factory NYC, parent of the Ecru brand, said in a ReturnLogic case study.

Data analysis from returns represents a significant opportunity for e-commerce brands and retailers, particularly in apparel, according to a recent report from McKinsey & Co.

“Returns data could, in fact, be considered throughout the go-to-market process,” the company concluded in its report.

Data that includes specific reasons for returns could be used in product design and development, for example, and to optimize merchandising. When the total cost of returns of certain items are factored in, it could lead retailers to focus more resources promoting products that have lower return rates, the report states.

Data around product returns can also help drive pricing decisions, Sobotta said. High-priced items are often more likely to be returned, he explained, so returns data might help retailers determine which items might drive better margins at a lower price point, if returns and their associated costs are reduced.

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Speed of returns matters: Making goods available swiftly for resale is key

Getting returned items back quickly and minimizing the time and distance they travel are also key, said David Morin, head of retail strategy and customer success at Narvar. Making returned products available for resale as quickly as possible is especially important in the apparel industry, he said, because the longer it takes to process a return, the more likely it is that the item will be subject to a price markdown.

To help solve for this, Narvar offers customers a "printerless" return option in which they can use a QR code to show when they drop off their package in lieu of printing a return label themselves.

During the pandemic, Levi’s was able to use Narvar to support the denim brand’s relaxation of its return policies. For example, Levi’s added online product exchanges that assisted customers in finding the right size even when stores were closed, turning 30% of potential returns into product exchanges instead.

In addition to offering consumers the option of returning items to a physical store, another tactic increasingly being adopted by e-commerce brands and retailers is to make sure returns are being shipped to the nearest location that accepts returns, Morin said.

Previously, many retailers had all of their returns shipped to one central distribution center, but shipping items to the nearest distribution center offers multiple benefits for both consumers and retailers, he explained. Consumers may be able to get their refund faster, for example, which in turn cuts down on the amount of time retailers might have to spend managing consumer queries about the status of their returns.

In addition, distributing returns among multiple distribution centers can help retailers better manage their labor costs and the speed at which they can process returns by dividing the labor up among multiple locations.

Along those lines, some retailers have also begun to incentivize faster returns, Morin explained, by offering free returns within a certain time window, such as 15 days, for example, but charging for returns past that time.

Jackie Ostrov, head of growth at logistics company Easyship, said transparency is key when it comes to returns. That includes clearly disclosing returns policies upfront and providing tracking updates via email or within e-commerce platforms.

Most shoppers prefer to have the ability to ship products back to the retailer rather than returning them to the store, she said, citing 2019 research from Statista showing that 63% of consumers that retuned e-commerce purchases did so by mail, versus 13% who brought products back to stores.

“Shoppers expect their e-commerce return to be as seamless as the purchase itself,” Ostrov said.

Ostrov believes retail pick-up/drop-off (PUDO) locations for product returns will gain traction as retailers seek cost-effective solutions that satisfy consumers.

“We predict a rise in online drop-offs at retailers in the U.S., similar to PUDO points across Europe and the Asia-Pacific,” Ostrov said.

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