Returns: How optimising the customer checkout journey can turn a financial void into a cash cow

In 2023, many retailers have taken a U-turn in their returns policy, shifting away from the “no questions asked, free returns in 30 days” strategy, which most adopted during COVID. While at the time, this type of policy was one way to keep a retail business afloat despite lockdown restrictions, the industry is now paying the price for this overly gracious positioning.

Returns are a worldwide hurdle for retailers

It is hard to find a consensus but estimates of the rate of return of online purchases in the retail industry vary between 15% and 50%. This fluctuates among channels, brands, countries, and types of items which leads to widely different estimations. For example, while household items are on average returned at around 1% to 3% rate, fashion go as high as 70%. The National Retail Federation (NRF) has estimated that in the US alone, this totalled to$743 billion in 2023, out of which a fair share (14%) could be avoided.

A large share of returns is abusive or fraudulent

In the US, 14% of total returns are abusive or fraudulent. This fraud can take many forms:

• Returning items paid for with stolen, fraudulent or counterfeit payment methods
• Sending back stolen or shoplifted items
• Using counterfeit receipts
• Intentionally making false claims to obtain a refund
• Pretending the item was never delivered when it actually was
• Bracketing: customers buying multiple options for size or colour to return the rest
• Wardrobing: customers returning used/worn non-defective items
• Initiating friendly fraud chargebacks: customers disputing accidently a legitimate charge

As many of the world’s developed markets are in recession, or in a cost-of-living crisis, fraud schemes are proliferating, and returns fraud is increasing in all its forms.

While some forms of fraud are more popular than others, customers are surprisingly comfortable abusing returns policies.

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In the UK, a third of consumers admit abusing return policies by false damage claims, the total number could be much higher. Other European countries showcase similar fraud rates, while each having their favourite type. In the US, 63% of consumers engage in bracketing, which consists of ordering multiple sizes or colours with the intent of returning the rest.

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Return fraud is a worldwide problem, and it is increasing at a rapid rate. Thus, consumers abusing returns policies is a widespread phenomenon, to the detriment of brands. On average, for every$100 of returned items, retailers loose $10.4 in return fraud.

While abusive or fraudulent returns are undeniably a loss for retailers, legitimate ones are tremendously costly as well. With the expansion of online shopping and consumers’ enthusiasm for free returns, the cost of reverse logistics increases continuously, at a 15% CAGR rate in the US, likely to be representative of the situation at the global scale.

Retailers’ supply chain must account for these items which will be out of the rotation in the stocks between their reception by the client and their reshelving, and which will not generate value within this timeframe, inducing extra costs. Additionally, retailers must absorb the cost of transporting, sorting, cleaning and repackaging legitimately returned items, and this cost is increasing. Professor Lisa Jack from the University of Portsmouth estimated that while the cost of returning a cardigan was around $10 in 2018,it has risen to about $15 today. Looking at chargebacks, for every $1reimbursed, merchants loose $2.4 in total costs. Therefore, a large share of items is not even worth being processed, and it is often easier to sell them off in bulk at auctions, or to discard them in a landfill.

Retailers have fumbled various strategies to minimise the financial impact of returns

Consequently, some retailers have decided to move away from handling returns and tell their customers to “just keep it” while they process the refund, such as Wayfair or Keurig. On the contrary, other retailers have made their return process as difficult as possible for customers to limit processed volumes, such aseverything5pounds.com. Other brands have implemented strategies ranging from a free return for all, such as Asos, to free returns for loyal customers only, such as H&M, or returns for a flat fee/monthly subscription, such as Missguided. The returned items can be picked up by couriers at the door, dropped off at a post office or delivery facility, returned in store, or even sent to the next shopper (C2C returns), as operated by Djerf Avenue or Vinted.

‍A three steps strategy to optimise the customer checkout journey and transform the returns’ financial void into a cash cow

On average, 70% of the items returned will never make their way back to shelves, according to Pollen Returns. Various reasons prevent retailers from restocking these products: the bad condition of the returned items, a processing cost superior to the retailer’s margin, a lack of efficiency of the logistical process etc.

Despite all these constraints, retailers cannot look away from returns as they are a fundamental feature of ecommerce customers’ attraction, retention, and satisfaction. According to Paypal and TRC Market Research, 62% of US shoppers declare being “much more likely” to shop from an online store offering free returns, with only 13% stating it would have no impact. Across Europe, free returns are the primary criteria of a good return experience. An easy returns process widens the customer base by attracting shoppers who may have otherwise preferred to shop in store. It also encourages customers to spend more and buy more frequently. Therefore, retailers need to effectively incorporate returns in their corporate strategy and transform them into valuable strategic assets.

EDC has determined three steps to optimise retailers’ checkout process and turn returns into a cash cow. Firstly, it is crucial to help customers make the right decisions through realistic images/descriptions, sizing and reviews. Secondly, retailers must reinforce their payment processes to reduce fraud both at the payment and returns level. Thirdly, reinforcing positive customer behaviour through non-monetary incentive is crucial to foster recurring transactions and increase revenues.

1– Set accurate customer expectations pre-checkout to cultivate trust, loyalty, and repeat purchases

While consumers may sometimes abuse return policies with “bracketing” for example, retailers may nurture it with low quality or inaccurate description of their products. For more information on bracketing see this link. Therefore, retailers must post realistic images and descriptions of their products, following standard sizing measurements. This can be enhanced through detailed explanations of key features and specificities of the product, and comments to warn of any extraordinary features (e.g. “this item may not be ideal if you avoid emphasising your hips”).

Additionally, retailers could introduce personalized recommendations based on purchase and return history, complimented by fit quizzes, styling guides and size comparison with old items consumers already own. Virtual try on, 360 visualization and AR/VR technologies may also be interesting tools to leverage.

Moreover, reviews are crucial in setting accurate customer expectations. Not only must they truthfully portray the item and give relevant information, but they must stay conservative, as too flattering reviews sets unreasonably high customer expectations, which generates more unsatisfaction and increases the likelihood of returns.  Lastly, retailers must collect feedback from their customers who are returning items to understand where they went wrong. This is key to identify gaps in product description or manufacturing.

According to Digital 360 and Narvar, the number one reason worldwide for legitimate returns, with 46% of responses, is a wrong size, colour or fit. Putting aside damaged items, an inaccurate description/photo of the product comes second. Thus, putting more effort into setting accurate customer expectations is a tremendous competitive advantage. The increased customer satisfaction enhances trust, loyalty, and preference, generating repeat purchases.

2– Strengthen the payment process during checkout to limit fraudulent transactions and abusive returns

During the checkout process, brands must dissuade fraudulent returns by reminding customers of the environmental impact of reverse logistics and clearly state abusing returns is a fraud.

Additionally, retailers must strengthen their Know Your Customer (KYC) process to block payments made with stolen transaction modes. Security features must also be reinforced to better detect counterfeit payment methods and receipts. By working with a proven payment service provider, retailers can implement security features within a hosted checkout page that is also PCI DSS compliance. An enhanced payment infrastructure will allow a more efficient verification process when returns are initiated, further limiting fraud.

To limit friendly fraud chargebacks, retailers must reinforce their customer service (for unambiguous and fast response) and inform consumers by providing clear guidelines on what constitutes a legitimate chargeback claim. Moreover, maintaining close relationships with card schemes is crucial to limiting the damages of chargeback claims. Retailers can also partner with specialist chargeback handling companies to process claims more efficiently. Companies such as Charebacks911,Riskified, Stripe, Signified, Verifi, just to name a few examples, can help merchants reduce and manage chargebacks more cost effectively.  

3– Reinforce positive behaviour post-checkout with non-monetary incentives to foster recurring transactions

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Within the share of consumers who actually make returns, only a fraction abuses the free returns policies, or use fraudulent techniques.

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Removing free returns for all does not appear to be the best strategy as it is one of the key features to attract consumers, including those who don’t return orders!

However, retailers must flag serial returners, who order massive quantities to return most of the goods. According to the Pareto principle, 20% of customers are likely to be responsible for 80% of returns. This is corroborated the RetailX study which found that 23% of UK online shoppers return their order “most of the time or always”. Identifying these customers and putting an end to this behaviour is a game changer. However, retailers must be careful not to upset anyone, as some of them are driving the brands’ visibility and reputation (i.e., the influencers)and some may still be valuable customers making repeat purchases despite their frequent returns. Thus, the key is to discourage serial returning, not cancel serial returners.

Retailers could implement sanctions to limit excessive returns such as fees or loss of rewards. Client status upgrades could also be blocked in case of intensive returns. Additionally, displaying the ratio of purchased to returned items in the customer's accounts, and the carbon footprint associated with it may have a positive impact.

In the same fashion, retailers must incentivize and reward customers who do not return too many articles.  Premium client status could be awarded for loyal customers who purchase often without returning much. Loyalty points, discount codes and other perks could be awarded to these customers who shop responsibly. Overall, gamification and social/status recognition goes a long way to deter certain behaviour, and encourage customers to follow new policies, especially when they correlate to hot topics like sustainability.

Conclusion

Returns are a crucial aspect of omnichannel shopping, and one of the key criteria of customer attraction, satisfaction, and retention. Therefore, retailers must keep the free returns option open for loyal and responsible customers, while flagging and disincentivising serial returners, who are responsible for most of the excesses and associated operational costs.

For more information on returns take a look at two previous articles - “Can retailers ban a customer whore turns too much?” and in the “5 best practices to improve the returns process that will increase sales”.

At EDC, our view of a returned item is an unhappy and costly experience for both the customer and the merchant. However, it represents an opportunity for retailers to further engage with customers, as it provides an additional point of interaction to enhance the overall consumer experience through carefully designed customer payment processing and refund processes. With over four decades of experience, EDC has built up a unique knowledge pool of payment optimization scenarios that have been applied to different retail verticals –including general merchandise, luxury goods, hospitality, hotels, and airlines. By applying EDC’s proprietary 360° Payments Diagnostic and using our data benchmark analytics, the complexity of payment acceptance and returns can be demystified, and significant cost savings can be achieved.

‍The content of this article does not reflect the official opinion of Edgar, Dunn & Company. The information and views expressed in this publication belong solely to the author(s).

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