Returns Management: How Retailers Can Stop the Bleeding

If you’re an online retailer, brace yourself: a whopping 80% of your customers would ditch you for a competitor after just one bad experience with returned products. That’s alarming. Your returns management process is a ticking time bomb that could damage your business if you’re not careful. 

With the global explosion of e-commerce, returned items have become a huge issue for retailers. The returns data is striking: Over $400 billion in lost sales in 2020, doubling to over $800 billion by 2022, according to the National Retail Federation! That kind of volume simply cannot be ignored. 

If you get it wrong, you're handing customers over to your rivals on a silver platter. On the other hand, a well-thought-out returns experience that is slick and transparent:

• Builds customer loyalty and satisfaction.
• Protects profit margins.
• Is far more cost-effective.

Returns of all kinds are inevitable. Think of it as an opportunity to build loyalty. In this article, we’ll discuss how to lessen the impact of returns on your bottom line and ensure a great customer experience.

What is returns management?

Returns management, or reverse logistics, is the normal supply chain process turned backwards. It involves getting an item safely back from a consumer to the retailer or manufacturer. 

Consumers have the right to return any item they have purchased for a full refund, a store credit, or a new item if it’s damaged, or they’re unhappy with the quality. 

But this can make life very difficult for small businesses. The reverse logistics process adds a whole layer of complexity to delivery and inventory management systems, and adds costs. 

5 ways a poor returns management process can hurt your business

The financial impact of returns can be severe for a small e-commerce business operating on thin margins. There are five major impacts:

1. Lost revenue and profits: If customers have a hard time returning items or getting refunds/exchanges, they are less likely to make future purchases from that business. This means a lack of repeat orders.
2. Damaged reputation: Poor returns policies and processes dramatically affect the customer experience. Unhappy customers often leave negative reviews or tell others about their bad experiences.
3. Increased cost of returns: Re-stocking, repackaging, and reselling returned merchandise takes time and labor — and sometimes resale might not be possible at all. The costs can add up quickly.
4. Cash flow problems: Refunding customers promptly while waiting to resell returned items can create cash flow issues for a small business with limited capital reserves.
5. Competitive disadvantage: Larger competitors typically have more streamlined and customer-friendly returns processes. Not matching them puts a small business at a disadvantage.

Why do people return items?

There are many legitimate reasons why consumers decide to return an item they have purchased. For example:

• The wrong item is delivered
• The product is damaged when it arrives
• The product that arrives does not meet their expectations

This flexibility is key to the success of e-commerce. There are lots of limitations to online shopping: customers can’t try clothing on for size, check the quality of what they’re buying, or confirm that an item looks exactly the way it does in the pictures. Without the ability to easily return something that isn’t quite right, they might not make a purchase at all. So returns are simply the price of doing business in the age of e-commerce — and successful online stores need effective returns management systems that fulfill customer expectations. 

There is a more cynical side to all these returns. According to the National Retail Federation, 7% of all returns in 2023 were fraud or abuse of the system, which added up to a total of just over $100 billion. For some people, e-commerce has become so easy that they treat retailers as their personal closet or pantry. For example:

• Some consumers will order an outfit online, have it delivered, wear it to an event and then try to return it the next day for a refund. This is known as wardrobing, and nearly 40% of shoppers admit to wardrobing clothes, shoes, or accessories.
• Bracketing is when a customer orders an item of clothing in a few different sizes, tries them all on at home, finds the right fit, and sends the others back. 

What impact do increased returns have on retailers?

There are several ways that returns make life harder for e-commerce retailers:

• Inventory management: With more items out on the road, less is  available in-store. 
• Shipping costs: Customers expect retailers to carry the cost of return shipping.  
• Labour costs: Restocking, refurbishing, and repackaging returned items takes a lot of time.
• Delivery operations: For businesses that make local deliveries, additional pickups increase the complexity of route planning. There’s also extra labor, mileage, and wear and tear on delivery vehicles.
• Lost revenue: Less than half of returned goods are resold at full price.

Apart from the direct impact on retailers, returns are also a sustainability nightmare. Anywhere from 25% to as much as 80% of returns end up in a landfill or shipped overseas as garbage.

The returns management process in four steps

For most small e-commerce businesses, there are four steps to the typical returns management process:

1. The customer logs a return request

A customer who is unhappy with their purchase for any reason has two choices: They can accept the loss and move on (probably unhappily), or ask to return the item for a refund, replacement or store credit. 

How a return request comes in will depend on what channels the retailer has made available. It could come via email, a phone call, or be logged via an online portal. 

A good returns management process with having a clear, easy-to-find returns policy and how-to information. Retailers who do this will probably get more return requests — but think of it as an opportunity to repair a damaged relationship! 

2. The retailer processes the request

The company can approve or reject the return request, according to their returns policy. 

If the request is approved, the company may issue a return merchandise authorization (RMA), or simply generate a prepaid shipping return label for the customer. 

3. The customer returns the item

There are several ways a customer can physically return an item:

• Take it back to a store.
• Have it picked up at their home or workplace by the retailer or a third–party logistics (3PL) service.
• Drop it off at a 3PL office like a UPS store or post office. 
• Put it in a parcel storage locker for pickup.

If the retailer is local and chooses to pick up returns directly, they will need to plan an efficient pickup route (see below for more on how route optimization can help).

Ideally, give the customer added peace of mind by tracking their return and providing real-time notifications about its progress. 

4. The retailer receives and processes the item

Once the returned item arrives back at the store, warehouse, or factory, the retailer will need to check it and decide what to do. Depending on the outcome of the assessment and quality control inspection, one of several things might happen next. The item might be:

• Added straight back to inventory for resale.
• Repaired or refurbished, then restocked for sale. 
• Donated or resold to someone else for refurbishment.
• Thrown out. 

As we noted above, too many returned items are thrown out and end up in landfill. Anything that can extend a product’s lifecycle will help to reduce the environmental impact of returns.

Returns management case study: Zenni Optical

Zenni Optical is an online-only eyewear store that manufactures and ships prescription glasses directly to consumers. Their low-cost manufacturing model means they can offer glasses at a significant discount, which attracts a lot of customers. 

But as anyone who has ever worn prescription lenses knows, getting new glasses that fit right, feel good, and look good is a complex process involving lots of measurement and personalization. Zenni Optical provides tools to help customers get it right first time, even without the help of an optometrist:

• Clear instructions on how to measure their pupillary distance (PD).
• A virtual try-on feature so that customers can see how different frames look on their own face.

Even with all these tools, sometimes things don’t work out. For those times, Zenni has a clear, easy-to-find returns policy. There’s a fairly generous 30-day returns window, Zenni provides prepaid shipping labels, and a full refund is offered.

Prescription glasses can be expensive, and customers are taking a risk when they choose an online-only supplier. By offering no-hassle returns Zenni lowers the risk, so customers are more likely to try their service in the first place.

Seven ways to reduce the impact of customer returns

It’s good for business, and for customer retention, to offer great customer support and free returns. But how can smaller businesses manage to do this without bleeding financially? Here are six suggestions to minimize returns and build greater efficiency into your returns management system: 

1. Help customers make great purchase choices up front

A lot of returns happen for totally avoidable reasons. The customer accidentally chose the wrong size, for example, or the color of the item isn’t the same as what was shown on screen, or the item is missing some critical component or functionality that the customer expected. 

To reduce the risk of unnecessary returns, pay attention to the design and content of your online store:

• Make sure your product descriptions are accurate and easy to understand. 
• Include relevant measurements and specifications.
• Take out information that’s not actually useful to the customer. 
• Provide good photographs that show accurate color. 

2. Invest in high-quality packaging

Using tough, high-quality packaging materials like sturdy boxes and plenty of cushioning helps protect products so they don't get damaged on the way to the customer. Quality packaging that can't be tampered with is a great way to increase customer satisfaction. When packaging includes clear product descriptions, it also minimizes returns.

3. Get drivers to double-check orders

Delivery drivers play a vital part in ensuring the right package gets to the right address, undamaged and on time. Having procedures for drivers to carefully check addresses and packages before delivering can significantly decrease returns caused by wrong deliveries or damaged boxes. Use the proof of delivery features in your delivery management software to help keep drivers accountable, for example by taking photographs of the packages on delivery.

4. Emphasize the environmental costs  

Many customers care about sustainability, so promoting green returns policies appeals to them. Try to encourage reusing packaging so it doesn’t end up in landfills, offer incentives for combining multiple returns into one shipment, and make sure they understand the impact of forcing you to clock more miles in returns and deliveries. Rothys, for example, delivers its shoes in reusable boxes that can double as returns packaging. 

5. Use drop-off lockers

Using secure lockers in convenient locations gives customers a single place to drop off returns. This can eliminate a lot of individual package pickups and lower transportation costs. Customers like the convenience, while businesses benefit from streamlined returns.

6. Develop a simple, clear return policy 

Spell out exactly what can be returned, when, any fees involved, and your refund policy. Being upfront manages expectations and builds trust. Provide a list of FAQs. For example, if you emai l return labels to your customers, explain exactly how to print them and attach them securely to the package. 

7. Improve your use of data and analytics 

Track data on why items get returned, which products are returned most often, and customer feedback. Use this information wisely to identify problems, adjust product design if needed, and create better workflows. You  share your time frame with customers and improve your returns rate.  

8. Use route optimization software for local returns

If your customers are spread across the country or across the world, you’ll need a third-party logistics service to handle your reverse logistics. But what if you handle your own local deliveries and returns? In that case, you’ll need route optimization software to help plan the most efficient route. 

Conclusion

A successful e-commerce business may handle dozens of return requests every day — it’s part of the cost of doing business. Here’s the bottom line: Every single day, part of your job as an online retailer will be to implement and streamline processes to enable efficient returns.