How to Create a Free Return Policy That Doesn't Hurt Your Bottom Line

Free and convenient return policies are a must for online retailers. Amazon, Zappos, and other major players set this standard years ago. But now, many ecommerce merchants are struggling with a deluge of returns and return fraud.

The costs of reverse logistics and the reduced chances of selling returned items are prompting some of the biggest names in online retail to rethink their return policies.

Asos made headlines earlier this year for changing its returns policy to "blacklist" customers who habitually return worn items (wardrobing fraud) or who order and return more than their most loyal customers. Amazon made similar changes to its return policy last year.

What this means for small online sellers is that to stay competitive, they need to offer convenient returns. However, changes in the way companies like Amazon and Asos do business are giving smaller retailers some leeway to set limits to protect their revenue.

The high cost of free returns

Free return policies started as a way to encourage customers to buy items online instead of in stores. The good news is that free returns do encourage people to shop online. Free returns are the second most popular feature shoppers look for, after free shipping. But online returns have become a costly habit for many shoppers. More than 40 percent of consumers say they’ve returned an online purchase in the past six months. And all those returns add up.

Consumers returned $94 billion worth of 2018 holiday-season purchases. The total value of returned items in 2018 was estimated at $390 billion, according to Forbes and the National Retail Federation.

Fraudulent returns are becoming a big problem for retailers. Appriss Retail estimates that 6.5 percent of all returns are fraudulent, but that figure rises to 9 percent during the holiday season. Their report found that for the US retail industry, including online, brick-and-mortar and omnichannel retailers, returns cost 10 percent of total sales in 2018.

Returns are so costly to retailers for three main reasons. First, reverse logistics isn't free. The retailer pays for return shipping, and then employees must spend time processing the returns. In the meantime, the retailer has to pay for storage space. If the items are unopened or otherwise like new, they can be returned to inventory. But often, they must be sold as markdowns or seconds. If the returns can't be sold, they go to the landfill. 

The strain of returns isn’t limited to ecommerce packages flooding reverse-logistics warehouses. The popularity of buy online, return in store (BORIS) options grew by 38 percent between 2017 and 2018. BORIS is also a popular vector for fraud. Appriss found that between 2017 and 2018, more than 28 percent of retailers reported an increase in fraudulent returns.

How to create a better return policy 

Amazon and Asos received some media and consumer backlash for changing their return policies, but they’re such large retailers that it’s hard for that kind of dissatisfaction to hurt their bottom line. Although the big players’ return policy changes give smaller merchants some cover to adopt similar policies, businesses with smaller customer bases and lower sales should proceed with caution. A good reformed return policy should include several elements that ease the change for customers.

  1. Be clear about new time limits or condition requirements for returns. Make it clear on your website, at checkout, and in emails that this change is coming, when it will take effect, and why it's better for your customers. They probably don't want prices to rise or more environmental waste, after all.
  2. Consider a "fitting room" option like Amazon's Prime Wardrobe that gives customers a discount when they order several items at once. The program lets them try on and return those items within a limited time without penalties. This can cut down on wardrobing fraud.
  3. If you don't already put returned items back into stock, consider offering them at a discount in a special section of your store, rather than just discarding them.
  4. If you sell online and in physical stores, consider changing your BORIS policy to require a receipt. You may also want to switch from giving refunds to offering store credit or an even exchange. This can cut down on the risk of fraudsters returning stolen items, worn items, or items purchased from other stores.

Returns will always be part of the ecommerce landscape, and it's important to make sure customers feel fairly treated. By framing return policy changes as better for customers and the environment, your store can get customer buy-in on practices that protect your business from logistical hassles, rising return costs and fraud.

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