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Best practices for e-commerce returns management

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Returns in direct-to-consumer e-commerce are a costly proposition for merchants. Merchants must walk a thin line between not draining resources and satisfying the customer by providing a frictionless and free or low-cost way to make returns or exchanges. 

With every return, merchants have to allocate more operational dollars for labor and the costs associated with inspection, re-stocking or refurbishment, and if merchandise cannot be re-sold, recycling or destroying. 

In 2021, consumers across a variety of retail and e-commerce U.S. merchants returned a total of $761 billion in merchandise, according to the 2021 NRF (National Retail Federation) and Appriss Retail Consumer Returns in the Retail Industry report.1 These return volumes reflect a growing percentage of all U.S. in-store sales in 2021 at 16.6 percent, up from 10.6 percent of all store sales in 2020 at the peak of the pandemic lockdown.

In 2021, returns for online purchases surged even higher at an average of about 20 percent of all U.S. D2C e-commerce sales. In sum, one in five items sold online were returned.2

Reverse logistics is more complex than forward logistics, and much is at stake for retailers to get returns management right. So how can brands and retailers run efficient returns and improve the e-commerce returns experience for the customer? We’re taking a deeper dive into best practices involving mitigating fraud, measuring performance, and product marketing.

1. Take precautions against fraud

E-commerce return fraud is mounting. In 2021 in the U.S., approximately $218 billion of online purchases were returned, with $23.2 billion or 10.6 percent of these returns deemed fraudulent, according to the 2021 NRF-Appriss Consumer Returns report. 

This means that for every $100 in returned merchandise accepted, retailers lost more than $10 to fraud, up from $8.80 in 2019.3

Return fraud is a lost opportunity for merchants, cutting into sales revenues and margins, not to mention the inventory shrinkage and losses associated with the extra work to process the return.

In the 2021 NRF-Appriss Consumer Returns report, retailers cited the practice of wardrobing, where an item is used and then returned, as the top return-fraud activity; followed by the return of stolen or shoplifted merchandise; employee return fraud, including employee collusion with external sources; and return of goods purchased on fraudulent or stolen credit cards or other tender. Other leading causes of return fraud reported by retailers are returns made by e-receipt such as duplication or forgery, and organized retail crime groups.

Fraud is an inevitable part of retail but can be reduced. Monitoring sales and return patterns across all customer-related systems like e-commerce systems, OMS, third-party payment processing systems and returns management software is essential to combat fraud. Retail and e-commerce fraud prevention software helps merchants see sales patterns, allowing them to flag, block and terminate suspicious transactions. 

Merchants can perform root cause analysis on a sampling of historical fraudulent return transactions to spot fraud trends. When data patterns are analyzed such as looking at types of returned products and specific SKUs returned, and in the context of the type of return transaction (receipted, non-receipted, payment method, etc.), suspicious activity can be identified and extra precautions can be taken. 

Merchants can then adjust their returns policies, boost returns training for in-store and back-office staff, increase monitoring activities, aided by automated solutions like fraud prevention software and data analytics tools.

By analyzing the patterns of previously flagged fraud orders, for example, merchants can set up business rules to monitor historically suspicious activity such as customers that are connected to previously charged-back purchases, or bogus-looking customer records with suspicious email addresses.4

2. Refine processes around re-stocking and performance monitoring 

With omnichannel retail complicating returns—from BOPIS and BORIS to new e-commerce return channels, such as lockers and participating stores and venues in third-party return programs—determining which party in the supply chain will manage each return may be subject to change. But running an efficient returns program takes planning for the flow of goods in the DC or store, and rules for product disposition must be set and followed. When working with a 3PL, this information can be rolled into a vendor routing guide. 

For both the merchant and 3PL, routing guides for returns are recommended as a resource for staff to follow when processing returns. Rules for processing returns can be noted by channel, product category, etc. Exceptions, such as returns on drop-shipped items that may need to return to the retailer or particular vendor that supplied the product, must also be noted in the routing guide.5

Whether handling returns in house or outsourcing to a 3PL or reverse logistics provider, monitoring performance of e-commerce returns management is critical to success. In addition to measuring general return rates, KPIs should be set within the merchant’s domain or established with the 3PL in order to gauge performance and improve service levels over time.  

After the item is returned to the merchant, a key benchmark for returns management is the return of goods back into stock at the facility or on store shelves as soon as possible for resale. Processing time for e-commerce orders for returns, once received at a fulfillment center, is known as “return cycle time,” with the standard KPI metric used in retail reverse logistics at 72 hours.6 Experts recommend a performance rate of 95% or better for this key KPI returns metric from your 3PL.7

3. Improve product detail pages, fit tools and guides

Given its power to make or break sales, accurate and abundant product data with good search and navigation tools is essential to any online retailer. The chief reasons for online returns? The wrong size, fit or color. Defective, damaged or long functional merchandise is the second most common reason, followed by inaccurate product descriptions and photos. These leading reasons for e-commerce returns have held steady in recent years, according to both the 2019 Narvar returns research and the 2021 Narvar State of Returns report that surveys U.S. consumers about their returns.8

When it comes to the wrong fit and inaccurate descriptions of products, merchants can go a long way to reduce return volumes when they improve their product detail pages (PDP) with comprehensive content that includes succinct, easy-to-read product descriptions, product dimensions, and customer reviews. In fact, customer reviews are the number-one deterrent to a consumer making a return, according to the Narvar’s 2021 State of Returns Consumer Study.9

For apparel, brands and retailers need to strive for accuracy in sizing and measurements charts which are essential in preventing customers from making a return—cited by 77 percent of consumers polled in the 2021 State of Returns survey. As well, for product photos of apparel, displaying the item on different sizes of models are appreciated by most consumers to help gauge fit.  

Improving the accuracy of PDP with use of assets like high-quality photos and videos, and rich product data not only supports lowered return rates but positively influences buying behavior and enriches SEO especially when web page metadata is optimized.  

Enabled by artificial intelligence, augmented reality (AR) is proving to be a great visualization tool to more effectively sell products online. These applications and tools, often proprietary to the retailer and offered in their own app, are allowing consumers to virtually sample a product within the context of its environment, whether it’s their face for “trying on” on cosmetics and eyeglasses, or their living room for seeing how a piece of furniture will look like in their home. 

Of those consumers polled who have used AR and similar visualization tools in the 2021 State of Returns survey, 58% believe these tools have prevented them from having to make a return. Another 32% of consumers would use AR and tech try-on tools if made available.10

It’s clear that with all the forms and channels of retailing and e-commerce today, returns are an inevitable part of doing business. But by following these best practices, brands and retailers can make better decisions about their returns policies while reducing their return rates and fighting fraud.

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