It’s time to forecast returns like we forecast sales.
Just the cost of doing business?
There’s an ever-growing mountain of waste in retail, and it’s not just materials or spent fossil fuels. It’s unused returns data, and it’s sitting right in front of us.
Retail has always been driven by consumption, with a business model that drives volume and sales but doesn’t take returns into account. Or rather, returns are seen simply as the cost of doing business. The result? 44% of retailers globally claim their margins take a hit thanks to returns—especially fashion and accessory retailers with an online presence. In 2018, returns were valued at $389 billion, and that number is slated to hit $550 billion by 2020.
It’s this environment that has prompted the emergence of “Reverse Logistics,” which seeks to reverse-engineer the supply chain in such a way that returns can be ethical, sustainable, predictable, and even profitable.
It’s certainly not just the moving target of customer preference that drives returns. Stringent government rules in automotive and rising product recalls are among others that are just as impactful, contributing to a Global Reverse Logistics Market valued at $415.5 billion in 2017.
This market, clearly, is one with varying degrees of influence and volume by global region, in accordance with supply chain centers of production and fulfillment. But that’s all the more reason for a fully connected, holistic understanding of supply chain, with complete visibility into every touchpoint including where the product actually lands upon return to sender.
Returns Are the New Normal
Thirty percent of all products purchased are returned. That doesn’t just make returns a fact of life, it makes them seem like an insurmountable force to be reckoned with. Retailers haven’t treated returns in the way they would other business functions. They’ve accepted that returns happen as the cost of doing business.
To make matters worse, fraud now accounts for 10% of all returns, having risen considerably in the past few years, which gives us a forecast of $55 billion in fraudulent returns by 2020.
Returns have also given rise to the new, off-price business model of brands like TJ Maxx and Overstock.com, which have developed their own brand equity and customer loyalty through the pleasure of the “Treasure Hunt”: the delight of finding “gems” that might otherwise be priced significantly higher. Of course, TJ Maxx doesn’t just resell off-price items anymore—they sell a different make of clothing that is specifically designed for their price point. So, excess inventory has itself helped to launch a new tier of clothing that sustains third-party retailers.
Who Said Returns Have to Be Free?
Returns are firmly built into customer expectations and behavior. But the idea that customers should always expect free returns is relatively new. And frankly, it doesn’t have to be that way.
Zappos launched with a brilliant business model that aimed to give customers the same experience of choice they’re used to in the shoe store itself: select a few pairs, try them on, and ditch the ones that aren’t working for you. They were the first company to develop returns as a customer retention strategy. Fast-forward to now, when free returns are virtually a foregone conclusion.
Free returns with eCommerce are provided by just about every retailer who does business. It’s one thing to grow your customers with free returns, but there’s a cost. The predictability around returns combined with loyalty data combined with your supply chain gives retailers the ability to judge which consumers are worth investing in and which are less so.
Free returns are a fixture, but there may be ways to alter this model and incentivize those customers who prove their ongoing value. It might not always make sense to offer free returns to customers who don’t show commitment to the brand. Brands might consider offering unlimited free returns only to customers of a certain loyalty echelon. They could also attach free returns uniquely to bulk purchases and seasonal/gift purchases, but not every purchase.
The customer service chatbot on Chewy.com, for example, doesn’t just auto-refund purchases for customers experiencing an issue, it also encourages them to donate that product at a local animal shelter. This is a great way to drive redistribution of product that might otherwise go to waste and spark brand loyalty in the process. With AI, brands can quickly determine what kind of communication should be served up to which kind of returns customer.
Regardless of their approach, retailers need to find ways to mitigate the substantial cost of returns—inventory loss, returns shipping (and packaging), production, and others. It’s a challenge with no one blanket solution.
The Push to Redefine Returns
Some companies are already attacking the cost of returns head-on. Parcel journey length is of enormous concern, especially within the geography of the United States. Could brands in the U.S. take increased inspiration from global smart parcel locker systems that allow people to both pick up and return goods to the very same site while in transit? Or could they look to build localized “re-fulfillment” centers that are much closer to where consumers actually live?
For most, ethical production and sustainability are either afterthoughts or newly incorporated into older business models. Eileen Fisher is a brand whose business is built around a sustainability model: an organic clothing line, ethical business practices, and fabrics (even from used clothes) that are recycled to make new garments.
Optoro, a returns optimization platform based in Washington, D.C., “uses machine learning and predictive analytics to route returned and excess inventory to the next best home, reducing financial, operational, and environmental waste.” In 2017, they estimated that just 10% of the merchandise they handle ends up back on shelves.
Meanwhile, the company Perfitly has put customer satisfaction front and center, enhancing the shopping experience to raise conversion rates and ultimately reduce returns. Their approach is to take the simple customer question “how will this look on me?” and answer it right on their product pages. How? By offering 360-degree views of how clothes actually look when modeled on your very own 3D avatar, allowing you to determine your best-fitting size.
The Tools Are Already in the Shed
Returns are probably here to stay for some time until we see sustainability become more of an agenda point. There’s a big push in the food industry here, though the fashion and hardware industries have yet to catch up.
But the truth is that brands already have the tools required to forecast returns. Essentially, the same algorithms that forecast sales are the ones that can forecast returns. These tools are bought and paid for, and with eCommerce now well into its adolescence, so is the data.
The value of forecasting returns lies in immense predictability and the ability to see exactly where your inventory is at all times. However, many brands (and CFOs) are not yet aware of this. They haven’t seen returns as a core competence, and they too frequently believe that there’s a direct correlation between free returns and customer retention.
This paradigm needs to change, and that starts with a shift in brands’ perception. Returns can’t just be seen as the cost of doing business or even just a customer retention strategy. They are a vastly underused space of potential revenue and a powerful way to prove out brands’ commitment to sustainability.