COVID-19 has permanently changed consumer spending habits. A recent survey by Internet Retailing shows that over 70% of consumers are now less likely to purchase in store. But with the reduction in the need for expensive retail square footage comes an increase in behaviour which can be painful and expensive for merchants to manage, most notably the thorny issue of returns.
Returns are regarded by retailers as a time-consuming and expensive task that generates a disproportionate impact on operations and margins. However, the process can become a source of differentiation if managed effectively. A recent survey from Invesp revealed that 79% of consumers want free return shipping and will not shop with retailers who charge for this service. Balancing the customer service, differentiation, and cost issues has become a surprising battle ground in online retail.
The issue of returns negatively impacts several steps in the customer journey, but each presents the opportunity to improve customer experience and create differentiation:
Many consumers consider returns a significant pre-purchase issue and dig into T&Cs in order to find returns policies. The opportunity for differentiation here is to present returns policies early in the shopping journey – especially for new customers.
Returns processes often require considerable effort from consumers. In this case, minimising the customer effort by providing pre-printed labels, and easy access to return points, can reduce customer service queries and potentially offset any direct costs.
Consumers are uncertain of the size of the item purchased. 52% of multi-size orders are returned according to recent IMRG Benchmark data. Retailers can use community feedback and product reviews next to each product to allow customers to judge sizing and other issues in advance.
Refunds processes are slow, require high levels of customer contact, and impact Net Promoter Scores (NPS). Retailers can differentiate themselves by improving the speed of refunds by either initiating the refund as soon as the courier scans the return package or by using virtual gift cards to credit customer card-on-file accounts.
PSE has spent a long time looking at how to make the best of the returns process. We recently came across a great set of examples where retailers can manage this balancing act:
Members-only free returns: By only offering free returns to registered customers, retailers like Nike maintain customers’ loyalty and encourage member registration.
Free exchanges: To avoid lost sales and to help customers with size or style issues, retailers such as iKrush offer exchanges for free but charge for returns.
Return in own store: Some retailers offer free in-store returns (e.g. Zara); this reduces returns costs and encourages customers to spend more once in-store.
Accelerated card refunds: International card schemes such as Visa and Mastercard offer near real-time payout solutions – Visa Direct/Mastercard Send – which can be used to process refunds globally, making funds available to customers almost instantly. They are also both expecting to roll out real-time refund authorisation products which will help speed the refunds process.
Return in-store at non-competitors: Retailers can partner with other merchants (e.g. supermarkets) to collect their returns. This can reduce costs for the online retailer and drive footfall for the physical shop. In the UK, the partnership between Wiggle and Tesco provides a good example.
No need to return: For low-value goods or non-reusable products (e.g. underwear or health and beauty products) it does not make sense to support returns. Amazon, Wayfair and Walmart all take this approach.
Parcel lockers: Fully automated parcel lockers can make both receiving and returning goods simple and straightforward. This is popular in Central Europe and enables 24/7 return cycles.
Work with specialist firms: Returns focussed companies offer dedicated services such as return handling, regifting, recycling, etc. – and remove the burden from retailers’ core operations. However, it’s important to select the best supplier as they can have a disproportionate influence on the customer experience.
Data and analytics: Retailers should use data analytics tools to identify specific return causes and consider a different approach to returns by specific product or customer segment.
Artificial Intelligence (AI): AI and chatbots can be used to offer sizing recommendations, especially on items that have suffered a high volume of fit-related returns to reduce the probability of returns. AI is even being used by Sephora to create a personalised shopping experience by recommending makeup that best matches the skin colour or clothes.
New consumer payment types: Savvy consumers are using alternative payment methods that allow them to order multiple goods before actually paying for them. For example, accepting Buy Now, Pay Later (BNPL) offers consumers the ability to try before they buy.
Charging for returns: Despite the concerns expressed by customers, several fashion retailers with high return volumes (e.g. Zara) have moved into charging customers for returns; provided that the cost for returns is aligned with the market, customers should continue to be loyal to the brand.
Regardless of the returns policy chosen, it is key to success to avoid negative customer feedback, so retailers should test and learn before rolling out any new policies. It is paramount to monitor social media feedback and NPS for changes in the approach to returns. After all, retailers should increase customer loyalty and avoid having their customers looking elsewhere.
Gonçalo Caraslindas has over 20 years’ payments business experience, of which ten have been with PSE Consulting, where he heads up PSE’s research team. A past senior marketing and product manager and currently a senior consultant, Gonçalo delivers projects that include building action plans to grow ecommerce in several markets and advising banks on implementation strategies, acquiring and processing market entry strategies, studies into the acquiring/processing requirements of large/SME merchants and fintech innovation.
PSE Consulting is one of Europe’s leading payments consulting firms. Established in London in 1991, PSE provides highly regarded expert advice across the payments industry to schemes, processors, transaction gateways, issuers, acquirers, private equity, and merchants.
PSE is recognised as understanding and shaping innovation in the European payments market by delivering insight to our clients. PSE always focuses on our clients’ customers’ needs, their buying journeys and requirements through our approaches and methodologies. We do not provide hardware or software services or take commissions and therefore provide completely independent advice to our clients.
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