Returns management – technical and practical challenges
Returns management is of crucial importance in online retailing. Only when returns are minimized and handled efficiently can online retailing achieve sustainable success. However, an excessive number of returns is still a major problem for many online retailers. The solution lies in proactive returns management, as this article shows. There are two strategies that make sense here: returns avoidance or returns as a customer-centric service.
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Content:
- Zalando: the cry of happiness
- Potential for success in returns management
- Returns in e-commerce
- Calculating the loss of returns
- Returns management
- Returns strategy
- Determining the optimal quantity of returns
- Returns prevention
- Optimization of the returns process (7 steps)
- Practical challenges
- Technical challenges
The cry of happiness
This article absolutely has to start with a cry, the cry of happiness. When Zalando became known about six years ago with their famous and award-winning commercials, no one could have guessed that this unconventional online retailer would one day become one of the leading companies in the German digital business. But what was also connected with this advertisement of “Scream with happiness or send it back” were discussions about Zalando’s returns rate. Because it quickly became clear after the brand’s successful publicity: Zalando’s customers take and took the request to return seriously. Zalando stopped the campaign again only a short time. According to insiders, the return rate had reached an order of magnitude that could hardly be financed. One rumor that persists to this day was that the return rate was 70%. This article will clarify how high Zalando’s return rate actually is and whether Zalando’s strategy makes sense or not.
Potential for success in return management
Potentials for success in the returns problem shows how proactive returns management can be used to turn returns into a marketing tool for customer loyalty and profit.
To do this, the following aspects are explained:
- the empirical and legal dimension of returns
- strategic and operational tasks of returns management
- technical as well as practical challenges in returns management.
Relevance of the returns problem
It is therefore clear that returns can be more than just an annoying logistics step that has to be completed as efficiently as possible. Especially with a return rate of 50% –as it is officially stated at Zalando– it becomes clear that returns are a central factor, in fact a strategic success factor. If you visit one of Zalando’s logistics centers, you will hear one message above all: From Zalando’s point of view, returns are a central component of the brand and thus a central value proposition to customers. Zalando is thus clearly following in the tradition of its role model, the American online retailer Zappos. There, too, free returns were part of the strategy from the very beginning and thus became part of the brand.
In fact, free returns are seen as the key to the emergence of an online shoe and fashion market. But is it possible to get rid of the ghosts that were summoned?
Returns in e-commerce
Because returns don’t just play a role for the big players in the shoe and fashion industry. All companies that sell goods online and then ship them are forced by law alone to take back goods sold, without customers having to justify this. The return of purchased goods thus becomes a system promise of e-commerce.
An estimate of returns for the year 2012 (Asdecker, 2016) shows how costly this system promise is. According to this, with total e-commerce sales of €39.8 billion, 286 million returns were estimated for 2012. With standard parcel dimensions of 40 cm in length, this results in a chain of parcels with a total length of just under 3 circumnavigations of the earth.
Returns can take many different forms. A current study by the EHI Institute Cologne, which will be published in mid-December 2016, presents the latest data on returns rates. According to this study, the following values for the return rate are given:
return rate up to
- 10 % – 65 % of respondents
- 20 % – 10 % of respondents
- 30 % – 10 % of respondents
- 50 % – 10 % of respondents
- 60 % – 3 % of respondents
Source: https://www.handelsdaten.de/handelsthemen/versand-und-retourenmanagement, 11/28/16
The EHI study also makes statements about the direct costs incurred by returns. The costs for handling returns are estimated at an average of €10, with a few companies even estimating costs of up to €50. However, this is not all, as the following table shows:
Return loss calculation
For e-commerce companies, returns mean additional expense and lost revenue. Together, these two variables add up to the loss of returns.
Factors influencing the loss of returns:
- Handling costs Logistics and administration
- Shipping costs, if not borne by the customer
- Loss on returns that cannot be charged to customers
- Lost profit
However, there can also be positive aspects to returns. If the rate of returns – as is the case with Zalando or other retailers – is considerable, there is another interesting side effect. If half of the goods are returned, the company saves storage space. However, this is only an advantage if the return is made promptly. At the moment of the return decision, the goods can be offered again. Under certain circumstances, a situation may arise where the returned goods are still with the customer, but are already offered to the next customer.
Another approach to return costs is the direct calculation of the return loss (RV), which consists of the lost profit and the direct costs of the returns:
- RV = RQ x (conversions x DB I – visits x CPC + conversions x RK)
- RV per conversion = RQ x (DB I – CPO + RK)
With
- Conversions = Visits x CR
- CPO = Cost-per-Order = CPC / CR
- RQ: return rate
- RK: return costs
The following sample values show the quantitative magnitude of the returns problem:
- RQ: 20%
- conversions: 4,000
- DB I: 50 Euro
- Visits: 100.000
- CPC: 1 Euro
- RK: 10 Euro
The result for the return loss is:
- RV = 20% (200,000 €- 100,000 € + 40,000 €) = 28,000 €
- RV per conversion = 7 €
So there are very solid financial reasons to deal with the management of returns.
Returns Management
The solution to the returns problem lies in customer-centric and proactive returns management. Customer-centric returns management integrates returns management into the design of long-term customer relationships. For returns management, the following questions must then be answered first.
- What is the returns strategy? Elimination or acceptance of returns
- What are the reasons for returns? Intended or unintended returns
- How are returns logistics organized? Economies of scale or outsourcing
Returns management in the broader context
Considering the scale and complexity of the returns phenomenon, the returns strategy is of central importance. It defines the goal and orientation of returns management. Possible goals are, on the one hand, an orientation towards short-term operational profit, which certainly leads to a returns avoidance strategy. On the other hand, service orientation, which takes a certain level of returns into account, is a possible strategic orientation. Finally, an ecological orientation should not be left out, which takes into account the environmental impact of returns.
The definition of a returns strategy can only succeed if the originator of the returns, the customer, is included. Therefore, the definition of the strategy should always be done with an analysis of the reasons for returns.
Looking at the reasons for returns, it becomes clear that, even just on an average basis, at least just under a third of returns were requested by customers for their selection. However, the majority of the reasons for returns are based on information and logistics problems, which are inefficient:
- Item did not fit: 67%
- Item did not please me: 56%
- Item did not match the description: 42%
- Item was delivered defective or damaged: 41%
- Ordered several variants to choose from: 32%
- Delivery time too long: 16%
- Wrong order: 13%
- Item was purchased cheaper in another store: 3%
- I have never returned ordered goods: 10%.
Source: ibi Research/Statista, data: 466 online customers in Germany.
The key factor in the returns strategy is therefore whether a return is useful and therefore intended by the customer, or whether it is of no benefit to the customer. This means that a key task in returns management in the broader sense is to identify the reasons for returns.
Determining the returns strategy
Once the reasons for returns have been identified, a targeted returns strategy should be developed and implemented. This involves deciding whether returns should be developed as a customer-centric and customer-engaging service or whether the aim should be to reduce returns by working consistently to avoid them.
This recording forms the basis for the planning of the returns offer but also for the implementation of returns avoidance.
Planning of the return offer
Qualitative planning
A qualitative design of the returns offer is decisive for the planning of the returns service. However, the efficient design of returns management is also part of the planning and general returns tasks.
Quantitative planning
In addition to qualitative planning of the returns service, quantitative planning of the optimum returns quantity is also part of returns management in the broader sense. The optimal returns quantity answers the question of how many returns a company can afford.
Determining the optimal quantity of returns compares the advantage of returns with the costs incurred. The benefit can also be seen as avoiding the opportunity cost of losing customers due to restrictive returns. Thus, it is necessary to compare costs of restricting returns with opportunity costs of restricting returns. A minimum cost can be determined at which the optimal quantity of returns can be identified. This is shown in the following figure:
In addition to determining the optimal quantity of returns, the question of outsourcing returns management is also part of quantitative returns planning. If the optimal returns quantity is only small, it may make sense to commission a service provider with very complex returns handling. However, parameters for this decision are also whether the service provider has also taken over other parts of fulfillment and thus the warehouse. If the online retailer also has part of the warehouse, the geographical distance between the online retailer and the fulfillment service provider is likely to play a role in the question of outsourcing. When it comes to the qualitative design of the returns service, parameters of the service need to be defined. These concern
- the return period by specifying the withdrawal period, which may exceed the statutory period of 14 days
- the determination of whether the costs of the return shipment are borne by the customer or the company
- the design of customer-side returns handling, in particular the creation of the returns label and the handling of inverse logistics, i.e. pick-up and return shipping
- the information of the customer about the status of the return and refund of the payment already made;
From the company’s point of view, the company’s planning also includes recording the reasons for returns and integrating them into the CRM. This ensures that the returns contribute to customer loyalty.
Return avoidance
In addition to planning the returns service or returns offer, the second important task of returns management is returns prevention. Returns prevention primarily involves eliminating information deficiencies that lead to unintended and thus inefficient returns. These reasons can be divided into three broad groups:
- Inadequate product information
- Quality, logistics and process deficiencies, including warranty issues
- Customer decision errors and
- Fraudulent returns.
Customer decision errors are certainly the most difficult to identify, and recording them is not easy either. A fraudulent return is when there is use of a product that goes beyond simply trying it on. Quality problems and warranty cases have an impact on supplier management and are certainly the most serious. Process deficiencies are present, for example, when delivery times are too long or the delivery process is not transparent.
Deficiencies in product information are certainly the most interesting. Production information is one of the assets within an e-commerce company, but it causes considerable effort in its creation. Many retailers use product information provided by manufacturers and suppliers. However, this information is neither stand-alone nor does it have the quality needed for e-commerce.
Against this background, it is necessary for retailers to invest in their own product information. The focus should be on products that are particularly likely to be returned. The rule of thumb here is:
The tighter a product is worn on the body, the higher the likelihood of a return.
The following success factors for product information can be noted.
- Product images from multiple perspectives
- Product images with impressions of how the product is used
- Video clips on product use
- Comprehensive product description that includes legal information requirements. Benchmark is Amazon
- Testimonials from other customers.
Problems with the fit of clothing are of far greater importance than average when it comes to avoiding returns. However, sports equipment, bicycles and furniture are also affected by this problem. The insufficient fit documented by sizes is primarily due to the importance of size policy as a sales argument on the part of manufacturers. The term “flattering size” makes the problem clear: in order not to have to confront customers with the fact that they have increased in girth, sizes are adjusted. Successful ordering by size is almost impossible.
Two main approaches have been established to eliminate this problem. One is the use of so-called fitting technologies, and the other is more industry policy approaches to standardizing sizes. However, since size policy is a customer loyalty tool for many fashion manufacturers, an agreement on standards is likely to be a while in coming.
Fitting technologies, on the other hand, are more likely to address the problem of lack of fit. Fitting technologies can be distinguished in two ways. On the one hand, there are online try-ons, such as those offered by the eyewear retailer Mister Spex, and on the other, database-supported solutions that record exact measurements and then make them available for the customer’s assessment. A simple but effective example is the determination of the frame height when buying a bicycle online. Here, a customer can enter an individual measurement, the crotch height, into an online form and receive a suitable size indication. Since I have already bought several bicycles online using this method, the proof of concept is given.
Returns management in the narrower sense – optimization of the returns process
Against the background of the optimal quantity of returns and despite all approaches to avoid returns, there are notable management tasks for online retailers in dealing with returns. This returns management in the narrower sense presents online retailers with both practical and technological challenges. The best way to discuss solutions for these is to depict the process of returns handling.
The return process
First step – offer and order of the goods
The process of efficient returns management begins with the offer of products in the online store. It is essential to plan the quantity of returns. To this end, category managers should prepare an initial forecast that determines the expected return rate for an assortment. The customer’s order also allows conclusions to be drawn about returns. The more frequently identical items are ordered in different sizes, the more likely they are to be returned. This also applies to similar articles. In this case, a common order can be used to draw conclusions about an intention to compare with subsequent return of the item that is inferior in the comparison.
In addition to the question of accuracy of fit, other product characteristics that make returns more likely can also be identified for the return forecast
- Value of the goods
- Extent of product information
- Awareness of the product
- Individuality of the product
- Probability of returns in the past
- Number of articles
- Structure of the shopping cart.
Second step – fulfilment and shipping of the goods
After the order has been placed, the most important step for the vast majority of retailers is the handover to a carrier, i.e. a parcel shipping service provider. The shipping by the carrier is another success factor for returns management, because the shipping speed is one of the factors that determines whether the customer decides to make a return. In particular, if there is an unexpected delay in delivery, the likelihood of returns increases. Customers who have their own time limit when procuring a good will procure replacements if the original shipment does not arrive on time.
Even though the speed of delivery is a general quality characteristic of online commerce, it is one of the essential variables for the extent of returns. If the delivery time exceeds the time expected by the customer, it may be that his need is no longer available. This is typical, for example, in the case of an occasion-related order such as a gift.
Third step – Receiving the goods
When customers have received their parcel, it is decided whether to return it or not. The receipt situation is already decisive here. If there are problems with delivery, this can encourage a return. If, for example, delivery is unsuccessful because the recipient is not present, the deadline set for receiving the goods may be exceeded. Their purchase becomes obsolete, accordingly, a customer decides to return the goods. Overall, a clear incentive is created for the shipping company to ensure fast delivery and smooth shipping.
The reception situation
An interesting and relevant situation is that of the actual receipt of a shipment. Research has shown that the expectation of a positive event such as a delivery evokes stronger emotions than the subsequent viewing (cf. Van Boven/Ashworth, 2007). Correspondingly, damaged packages that do not meet expectations lead to dissonance, which may result in a return decision.
Shippers can counteract this situation by not only making the package stable and secure, but also by making it appealing and positive on a more emotional level of the user experience. The specific target group segment must also be taken into account. Expectant mothers will certainly expect a different package for ordering baby items than seasoned do-it-yourselfers who are having the latest impact drill sent to them.
Fourth step – the returns decision and notification
After receiving the merchandise, consumers make the decision whether to keep or return it. For items that need to be checked for fit, this is where the fitting process comes in. They also check whether an item that has been shipped corresponds to the product information. The product page is regularly revisited in order to carry out a comparison. If there are serious discrepancies, the return is more likely. Returns are also more likely if the fit is not accurate and if there are no deviations from the expected deviations.
Payment method and return probability
Another factor influencing the decision to return goods is the payment method selected, as shown in the following figure:
Here, advance payment methods such as prepayment and direct debit have a rather negative effect on returns while the subsequent payment method invoice has a positive return effect. In conjunction with the problem of payment defaults, invoice payment tends to be a disadvantageous payment method from the retailer’s point of view.
Once customers have decided to return an item, the question of organizing returns notification and processing arises.
The following steps must be taken:
- Requesting or retrieving the return slip
- Filling in the return note
- Packing the goods
- Handing over the goods to a parcel service
- Verification of the return invoice.
For customers, returns are therefore a time-consuming process. This means that the amount of time and effort customers spend on returns is also a control variable for making returns more restrictive. The provision of a returns bill and a returns label is a key factor. A customer declares his or her wish to return goods on the returns slip. This complies with the legal basis of the Distance Selling Act for returns. According to § 355 BGB, the consumer can revoke his declaration of intent to conclude the purchase contract within a period of 14 days without giving reasons.
Returns voucher and returns deadline
If the return label is supplied as standard, as is the case with Zalando for example, the likelihood of returns is greater, as the decision to return goods is made much easier. If, on the other hand, it is necessary to retrieve a returns label from the online retailer’s website – as is the case with Amazon, for example – the effort involved increases. However, this is certainly not to such an extent that it has a fundamentally restrictive effect. On the other hand, requesting a return label while at the same time declaring revocation is likely to have a restrictive effect. Which approach a retailer chooses can be derived from the returns strategy and also from the optimum quantity of returns.
Another adjusting screw for implementing the returns strategy is the length of the returns period. Zalando advertises a 100-day right to return purchased goods. From my excursions to Zalando, however, I know that only about 5% actually use this period. For most returns, Zalando customers decide for or against the product within a period of a few weeks.
At Amazon, the return period is only 30 days, but this is still well above the statutory period. Since the choice of return period involves a significant degree of uncertainty and – as will be shown later – can also have an impact on the balance sheet, it should always be chosen as part of the returns strategy in such a way that no additional damage is caused to the company.
Distribution of shipping costs
Finally, the distribution of shipping costs should be mentioned as the last key factor in restricting returns. After the new Distance Selling Act came into force in July 2014, the legal regulation stipulates that in the event of an unfounded revocation, the consumer must generally bear the shipping costs of the revocation. Even though many companies, such as Amazon and Zalando, assume the return shipping costs as part of their returns strategy, there is still the possibility of using shipping costs prohibitively, i.e., avoiding returns, if they are handled restrictively.
However, it must also be remembered that rarely is a company not faced with competition in e-commerce. Accordingly, it must be taken into account which goodwill regulations competitors apply.
If a positive returns decision has been made, with or without an extension of the deadline, with or without an assumption of the shipping costs, this should be accepted. The company should also process the return quickly and in a customer-friendly manner. The services that depend on the parcel service provider also include the posting option. Certainly, the choice of a parcel service is viewed positively, because most customers prefer a specific parcel service for purely practical reasons. The market leader DHL still offers the most options for returning parcels with pick-up service, the Packstation and regular delivery.
Fifth step – returns receipt and processing at the company
The next stage, returns receipt and processing, begins with the customer’s declaration of cancellation. This announces the return. Since this declaration is basically legally binding, the retailer must now charge off the sales. In addition, the returns announcement can be used to basically specify the capacity planning for returns planning.
Once a return has been received, returns handling begins. In the logistics of the e-commerce company, this is a separate area of goods receipt. Incoming returns are fundamentally different from goods received from suppliers. This is because customers receive packaged parcels, unpacked goods, whose condition is often no longer adequate. Basically, it can be concluded that the transition to the sphere of private customers and back again means a significant economic risk. The figures speak for themselves. According to Novalnet, the return loss for electronics is 36% of profits, and for textiles it is still 21%. This damage occurs when products can no longer be sold or can only be sold at a discount.
Returns handling
Returns handling therefore consists of the following steps
- Opening and registering the package
- Checking and registering the item
- Quality check and documentation
In the best case, articles can be returned to the warehouse without further processing. In the worst case, they have to be processed further, such as cleaned. Partial returns, in which only part of the ordered goods are returned, are particularly time-consuming and complex. The quality check is about the condition of the goods, e.g. may be dirty. If the effort for cleaning exceeds the value of the goods or the costs of disposal, a dealer must decide on disposal. But this also means effort, so that overall there is a return damage.
Finally, it is important to have the exact documentation of the item’s condition so that the facts are recorded for the settlement of a possible damage. This recording can then be used for evidence purposes. However, the documentation of a damage is not yet a basis for being able to pass on the damage to the customer. As a rule, it is very time-consuming to be able to prove damage to a customer – for example in the case of an electronic device. Dealers often choose to take over a loss instead of taking legal action with an uncertain outcome.
Sixth – Restocking the item, invoicing the return
The final step in completing the returns cycle is to settle the return and market the returned goods. Settlement takes place via a credit note to the customer, as well as the reimbursement of the purchase price already paid. In addition to the purchase price, shipping costs already paid by the customer will also be refunded. The outward shipping of the returned items is therefore usually borne by the company. This does not include additional shipping services that go beyond standard shipping.
For the marketing of the return, it is initially relevant whether the product is undamaged and unimpaired. Relevant damage includes damage to the packaging that reduces the resale potential of the goods.
If the goods are undamaged, they can be reintroduced into the inventory. Damaged goods, so-called 1 B goods, can either be marketed on their own platforms. One example of this is Amazon Warehouse. Another example in the B-2-B area is the Corso platform, which handles the shipping of returns in the fashion sector for the Otto Group.
Seventh step – returns monitoring and analysis
The last step is only a final step in thought, but rather a permanent task. It involves observation, i.e. monitoring of returns behavior, which at the same time forms the basis for analysis of returns. The analysis involves comparing the number and development of returns with changes in the reasons. The following factors can change at the store operator level and thus increase the number of returns:
- Change in the conditions of returns
- Price of the products
- Product information
- Product presentations
- Sizing policy for fashion
- Shipping speed
Especially when measures are implemented to reduce the return rate, it is important to record changes in the return rate so that the mode of action and causality of the implemented measure and a change in the return rate can be recorded.
Other adjustments to the shipping service can also lead to a change in the return rate. Especially if there is a reduction in services such as the number of product images, it is important to see whether a savings effect at one level does not lead to an increase in returns and thus to additional expenses.
Finally, it is important to record the results of the returns analysis in the CRM system as well. Customers who return an excessive amount are blacklisted by some retailers to rule out future returns and return damage.
Challenges
Backward logistics that run counter to the company’s purpose is a challenge for any organization. However, it is digital innovations in e-commerce that help mitigate the returns problem.
Practical challenges
Numerous challenges have already been identified in the description of the returns process. Overall, the main challenge is to always strike a balance between avoiding returns and using returns as a service as part of the chosen strategy. This also involves recognizing the necessity and benefit of a return on the customer side. It is important to make the company’s returns policy transparent so that customers can adjust to how the return request is handled. Since there is always a threat that customers will post bad reviews if they are disappointed with reduced service, publishing policies is a self-protection against unwarranted criticism.
As can be seen from this complaint, it is also important to maintain sufficient capacity and, not least, liquidity. Liquidity management in the face of high return rates must be seen as a particular challenge.
Accounting for returns
Accordingly, a high volume of returns also has accounting implications. If a company such as Zalando has a high volume of returns, this must be taken into account in the financial statements. Since the returns claim is a deferred liability, the provision can be recognized in the amount of the value of the expected returns volume.
From a financial and tax point of view, it is therefore advantageous if returns are processed promptly, especially before balance sheet and tax reporting dates. If many returns are made after the cut-off dates, declarations have to be changed and the administrative effort is high.
In addition to the financial challenges, the implementation of the returns avoidance strategy is also a challenge. These can be
-
- with the customers
- with the products and their presentation
- in fulfillment and
- with the logistics (cf. Graf (2015), p. 161 f.).
If, for example, there are logistics problems in the peak season, which in many sectors is the pre-Christmas period, and thus also an increase in the number of reasons for returns, capacity problems should be expected on the part of both management and service providers in order to change the reason for returns as quickly as possible.
Technical challenges
The evolution of returns management is part of the Digital Transformation and thus the challenges in returns management are mainly technological challenges. The returns problem can be reduced to three levels:
- Efficiency in returns processing
- Returns avoidance through improved presentation
- Returns avoidance through improved logistics.
Process efficiency in returns processing is primarily a matter of ensuring that the processing of the returned goods is carried out without friction in all the relevant systems in the IT system landscape, i.e., through the automated transfer of data. As a rule, returns handling is likely to take place in the store system, since this is where the order process, the inventory and also the product data are accessible. Further subsystems are:
- Shipping module for the creation of the returns label
- Merchandise management for the inventory
- Transfer of inventory changes to external platforms
- Accounting system for crediting, refunding and adjusting taxes
- Customer Relationship Management.
Returns management and e-commerce systems
The following systems are involved in the analysis of return reasons and return behavior
- Analytics/BI
- online marketing
- PIMS /CMS.
For the most widely used systems, such as Magento, modules or extensions are offered, such as Magento 2 RMA, which cover most of the returns work:
Large companies with their own developments for the e-commerce system landscape will then also have to carry out their own developments for returns management.
An important aspect is the ongoing linking of returns processing and returns prevention. When recording the reasons for returns, it must be ensured that customers are provided with relevant suggestion lists. Reasons for returns can be dynamic, so that the suggestion lists can be adapted on an ongoing basis.
Innovations in product presentation
Product presentation is also subject to ongoing innovations that can help avoid returns. In particular, 360° display and the use of augmented, mixed and virtual reality are considered to be technological solutions for improving the assessment of a product in order to prevent decision errors. However, it must be noted that the use of such a representation technology for a very large range of products is very costly and can only be imagined with highly automated processes.
Beyond this goes the use of augmented reality, which is particularly interesting for furniture and fashion. It is about virtualizing the reality of one’s own body and, for example, one’s own home, in order to be able to better assess the use and fit of a product in this way. The development of such a virtual reality system is a strategic investment that both Amazon and Zalando are currently preparing (Melchior, 2016).
Finally, another technical challenge arises that affects not only returns management but e-commerce as a whole. The increase in mobile usage also leads to an increase in mobile purchases, even if the conversion rate for mobile purchases is lower. The returns rate should not be lower. The main cause is the limitations of product displays on small smartphones, as this example at Zalando shows. (Tool: http://www.website-analyzer.de/smart-simulation.html).
Text: Prof. Dr. Dominik Große Holtforth
Literature:
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Asdecker, Björn H. (2016): Statistiken Retouren Deutschland – Definition, verfügbar unter: http://www.retourenforschung.de/definition_statistiken-retouren-deutschland.html
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https://www.handelsdaten.de/handelsthemen/versand-und-retourenmanagement