Retail 100% Satisfaction Guarantee Policies May Be Reaching A Point Of No Return

Not long ago, easy and no-questions-asked return policies were table stakes for retailers and even more important when transactions were conducted online. Estimates are that about half of e-commerce retailers even paid for the privilege of customers shipping back their items.

But with costs rising across the board and margins squeezed, retailers are looking twice at their return policies and tightening up.

For example, Kohl’s no longer pays for return shipping costs and Bath and Body Works has limited its previously wide-open return policy to 90 days and to $250 per customer over that period. And LL Bean, Dillard’s, J. Crew, REI and Zara in the U.K. now deduct a fee for returns made by mail, with H&M just announcing it is testing a return fee for online orders in some markets.

Other retailers are considering opting out of the returns process entirely and letting customers keep unwanted merchandise, giving a new definition to retail shrinkage. But these policies must be applied on a case-by-case basis and are frankly unsustainable as a business practice.

Steve Rop, chief operating officer at goTRG, a firm that handles returns processing for Walmart, Sam’s Club, Target, Lowe’s, Home Depot, among others, sees the writing on the wall. “It’s not sustainable for retailers and DTC brands to continue to absorb the costs for returns. It all comes down to economics.”

Costs for returns nearly doubled from 2020 to 2021

And the returns economics are astounding. The National Retail Federation and Appriss Retail figure returns cost retailers $751 billion last year or 16.6% of total U.S. retail sales. That’s up about 80% from the $428 billion returns during 2020, or 10.6% of retail sales. Online return rates are even higher, accounting for $218 billion and 20.8% of sales in 2021.

However, the NRF estimates may be underestimating the real costs of returns. A survey conducted among 117 retailers by Supply Chain Dive and Optoro found that only about one-third quantify the full costs associated with returns.

“There’s the packaging costs, shipping costs, sorting and processing. That cost could be anywhere between $10 to $15 to return an item for the retailer,” Rop explained.

“Easy returns with return shipping costs paid by the retailer were part of the early ‘land grab’ in online retail. Now the tide is turning and retailers are under pressure to find a better way.”

Trained to return

Retailers know that customers pay attention to their return policies and it is even more important in e-commerce. It can make the difference between clicking the buy button or going somewhere else to make a purchase.

Some online retailers, like Warby Parker, Stitch Fix and Zappos, build returns into their business model, while others just figure it’s a necessary cost of doing business online.

Not unexpectedly, customers favor free returns. It’s the second biggest factor after free shipping in influencing online shoppers, according to a survey among nearly 8,000 consumers conducted by PowerReviews.

Some 96% of consumers consider free shipping important with 79% expecting free returns on the other side, meaning the retailer pays for return shipping. Buy-online-return-in-store is far less favored, with just under half finding this option important.

And consumers’ expectation for free returns rises with incomes, from 75% for those with HHI under $50,000 to 83% for HHI over $100,000.

Caught between a rock and a hard place

Retailers are pretty much on their own when it comes to finding the right balance between the push to make customers happy with free and easy return policies and the pull to reduce costs from returns.

“To date, there is little academic research that systematically unpacks and tests the firm performance and consumer behavior implications of evolving product return policies,” wrote Thomas Robertson, director of the Jay H. Baker Retailing Center at Wharton, and his co-authors in a paper entitled “Many (Un)happy Returns?”

Robertson et al. propose that retailers need to factor in returns as part of their customer journey model. Most such models focus on the purchase as the “destination and anything that comes after is considered relevant only to the extent it leads to another purchase.”

However, consumers are increasingly using returns strategically – bracketing apparel purchases for size or ordering multiple colors – so that the “status of the purchase as a destination is eroded.”

The researchers suggest that returns should be considered part of a distinct post-purchase stage in the journey. Returns can serve as “conduit back to other stages in the journey,” the motivator for a new journey, if an item is defective, or a step that leads to a different retail experience, such as an online purchase returned to the store.

goTRG’s Rop sees buy-online-return-to-store as a highly desirable alternative with online retailers forgoing return fees for items returned to the store. Retailers thus incentivize shoppers for more in-store face-time where they have the opportunity to make another sale.

And buy-online-return-to-store may have an added benefit. It may reduce future returns if “salespeople respond to returns with relationship building behaviors,” Robertson et al. suggested.

The researchers identified 20 topics concerning returns that are ripe for further investigation. Beyond integrating product returns into retailers’ customer journey maps, more study is needed in the area of fraudulent returns, impacts on supply chains, logistics, retailer reputation and customer loyalty.

They also believe more research is needed into the ways retailers have trained customers to return more merchandise and how customers can be retrained to return less.

“Easy returns change the customers’ commitment levels. Purchases become temporary and decisions are no longer made in the store or on the website, but instead become fluid and intermediate, with the ultimate determination shifted to some point in the future when consumers make the final decision to keep or return an item already purchased,” they wrote.

Returns ready for an overhaul

The assumptions underlying lenient return policies may not hold any longer. “Returns have moved from a staid logistical issue to a dynamic and often strategically important part of the retail business model,” Roberston et. al. wrote.

“Customer expectations, norms and behavior have shifted dramatically in a short period of time. While some retailers have identified (potential) opportunities in new product return strategies, the danger to retailers is real.”

And highlighting the danger is that many retailers “lack a coherent philosophy on where returns fit into their strategy and appear not to have built return rates into their business models at all,” they wrote.

Aaron Orendorff, former editor of Shopify Plus, put it succinctly, “Returns can be a disease — aggressively attacking profit margins, gutting conversion rates, and ultimately threatening your business.”

There’s no easy answer to returns, but one thing is for sure, with the cost of returns nearly doubling year-over-year, more retailers will be taking a fresh look at their return policies. They need return policies that work better for their business and customers may end up doing more of the heavy lifting as a result.