White Paper One
Reducing the Impact of Consumer Returns on the Logistics Bottom Line
Benjamin Joseph Samuel,
Marketing Executive
[email protected]
Online consumers have the privilege of returning what they purchased, but how does this impact logistics? Here, we discuss the effect of increasing consumer returns on the logistics industry. We investigate why consumers expect free returns and how businesses are affected. A critical review of existing processes and existing solutions are presented. Also, we propose a solution, “Try-and-Buy” to reduce consumer returns and support first time conversion of an online sale. The fashion industry is used as an example to understand the steps of the process. However, the proposed solution is not limited to the fashion industry and can be implemented across various businesses with options to upsell. We verify our proposed solution and finally, we address our solution, “Try-and-Buy” and its benefits.
Introduction:
The COVID-19 pandemic resulted in an exponential growth of online orders as consumers satisfied their shopping needs from the comfort of their homes and mobile phones. Many brick and mortar businesses became retailers on online marketplaces. The online marketplaces took advantage of this change in consumer behaviour and hosted numerous benefits to buy online. As a result, consumers had access to a wide range of options at their fingertips and these tech-savvy, smart consumers became a boon to the businesses during the pandemic.
However, online retailers faced an increased problem related to logistics and transportation as it was difficult to meet the high-volume demand. Deliveries were delayed or lost, stocks were not readily available, and sellers were not keeping to their promises. These problems were fuelled by the rise in the number of returns (Roberts n.d., 2022). For instance, the returns for fashion products grew to 40% (Roberts n.d., 2022). This increase in returns amplified related costs and caused wounded profits. Companies are scrambling for ideas to retain consumer loyalty and happiness, whilst trying to prevent a fracture in sales and profits.
Existing solutions to reduce returns, primarily revolve around changing the return policy. One of the suggested solutions is to place a charge for a returned product by deducting a certain percentage from the refund amount. This was recently implemented by Zara, where there was NO charge if the product was returned directly to a store by the consumer, but a charge was levied if Zara had to manage the logistics of the return (Roberts n.d., 2022). This clearly shows that the main challenge was in managing the cost of the logistics for the return.
From the consumer’s perspective, the freedom to return a product without additional charges is a crucial factor, and this encourages the consumer to do more online purchases. About 64% of consumers are only likely to repurchase if they can return the ordered product for free (Roberts n.d., 2022). Other proposed solutions suggest optimizing existing systems to manage returns more effectively and efficiently. Needless to say, the turnaround time to redevelop the systems and related functions with new policies and without errors turn out to be expensive and a time-consuming alternative.
There are several reasons for consumers to return a product that they purchased online. When it comes to fashion, the biggest reason is a mismatch between the expected feature like size or color, and the one received. Returns may also be a result of bracketing (consumer ordering multiple sizes of the same product to get best fit and return the ones that don’t fit) and wardrobing (consumer ordering with the aim to wear once and return). Products are also returned when damaged products are delivered.
Why are returns so painful for companies? Product returns are lost sales as they trigger an increase in the cost for logistics and a decrease in the return on investment. Once the consumer requests for a product to be returned, a new job has to be created for return-transportation. Vehicles have to be designated and dispatched, drivers have to be assigned, and the returned product has to be picked and delivered back to the source fulfilment center. The returned products must be sorted, tagged, and stored separately both physically and in the system. These returned products must then be repackaged and repaired if damaged or discarded if they cannot be salvaged. Once this is done, the product will once again have to be re-advertised for resale. To top it all, the product may have to be sold at a reduced price as the season may be over or the entire process of return has taken too long. Therefore, there is an increased concern about the problems and associated costs of product-returns and its strong impact on the bottom line. Now, it is important to note that returns cannot be completely eliminated. There are always reasons for a product to be returned, but can we reduce the impact on the supply chain?
Try-Before-You-Buy (TBYB) (Park et al., 2022) has been an evolving option recently and has been the centre of many discussions. This allows the consumer to try out a product purchased online and select the right choice, which increases the probability of a successful sale in the first attempt reducing any returns. As technology advances, people tailored this concept to serve and meet their organizational goals. Allowing consumers to have various products brought to them, pay for the ones they wish to retain, and return the rest for free was one of the strategies. By implementing this version of “Try-Before-You-Buy” technology, Stitch Fix was able to attract 3.5 million consumers and had an earning of 1.71 billion in 2020 (Stitch Fix, n.d., 2021). Stitch Fix used TBYB as a business idea catering to an audience that wanted their fashion to be determined by a set of stylists (Marr, n.d., 2018). They were able to convert a sale in the first attempt. However, since consumers were given the freedom to return products, there was no assurance of a sale, and it created a nightmare for transporters. Also, of the 200 retailers in the US and UK, only 8% were willing to implement this strategy (Brightpearl, n.d., 2018).
Another strategy involves the use of Augmented Reality (AR) (Lavoye et al., 2021). With the use of AR, the consumer is able to virtually try out the product purchased using computerized technology, but not in the physical. This is a unique concept which is in its infant stage and still has a long way to mature. The idea and its applications are still being researched and the adaptation of this is still indefinite (Bonetti et al., 2018). Applications using AR have to be more accurate and appropriately portray sizes (Yim & Park, 2019). After the technology has matured and implemented, time will tell if users will accept the technology and be comfortable in adopting it (Beck & Crié, 2018). Furthermore, nothing negates the fact that consumers will enjoy more satisfaction with a product only after physically viewing and trying it.
Proposed Solution:
Our proposed strategy incorporates improvements that will reduce the number of returns that is based on features such as size and color, while increasing logistical efficiency. It is easy to adapt and will be beneficial for all stakeholders. When a consumer places an order for a product but is unsure of the correct size, the consumer is given the option to select the “Try-and-Buy” option. The product is then delivered along with a size up and a size down based on the consumer’s initial size selection. This may also be done for assorted colors of the same product, allowing consumers to try them out when it is delivered to them. The flowcharts below compare the current process (Figure 1) and our solution (Figure 2).
Figure 1: Existing flow of events with one Return
Figure 2: Flow of Events with Try-and-Buy
The benefits of this concept are numerous. In the current process (see Figure 1) with either a return or reimbursement, the retailer holds onto the money for a longer period of time even though the consumer has not received the right product. On the contrary, adopting “Try-and-Buy” results in a higher probability of the sale being confirmed at the site of delivery and the consumer getting his money’s worth. Moreover, we can lower the number of trips by 50% as seen in Figure 1 and 2, and fewer trips lead to a reduced carbon footprint and improved environmental sustainability. Furthermore, the consumer is satisfied with the purchase and all associated costs of return are avoided. It’s a win-win situation for both the retailer and the consumer. Also, businesses can upsell i.e., additional items can be sold to increase sales revenue. An example would be to promote the sale of a pant along with an online ordered shirt.
A poll was conducted with the following question being posed to one thousand (1000) online shoppers between the ages of 18-30: “You purchase a pair of shoes online and it turns out that your choice of size was wrong. As a consumer, which of the following options would you prefer?”. Based on poll we conducted, 52.1% chose the proposed solution of Try-and-Buy, 32.6% selected the alternative to return with an additional charge, and 15.3% opted for a reimbursement (see Figure 3)
Figure 3: Poll Results
Conclusion:
In conclusion, the problem of increasing returns and its effect on the net profit and consumer satisfaction of businesses is a growing concern. While free returns are vital to maintaining consumer loyalty, existing solutions are expensive and time-consuming to implement. Our proposal here is to provide the consumer with the “Try-and-Buy” option. The poll we conducted show that many online consumers would prefer our proposed solution. We also explained the benefits of this option and how it would help achieve consumer satisfaction. This next generation solution proposed by SCNext Supply Chain Solutions – “Try-and-Buy,” allows for the improvement of the transportation costs while increasing the probability for sale in the first attempt, and increasing return on investment.