E-commerce returns: how can merchants improve the customer experience while reducing costs?

Gonçalo CaraslindasSenior Payments Consultant at PES Councilprovides valuable insights into e-commerce returns and how merchants can improve customer experience while reducing costs.

COVID-19 has permanently changed consumer consumption habits. A recent Internet Retailing survey shows that more than 70% of consumers are now less likely to shop in-store. But with the reduced need for expensive retail space comes an increase in behaviors that can be burdensome and costly for retailers to manage, including the thorny issue of returns.

The problem with returns

Returns are seen by retailers as a time-consuming and costly task that has a disproportionate impact on operations and margins. However, the process can become a source of differentiation if managed effectively. A recent Invesp survey found that 79% of consumers want free return shipping and will not buy from retailers who charge for this service. Balancing customer service, differentiation, and cost issues has become a surprising battleground in e-commerce.

The problem of returns negatively impacts several stages of the customer journey, but each presents the opportunity to improve the customer experience and create differentiation:

  • Many consumers consider returns an important issue before purchase and dig into the terms and conditions to find return policies. The differentiating opportunity here is to introduce return policies early in the buying journey, especially for new customers.

  • Returns processes often require considerable effort from consumers. In this case, minimizing customer effort by providing pre-printed labels and easy access to return points can reduce customer service queries and potentially offset direct costs.

  • Consumers are unsure of the size of the item being purchased. 52% of multi-size orders are returned according to recent IMRG Benchmark data. Retailers can use community feedback and product ratings next to each product to let customers judge size and other issues in advance.

  • Refund 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 either by initiating the refund as soon as the courier scans the return package or by using virtual gift cards to credit registered customer card accounts.

What else can retailers do to reduce return costs while maintaining (and improving) the customer experience?

PSE spent a lot of time researching how to get the most out of the returns process. We recently came across a set of examples where retailers can manage this balancing act:

  • Free member-only returns: By only offering free returns to registered customers, retailers like Nike maintain customer loyalty and encourage member sign-up.

  • Free exchanges: To avoid lost sales and to help customers with sizing or style issues, retailers like iKrush offer free exchanges but charge for returns.

  • Return to store: Some retailers offer free in-store returns (eg Zara); this reduces return costs and encourages customers to spend more once in store.

  • Expedited Card Refunds: International card schemes such as Visa and Mastercard offer near real-time payment solutions – Visa Direct/Mastercard Send – which can be used to process refunds globally, making funds available to customers almost instantly . They also both plan to roll out real-time refund authorization products that will help speed up the refund process.

  • Return in store at non-competitors: Retailers can partner with other merchants (eg supermarkets) to collect their returns. This can reduce costs for the online retailer and increase footfall for the physical store. In the UK, the partnership between Wiggle and Tesco is 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 receiving and returning goods simple and straightforward. This is popular in Central Europe and allows 24/7 return cycles.

  • Work with specialized companies: Returns-focused companies offer dedicated services such as returns management, re-gifting, recycling, and more. – and relieve the basic operations of retailers. However, it is important to select the best provider 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 experienced a high volume of fit-related returns to reduce the likelihood of returns. AI is even being used by Sephora to create a personalized shopping experience by recommending makeup that best matches skin color or clothing.

  • New payment types for consumers: Savvy consumers use alternative payment methods that allow them to order multiple products before paying for them. For example, accepting Buy Now, Pay Later (BNPL) offers consumers the opportunity to try before they buy.

  • Invoicing for returns: Despite concerns expressed by customers, several fashion retailers with high return volumes (e.g. Zara) have started charging customers for returns; provided the cost of returns is in line with the market, customers should remain loyal to the brand.

Regardless of the return policy chosen, avoiding negative customer feedback is essential to success. Retailers should therefore test and learn before rolling out new policies. It is essential to monitor social media comments and the NPS for changes in the approach to returns. After all, retailers should retain their customers and prevent their customers from looking elsewhere.

About Gonçalo Caraslindas

Gonçalo Caraslindas has over 20 years of payments experience, ten of which have been with PSE Consulting, where he leads the PSE research team. A former senior marketing and product manager and currently a senior consultant, Gonçalo carries out projects that include the development of action plans to develop e-commerce in several markets and advising banks on implementation strategies, acquisition and treatment of market entry strategies, studies on acquisition/processing requirements of large/SME merchants and fintech innovation.

About PSE Consulting

PSE Consulting is one of the European leaders in payment consulting. Founded in London in 1991, PSE provides advice from renowned experts in the payments industry to systems, processors, transaction gateways, issuers, acquirers, private equity and merchants.

PSE is recognized for understanding and shaping innovation in the European payments market by providing insights to our customers. PSE always focuses on our clients’ customer needs, their buying journeys and their 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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