Inside this article
I went shopping the other day. In my pyjamas. A few years ago, this might have called for quite a few odd looks. Or maybe some autograph requests from people mistaking me for a Hollywood celebrity. But now I was just one of the thousands of other shoppers, also in their pyjamas. In the same shop, at the same time. Clicking away, comfily on their living room couches.
That’s when it happened. I would like to call it a premonition, but that would be over mystifying it. Let’s just say, my mind transported me a few years into the future. A future constructed based on the information and experiences I have acquired so far, and the dynamics and directions of the current retail market status quo.
In this world, a few years from now, if you shop, you shop online. Online shopping, will just be called shopping. The real world will be used to showcase and exhibit products through a natural and smooth experience that will bear little resemblance to our shopping activities today. The purchase might be made on the spot, but always via the web. Delivered with a click of a single button (or a well-aimed blink of an eye) and maybe fulfilled even before you get home.
Strutting around with a bunch of shopping bags flaunting designer brands is going to be so yesterday. You will not have to look up reports on the state, growth and expansion of eCommerce and online retail, it will just be called Retail. Instead, there will be reports written on the decline of offline retail and brick-and-mortar commerce. Online will be the norm, offline the channel that needs an introduction.
Just like our children will never know what magic the letter combination VHS once delivered, their children will never understand why people would ever go shopping outside of their homes. Just to feel sweaty and tired trying to drag home the shopping bags and the whiny and hungry kids clinging to their feet?
Everything is getting more convenient and seamless for consumers. Better, faster and easier. Effortless and more precise. But in a true information society, why would consumers accept being less informed about the products they are buying? Because not being able to touch, feel or try on your purchase before committing to it, means exactly that. They wouldn’t!
This is why, returning orders, is a norm of the new retail business. You would not buy shoes in the local shoe shop down the street without trying them on first, would you? Exactly. And this is why online shops need to encourage returns. Trying to minimise returns equals telling your customers not to shop at your online store.
There are always extreme cases and people trying to abuse systems, and these, of course, need contingency plans, but for an online shop to succeed, the basis has to be – order what strikes your fancy, if needed, return it with no questions asked.
Just look at Zalando
I wrote a few weeks ago about why Amazon insists on losing money on shipping. Amazons returns policy is also quite an aggressive one, but to illustrate the power of free and painless returns there is no better example than Zalando.
Zalando was founded in 2008 by two German university friends Robert Gentz and David Schneider with the backing of a 75k euro loan from the venture capital firm Rocket Internet SE.
Offering the best customer service was their number one goal from day one and the epitome of that commitment was Zalando’s free delivery and 100-day, no questions asked, right of return.
To boil down Zalando’s success to merely their returns policy would be misleading.
They have a great technological framework, supported today by almost 2000 in-house developers. This allows them to make suggestions to customers based on previous or current purchases. It also allows them to make gift recommendations and give style advice automatically online.
Their mobile app is capable of making similar items suggestions just based on an uploaded picture of a garment. And they run smart sweepstakes to keep their audience engaged while allowing them to collect data on trends and preferences. Couple this with insight to the diverse European market and a personalised approach to each of the countries they operate in and you have an unstoppable money-making machine.
Zalando is a company where nothing is left to chance. Especially the basics — shipping and returns! Free shipping is quickly becoming the industry norm. 80% of shoppers (Walker Sands) say free delivery is key to their purchase decision. Slowly, but firmly, returns are starting to be noticed as an equally important part of capturing clients. The most successful online shops have known about the magic a lenient returns policy can deliver already for some time now.
Zalando’s returns policy is so notorious that in Germany the term “Zalando party” became commonplace to define events where the guests wear outfits ordered just for the sole purpose of having the party, only to be sent back the next day to get a full return.
Zalando’s return rate used to be the retail industry’s topic of speculation until a few years ago when its managing director Rubin Ritter confessed it to be around 50%.
There has been wide held belief that this kind of a loose returns model cannot possibly support a profitable business, but Zalando has proved this wrong since 2014 when it first turned a profit. Since then it has increased profit year on year in a sustainable manner. In 2016 Zalando reporter EBITA of over 200 million EUROS, with similar numbers initially reported for 2017.
Zappos, the US shoe retailer that Zalando got most of its business inspiration from, has also confirmed that while they average 25-30% returns, their most profitable customers are the ones that return close to 50% of their orders.
These high-returners are a priority to the successful retailers of the future.
But why exactly is this?
A shift in the paradigm of returns?
Let’s step out from the virtual retail, back into the real world for a second.
We don’t need to hypothesise about the future to understand the significance of return policies. We just have to look at the present and the past.
Aggressive returns policies have been used by successful brick-and-mortar stores for decades.
Take IKEA for example – they allow to return any item within 365 days (1 year), no questions asked.
El Corte Ingles in Spain has enforced their customer oriented and hassle-free returns guidelines for ages.
Looking at the US market, the emphasis on “buy now, decide later” mentality is even more pronounced. Easy returns are part of the foundation that the economics of the United States has been built on since the 1950s.
However, when the first online retailers opened their sites for shopping, this concept of seamless returns somehow got pushed to the sidelines.
Everything in online shops was meant to be cheaper for the customer while at the same time delivering more profit to the owners.
This meant that any superfluous costs had to be cut. Including costs related to returning items.
However, as it turns out, people really don’t like buying things they are not able to see, touch or try on without compromise.
They also don’t like to go through annoying processes to return items that do not correspond to their expectations.
And they certainly do not want to put trust in shops that are insecure about the quality of their own products and service.
All of this is hardly a surprise.
In fact, studies show that up to 65% of returns are due to mistakes made by the online shops themselves – shipping incorrect or damaged products, items not matching their descriptions, issues with timely and secure delivery. Even more so, as more consumers are getting used to mobile shopping, an unresponsive and inexact UI might increase returns even more.
With statistics like these, customers are right to be sceptical about complicated returns processes.
And they are.
80% of shoppers are not willing to buy in online shops that restrict returns. And yes, most of them will read the returns policy before purchasing.
The more expensive the item being purchased, the more important are easy and free returns to the customer. In fact, Walker Sands has found that just by offering free returns people are twice as likely to purchase items with value over 1000USD than otherwise.
Statistics, case-studies and consumer behaviour studies all demonstrate – even though more lenient return policies lead to higher returns, they lead to proportionally even higher sales.
It all comes down to psychology
To understand the effects a mere returns policy can have on customer behaviour we have to look no further than our own minds.
Like always with human behaviour, we are bound unconsciously to cognitive biases that guide our everyday actions without us even being aware of it. In fact, sometimes, even when conscious about them, we still cannot resist succumbing to their effects!
The zero-risk bias
The first and the most obvious one at play when shopping online is the zero-risk bias.
People are by nature risk aversive and will try to avoid it whenever possible. Even adrenaline driven skydivers that seem to seek it prefer to pack their own parachutes. Just in case.
And shopping in an online shop always means risk.
Committing to buy items based on limited information and putting their faith in the hands of anonymous pickers/packers/couriers, without an easy way to backtrack, is an unreasonable request to make from any consumer.
And buying without the possibility to physically see or try out the product beforehand equals limited information. No matter how much detail you give in your descriptions, at least for now, the sensory part is impossible to convey.
A hassle-free returns policy will help minimise this risk and demonstrate the retailers’ confidence in its products and services, thus leading to higher sales (and not necessarily to higher product returns).
The placebo effect
Another reason why a more lenient returns policy has such a pronounced effect, is our predisposition to the placebo effect.
This one makes us perceive benefits in situations where there are no other grounds for it, except for our belief that there will be benefits.
For example, even if we know that extending the returns period from 30 days to 60 makes no real difference for us, we perceive it as an extra motivator to buy, just because it is presented to us as delivering more value (yeah, we mostly also tend to believe what we are told).
Once we have already been conditioned to view the online shop in a positive light, because of the promise of easy and free shipping and returns, our selective perception kicks in.
Once we decide we like something, we become more or less blind to the downsides. We are willing to accept shops with less choice, less reputation, even less than optimal user interfaces. All in exchange for better customer service and freedom.
This is why a returns policy can be used to make up for other shortcomings, that otherwise might negatively affect sales – higher prices, unrecognisable brands, new and “scary” products and so on.
So as shoppers, we are totally at mercy of (and well, quite often let down by) our brains.
But not so as online retailers!
We can use these cognitive biases to ease people into buying more. And, what’s even more, there are psychological mechanisms at play in favour of online retailers once the customer has already received the goods and is contemplating a return.
Even though before buying our brain tells us that we absolutely need to able to return, later on, that same brain tells us that, at all cost, we must avoid doing it!
We are our own worst enemy.
Whenever we make a decision, be it to move across the world for a new job, or to buy yellow shoes instead of red ones, we have the need to feel good about it.
We want to be right and to never make a mistake. Anyone can relate to that.
This is called choice-supportive bias, and it is why even if we do not completely like the tone of the yellow colour of our new shoes, we convince ourselves that the shoes are fine in any case. If we are really good at it, we might even convince ourselves that they are even better than we initially expected.
We similarly want to avoid all information that indicates we have been wrong. We much rather only process the facts that confirm our position.
This is called confirmation bias and it, together with choice-supportive bias, are the main culprits to why we have so many unused, brand new, still labelled clothes in our closets. And dusty, never been used, waffle makers and elliptical trainers hidden away somewhere in the basement.
Leaving aside possible fulfilment errors and mistakes by the online shop, going through the process of returning an item means admitting to yourself that you have made a mistake.
Chosen incorrectly, having bad taste, been fooled by marketing, maybe even managed your finances irresponsibly?
Most of us would rather just convince ourselves of being right from the beginning.
Another reason online shops should feel comfortable offering long time windows for returns is the endowment effect.
Simply put, this means we become attached to stuff. Even stuff we do not need.
Quite bluntly, we are all hoarders, even if just a little bit!
This cognitive bias is responsible for making it impossible to throw away our favourite childhood teddy bears or the “lucky” pants we last wore in university.
Rationally we know we will never have the need for these items. Even if we wanted to, there is no way we can ever fit back into those pants! But emotionally we are attached and letting go is not an option.
The same happens when you order from an online shop that advertises long return times. Shoppers usually leave the return to the last moment and by not feeling any urgency to do it in a hurry, they start living with the purchase. Big mistake!
It has been demonstrated that the longer the timeframe for returns, the less people actually return.
This is because the longer they have time to spend with their new possession, even if not using it for its intended purpose, the harder they find to depart from it.
And, of course, last but not least – most of us are plagued by plain simple bad memory.
Even though not really a cognitive bias, but more of a widespread case of – too little time to concentrate and too many things to do – bad memory also plays a big role in reducing returns when you are given too much time for it.
People forget. Sometimes they misplace the items and cannot even find them. Often, they just have other things on their mind.
All this results in the fact that, the more lenient the returns policy, the smaller the rate of return.
Embrace returns, enhance your processes and discourage fraud
Since we can’t fight human nature, we might as well embrace it.
The question online shops need to be asking about returns is not how to minimise them. They are a necessary and a normal part of the online business.
Rather, they need to answer a question about how to manage returns in the most profitable way.
There will always be customers who are more likely to return items than others. In fact, a UPS study from 2016 shows, that 72% of shoppers return only 10% or less of their purchases. Only 8% of the shoppers return 26% or more.
Keep in mind that Zappos and Zalando both have confirmed that within this 8% of high-return customers are also those who shop and spend the most. The valued customers who bring in the biggest profit.
The target should be to encourage these shoppers with free and easy returns while reducing returns that are caused by delivery mistakes, bad user interfaces, insufficient product information and of course, fraud.
In addition, online shops need to find ways to cross-sell to customers that are returning an item.
The same UPS study mentioned previously also showed that 70% of customers returning items to physical shops purchase additional items when doing so. Only 45% of customers who return online do the same. There is room and need for improvement here.
How to achieve profitable returns?
There are 3 key areas to concentrate on when developing your ultimate returns strategy:
- The returns policy
- The UI and technological framework
- Deterring fraud
The returns policy:
- To completely remove risk from your risk-avoiding customers (this includes all of them), offer FREE returns (no transport fees, no restocking fees)
- To make them less likely to return items set a longer than usual timeframe for returns. Even though it seems like a mistake of logic, it’s true, the longer people have to return items, the less often they actually do it.
- Write your returns policy in an easy to understand everyday language.
- Make your returns policy easily accessible on your site.
- Advertise your great returns policy to make sure people know about it. Also, remind them about it during the checkout process.
The UI and technological framework:
- Make sure your user interface is completely responsive and pleasant to use on any device.
- Make sure you provide as much relevant information about the product as possible. Pictures, user reviews and videos all add up. And do not forget a great description – people not only want the facts, they want to know how the item feels to the touch, how much it weighs and how it smells. Tell them.
- Understand differences in sizing amongst your markets and avoid mistakes when converting sizes from one system to another (for example shoe sizes in US and EU). One of our customers saw a high return rate on a particular brand of shoes. It turned out they were using the wrong conversion table from US to EU size (US 10.5 is actually EU 44.7 for Adidas, not EU 45)
- Use fitting technology and questionnaires to gauge the true sizes, desires and needs of your customers.
- Set up order fulfilment processes that minimise wrong deliveries.
- Offer your customers an online tool to easily process and monitor their returns. You can use Outvio interface to do this with just a click of a button. Check out
- how it works.
- Find technological solutions to sell to customers while they are returning a product.
- Collect as much data as possible regarding your customers return habits. Use it to profile them in order to personalise offers and communications accordingly.
Returns fraud is quite a wide concept. It encompasses some behaviours that are quite likely seen as benign by the committers themselves, like ordering clothes, appliances or any items with the intention of using them only once just to return them later, called wardrobing. And it reaches all the way to organised groups returning counterfeit items in cooperation with employees of the retailer.
The rate of fraudulent returns is estimated to be around 3.5% of total returns in the industry. This amounts to about 0.28 – 0.49% of sales. In comparison, it is estimated that brick-and-mortar shops lose about 0.6% of sales to shoplifting.
While certain eCommerce niches might experience slightly lower or higher fraudulent return rates, essentially, it is safe to say that, while bringing shops online has, in essence, abolished one type of criminality, it has enabled another.
But just as you wouldn’t shut down a physical shop because of fear of shoplifters, you wouldn’t deny returns to the vast majority of honest online customers because of possible fraud.
Instead, try to use technology to your benefit:
- Allow returns only through an online interface that identifies the returner.
- Analyse shopping and returns patterns to identify possible con-artists, like we do with Outvio insights.
- Use targeted educational content to curb “light” fraud, such as wardrobing.
- Use personalised shopping experiences to deter flagged customers.
- Keep current with technological advancements to continually improve your online shops’ defences.
While retail keeps moving increasingly online, thus allowing for more sales while using fewer resources and removing a lot of the entry barriers to new businesses, it does not mean it is without costs and risks.
Many of the traditional expenses of physical shops will be eliminated. But some of them will merely be converted into alternative ones.
And this is ok.
Just like with the notorious and “costly” returns – as long as they are properly categorised, planned and executed, they will, in fact, lead to greater sales and bigger market share.