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Our Thought Provoking Insights

How to minimize the impact of returns on profitability

Online returns continue to rise with research suggesting an estimated annual cost of up to £7 billion for the UK fashion industry. The ongoing cost of living crisis has added to customer hesitation to purchase, as disposable incomes are stretched beyond the norm. Over recent years we have also seen a change in product sales mix with negative outcomes for returns rates; gone are the days where loungewear and activewear were the driving categories with associated lower returns rates. The past year has seen occasion wear and more formal categories understandably increase their prominence compared to pandemic levels. In these more formal categories, customers often exhibit a behaviour known as 'Bracketing,' ordering multiple sizes or styles with the intention of returning a portion of the order. The impact of the above can be catastrophic for retail margins, which already face significant challenges as a result of increasing internal costs.

A secondary concern, growing in importance to both consumers and government legislation, is the impact of inflated returns on the environment and consequential CO2 emissions. Several retailers now offer delivery options allowing customers to choose the most efficient and environmentally friendly route for their order. While these efforts, along with sustainable considerations in product development, represent steps in the right direction, retailers still have work to do. They must incorporate the impact of returns into annual sustainability strategies and develop processes to mitigate this impact in a world where returns are expected to continue to rise.

Enhancing product guidance to reduce over-ordering

A first step in tackling returns, and the associated cost implications, is to provide more proactive and intelligent guidance to the customer before their purchase decision. Providing personalised assistance regarding sizing and fit, along with the inclusion of 3D and video imagery, reassures customers when ordering a specific size and compensates for the lack of ‘touch and feel’ in an online environment. AI software can also assist in optimising product listings, ensuring accurate and enhanced product details and instinctively checking for any manual errors in the product data upload. These strategies, alongside product reviews, have a significant impact on the likelihood of returns due to a product being ‘not as expected’.

Utilising dynamic pricing through data science

Research has also shown that up to 10-20% of total returns can be a result of price competition or poor value perception. AI can be implemented to ensure that pricing remains competitive and relevant to the level of customer demand or satisfaction. AI can be utilised to review market data, customer behaviours and apply optimal pricing around planned promotional periods, all consequentially reducing the likelihood of a product return post-purchase.

Harnessing science-led demand forecasting

Retailers should look internally first, to highlight inefficiencies and opportunities, before passing the cost of returns directly on to the consumer. Research has suggested 56% of consumers would hesitate before buying from a brand that introduces a returns fee. However, many retailers have had to explore this route due to unwavering pressures. Significant benefits can be found by implementing an AI and data science-driven demand planning system to optimise a retailer’s stock inventory. This includes increased availability, a reduction in returns disruption, and improvements in the speed at which a product is able to get back on sale following a return. Data science can use patterns in customer behaviour, seasonality, and product categories to ensure stock is best placed for both increased sales and reduced returns rates. System providers can even allow retailers to model what-if scenarios ahead of implementing demand plans, allowing a retailer to foresee margin impacts, and make educated decisions on sales and return strategies.

Returns are likely to continue to pose a challenge to retailers within the e-commerce world. However, with intelligent strategies, brands can reduce the margin impact, while strengthening customer loyalty and perception via a frictionless returns procedure.

Thought Provoking Consulting can support retailers on their journey to transform their returns strategy. We provide expert guidance on price optimisation, site analytics and demand planning transformations. If any of the above resonates, we can confidently help minimise the expensive effects of increasing returns.



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