DEEPER DIVES #0003 - Thinking Differently About eCommerce Returns

Good Morning,

First, as always, thank you for joining.

It’s been an interesting week. A lot of things going on in the operations and supply chain world.

Here’s what this issue brings:

• Featured Article: I share how to use psychological biases to change and shape returns behaviour related to eCommerce

• Broader Focus: The growing trend of local regulations in the global commerce market

• From the Community: Everyone offers affiliate relationships. Do you accept?

The Best Way To Survive A Gunshot Is To Not Get Shot In The First Place

The US eCommerce returns market is estimated to have a value of over $800B. Some firms peg the dead net cost impact of that activity to over $100B a year in losses for retailers.

It’s no wonder that this area gets attention.

And it’s been getting a lot more over the last 7 years.

With average return rates for eCommerce in the 20% to 30% range (typical brick and mortar is around 9%) there’s a lot of activity that needs to be managed.

How Is It Typically Handled?

First, the product has to get back to the retailer.

This happens via mail in, store drop off, other drop off point or an at home pick-up.

Based on the snippet from a 2023 National Retail Federation report, you can see that the majority of returns are still being handled by retailer own operations.

With the returns now in hand, it’s decision time. Each item must evaluated for condition, value, and best course of action. Possible options include repair, refurbishment, resale, recycling, or disposal.

Why Do Customers Return?

If you can think it, someone has used it. There is a whole host of reasons why a customer will return a product, and from top to bottom, they vary a lot.

Here’s some recent data collected by eMarketer from July 2022:

Retailers’ Made Their Own Bed

For all of the reasons above, at the core, retailers themselves are to blame. They created it by pushing programs to increase sales and market share.

They created “free returns”.

The idea around free returns is about building trust and giving you (the consumer) confidence.

By offering easy and free returns, a retailer is essentially telling you, "Go ahead, give it a try. If you don't like it, you can send it back at no extra cost."

This policy removes a significant barrier to purchasing: the fear of making a mistake.

The biggest reason why free returns works is risk aversion. As a species, we are exceptionally risk averse. We have a strong tendency to avoid losses rather than acquiring equivalent gains; it's the idea that the pain of losing is psychologically twice as powerful as the pleasure of gaining.

No one wants to lose their money, especially these days.

Next, free returns wipes out our challenges with paradox of choice. This principle suggests that while consumers like to have choices, too many options can lead to decision paralysis and dissatisfaction. Offering free returns can help mitigate the negative effects of the paradox of choice by assuring customers that they can return items if they regret their decision, thereby reducing the pressure to make the perfect decision.

And lastly, retailers preyed on the endowment effect. The endowment effect describes how people place more value to things merely because they own them (ever feel flabbergasted trying to buy something of Craig’s List or Kijiji?).

With free returns, customers might purchase more items, taking them into their possession. Even if they initially intend to return some items, owning them for a period can lead to an increased perceived value, making customers less inclined to return the products.

All of these strategies were put in place to get people to buy (and keep) more stuff. And overall they have - and frankly still do.

The challenge now is that the offset to what people are keeping, is becoming way more costly than was ever expected.

Add in things like influencer culture, fraud, and wardrobbing and everyone is starting to acknowledge that the tactics need to change.

So What’s The Solution?

Coming back to the headline for this article, the best thing retailers can do to fix the returns problem is to stop consumers from making returns in the first place.

Trying to develop more ‘efficient’ systems to deal with the huge amounts of loss isn’t working.

Frankly, it’s a waste of time. The returns volume continues to increase YoY.

The key however - is that customers have to CHOOSE to not return, on their own.

You do this by giving them something more valuable than the ability to return for free.

What I have shared is for retailers to create a “Returns Credit Score”.

This would be a feature built into retailer loyalty programs. It would measure different elements of a consumer’s behaviour:

• How many returns per period

• Days from delivery to return initiation

• Overall return cost

• Average retail value of returned item

• Percent of order returned

The simple premise is that the lower the return score, the better the value the customer is for the retailer.

Customers with low returns scores would receive exclusive benefits not available to anyone else:

• Early access to sales

• Exclusive access to product drops

• Better discounts & offers

You tie these benefits in with the same psychological biases used to drive more sales in the first place.

Loss Aversion - By emphasizing what customers stand to lose if their returns credit score drops (such as access to exclusive deals or special pricing), retailers can make the pain of losing these perks feel more significant than the benefit of returning an item.

Scarcity and Exclusivity - People value what's rare or in limited supply more highly, so the opportunity to access exclusive deals and pricing becomes a powerful motivator to maintain a favorable returns behavior.

Desire for Social Status - Human tendency is to seek recognition and prestige from their peers. People often make decisions based not just on their personal preferences or the inherent value of an option, but on how those decisions will affect their standing within a group. By giving consumers access to an exclusive club / group, you feed this desire for social status.

Like any type of change management, when the end user feels as though they made the choice and are actively participating in what is happening, adoption and success rates go through the roof.

How You Build Your Business Matters. Changing Regulations Are Going To Change How You Shop

Where do you draw the line between innovation and abuse?

Everyone is always looking for a way to improve their position, grow their market and win more customers.

While not a new practice, modern businesses that have surged with the rise of digital global commerce are starting to face headwinds.

They have built their businesses in ways that while legal, are being seen to take advantage of areas of opportunity that were never intended to be fertile ground.

Our laws simply haven’t kept up with our industrial progress and the rapidly changing markets.

What happens when the business you built for the current landscape has it’s model up-ended by new government policies?

SHEIN

Shein is now producing 7,200 new articles of clothing … a day.

That’s not manufacturing volume.

That’s completely new items (variation in style or design, but not size or colour).

To put that into perspective, a large department store would typically carry 2,000 - 5,000 items at any given time.

SHEIN would be able to completely turn over a Macy’s department store with entirely new items. Every. Single. Day.

France has had enough.

French lawmakers are looking to pass a bill that would clamp down on the industrial machine of fast fashion. The bill calls for gradually increasing penalties of up to 10 euros ($11) per individual item of clothing by 2030, as well for a ban on advertising for such products.

While SHEIN was specifically mentioned, retailers like Zara and Primark are on the radar as well.

SHEIN feels that they are doing nothing wrong and are being unfairly penalized. They state that their processes and data based production models are up to 40% more efficient than other manufacturers in the space.

TEMU

TEMU has also had a lot of negative press lately as small parcel volume continues to flood the US. Section 321 shipping operations are all the rage right now.

Entire businesses have been set up in Mexico and Canada to specifically ship individual parcels into the US.

Mexico even is set up in a such a way that product can be warehoused within it’s borders and never pays and taxes or duties if it’s sole purpose of for export.

The volume from companies like TEMU have supported the growth of all kinds of regional logistics activity across the US. From transportation, to warehouse operations to last mile delivery.

The US De Minimis laws are gaining traction as a November election items as many US Domestic retailers feel that it’s unfair competition since they do not get the same breaks when it comes to taxes and tariffs.

Rideshare & On-Demand Delivery

More and more cities are instituting legislation around gigwork labour. Doordash, Uber and Lyft have all been in the news in recent months as forced minimum wage compensation is being pushed by law makers to the platforms.

In some cities they are accepting the changes. In others they are shutting down services.

In areas where they are continuing to operate, surcharges have already been established and have been pushed through to end users.

Tik Tok

Another major political battle that will have an impact to eCommerce is the demand by the US government that Byte Dance sell Tik Tok or have it banned from the US.

The US has held firm on its position of National Security and concerns around the data mining that is said to be moving back to other countries.

With the recent launch of Tik Tok shops, a ban in one of the largest markets in the world would have a massive impact to its operations and valuation.

The general consensus is that Byte Dance will sell Tik Tok - which is valued at around $250B.

Final Thoughts

If one thing seems clear, how you structure your business matters. Taking advantage of old laws or grey zones might put you in a position to benefit short term, but you can find yourself in hot water when you see your advantage or market access ripped away.

General consumer sentiment is aligning more and more with the expectation that corporations behave in a way that does business in an ethical way.

If you are evaluating entering new markets and launching new services, make sure you do your due diligence to understand the current political landscape. Identify risks or potential challenges to what you want to do, and understand from the start how you want to mitigate, avoid or incorporate local expectations into your offer.

This gives you the stability and certainty you need to scale your business. The vast majority out there will not have the resources like those mega corporations I mentioned here to absorb the impact and restructure only when forced to.

Making Commission For Recommendations

I get asked all the time to set up an affiliate relationship. When this comes up in conversation, people are curious as to my position.

So, here it is.

People frame their programs in different ways, but the gist is always the same.

Help some company make more sales, get paid.

I’m not against these types of relationships in general. I do believe there are occasions where these things make sense.

For me however, I can tell you, I would rarely ever accept - and at this time, I don’t actually have any in place.

This has a lot more to do with my personal values and the position I want to be in (or rather, don’t want to be in). My credibility means a lot to me and I know when I am working with different clients, my words have weight.

I find it easier to avoid conflicts of interest rather than manage them.

Recommendations or praise that you may see or hear me share in writing or in conversation are authentic and based on my experience or exposure to what a product or service is.

Since it’s my own opinion, I am confident to share what I do and how I do it. I don’t owe anyone anything.

Different people have different levels for these types of things.

If you are out there and are asked to participate in these programs, my only feedback is to make sure you feel comfortable with the product or service and truly feel you can suggest it authentically when you do.

That’s it for this week. Thanks again for being here.