It’s every online retailer’s wish, but most accept high returns as the price of doing business virtually.
This holiday season, more shoppers than ever before will forego crowded malls for cyberspace and enjoy the ease and convenience of purchasing gifts from their home computers, tablets, and mobile devices.
In fact, the 2016 holiday season will drive online sales higher than ever before. A study by the Centre for Retail Research forecasts that by year-end, online sales in the United States will soar 14 percent higher than 2015’s $349 billion.
Even though sales are booming, online retailing profits aren’t as high as they could be. Why? Because nearly one-quarter of the products purchased on the internet — a whopping 22 percent of sales, on average — are returned, according to Supply Chain Management Professor Elliot Rabinovich, at the W. P. Carey School of Business.
The very nature of the online shopping experience is one obvious explanation. After all, not being able to try items on for size or examine quality firsthand certainly increases the likelihood of returns in many product categories.
“Often you can see from the order that there will be returns,” Rabinovich said. “For example, if someone orders the same shoe in the same color in three different sizes, most likely, two pairs will be returned.”
Ease of returns
Another factor has to do with how easy or difficult it is to send something back.
“You can make return policies more stringent, but that can backfire because it may push customers away,” Rabinovich said.
Researchers have found, in fact, that the ease of returning unwanted merchandise increases customer confidence and repeat business. That’s why many online retailers offer lenient return policies.
Either way, these factors still don’t account for the vast difference between the number of returns for purchases made online and those made in stores, which amount to only eight to nine percent of sales.
While research has investigated products and promotions, little is known about the effect that the actual transaction process — start to finish — has on returns. So Rabinovich and his colleagues Shashank Rao, associate professor at Auburn University, and Dheeraj Raju, assistant professor at the University of Alabama at Birmingham, examined the reverse supply chain of online retailing and reported their findings in their paper, “The role of physical distribution services as determinants of product returns in internet retailing,” published in the Journal of Operations Management.
For their study, the researchers looked at the online arm of a major jewelry company, one of the largest 500 online merchants in the United States, and evaluated data from 6,732 transactions occurring over the course of one year.
One key finding of the analysis points to delivery delays — especially for orders that promise fast delivery — as a factor resulting in higher returns.
“Usually a request for speedy delivery means there’s a time sensitivity to the purchase, as the item is a gift for someone’s birthday or a holiday,” Rabinovich said. “If it arrives late, it loses its value.”
Likewise, customers’ expectations that holiday gifts arrive on time raise the bar for retailers to achieve prompt deliveries. However, the higher demand and the reliance on third-party vendors can make fulfillment more challenging during the holiday season.
Consider the growing pains experienced by one of the largest internet-based retailers in the world, Amazon.com Inc., a company that grew from $1 billion to $90 billion since the 1990s.
“A few years ago, Amazon had a huge surge in demand during the holidays,” Rabinovich explained. “But when the demand exceeds expectations, it can overrun the capacity of the third-party providers and create problems with deliveries.
“Amazon had a lot of difficulties fulfilling orders on time because FedEx Corp. and UPS — and Amazon, for that matter — were not prepared for the orders they received.” Since then, the company has arranged alternatives, such as leasing planes, to alleviate constraints caused by holiday demand.
Interestingly, gifts that are sent directly to recipients are less likely to be returned even if they arrive late because most people are too polite to complain. “Someone receiving a gift generally won’t say anything if it comes a day later or if it’s not in perfect condition,” Rabinovich said.
While proper etiquette is admirable, it doesn’t help companies like 1-800-FLOWERS to measure quality control.
“A lot of the items they deliver are gifts, and it’s very hard for them to figure out if they were delivered on time, and if they weren’t if it even mattered,” Rabinovich said. “Was the product damaged? They have no clue because they are gifts. The company can’t measure it objectively.”
In addition to delivery delays, Rabinovich and his colleagues discovered another connection between online purchases and the likelihood they’ll be returned: the suggestion that inventory is dwindling.
Many online retailers promote the fact that their stock is running low with the hope of motivating customers to buy on the spot. Every holiday season, there’s at least one popular toy shoppers scramble for, and the perception that supplies will run out drives demand, sometimes to a frenzy. (Think Beanie Babies and Tickle Me Elmo.)
“While information about scarcity is useful, it can also backfire and result in customers buying prematurely or buying without a real intention of keeping the product,” Rabinovich explained. “We observed that the disclosure of scarcity has an effect on the likelihood of return.”
It’s a Catch-22 situation because to customers, items in short supply seem to be more valuable. Since the strategy increases sales, retailers could make pricing adjustments to offset expenses for the inevitable returns and take less of a hit on profits.
Limited-time, seasonal losses
In addition to shipping and handling fees, returns can cost in other ways, too. For example, products such as winter boots and swimsuits have a limited, seasonal shelf life. If they get held up in the return process, it may be too late to resell.
“The value of the product diminishes over time,” Rabinovich said, making it more difficult for the retailer to put the item back in circulation off season and sell it.”
Returns will always be a price of doing business online, but with better insight on what aspects of the transaction process increase the probability of items being returned, retailers can refine their distribution systems to lower the percentages and increase revenues.