Innovation Helps Small Merchants Tackle eCommerce’s $212B Product Returns Problem

Product returns as we’ve known it is getting an overhaul as retailers and payment partners find new ways of offering good experiences without losing their shirts.

PYMNTS’ Karen Webster was joined by David Sobie, vice president of PayPal’s Happy Returns service, and Drew Cook, chief financial officer and head of operations at sustainable clothing brand Pact, for an episode of SMB-TV that explored the changes coming to retail returns.

Happy Returns offers retailers a software and returns solution that creates a convenient and sustainable return experience for their customers. Happy Returns took a wasteful, expensive and frustrating process and introduced an elegant solution of box-free, in-person return drop off. It allows shoppers to easily return or exchange a purchase without printing or packaging in under 60 seconds and receive refunds immediately, according to Sobie.

The National Retail Federation estimated that 16.5% of merchandise bought online in 2022 was returned, worth $212 billion, giving a sense of the problem. Consumer habits like “bracketing” where a shopper buys multiple sizes or colors expecting to return what they don’t like or want is a pricey part of the problem that some retailers are reacting to by clamping down on returns.

That’s risky, as it can alienate customers who have lots of other choices, and with customer acquisition costs at all-time highs, it’s smarter to find ways of making returns work for everyone.

Sobie said a key driver of bracketing is sizing variations, noting that his closet has shoes that range from 9.5 to 11.

“It’s not because my foot is changing size,” he said. “It’s because sometimes a 10 is not a 10 in a world where products are made all over the globe.”

Uncertain fit in online buying and no-questions-asked policies on returns are snowballing into an unsustainable practice that’s costly and inefficient, even without bracketing. Many brands have started to test out charging for returns to offset costs they are experiencing due to inflation, logistics and supply chain issues, but this is not sustainable and not the answer as customers will go elsewhere.

Sobie said that a better option for retailers is to look at partners like Happy Returns, which allow consumers to return items in-person, the method they prefer anyway. When retailers use Happy Returns, they end up saving money on return fees because the service aggregates items when making the return, saving as much as 40%.

“As we expand categories and offer things that may be further up the fashion curve, we are working very hard to mitigate this kind of bracketing issue because returns are incredibly expensive, and a lot of times, the products you get back you can’t even resell,” Cook said.

Happy Returns disrupted this cycle with its November introduction of Return Shopping on Shopify, a free feature in the Happy Returns portal that encourages shoppers to keep their refund in the store’s online ecosystem to be spent on another item, rather than cashed out.

Sobie said Return Shopping acts as store associates would, asking basic questions about why the customer is returning, ideally pointing them to other items before issuing a refund.

“The whole idea of Return Shopping is around this theme of revenue retention and trying to put tools in our merchant partner’s hands so instead of having a refund, they have an exchange,” he said.

He added that in its first 90 days, Return Shopping is seeing the fastest adoption of any feature in Happy Returns’ history.

Balancing Retention and Margins

There’s a consumer psychology angle to returns, as Cook noted that online sellers walk a fine line and need to keep customers happy and confident — while keeping an eye on margins.

“We start from a place that consumers have good intentions, and you manage the exceptions outside of that,” Cook said, adding that Pact uses data to manage returns fraud and abuse.

He said Happy Returns not only reinforces Pact’s sustainability goals as a brand but offers well-meaning returns giving consumers more options while helping root out policy abuse.

Happy Returns operates thousands of Return Bars in retail locations where consumers can bring back items without packaging or labels, which involves interaction with a human associate. That helps assure that someone who bought black leggings is returning those same black leggings, as Cook joked that “you don’t want to know” what comes back in some cases.

With the January-February period typically an intense time for returns of holiday gifts, and given the growth of eCommerce over time, retailers need these kinds of solutions now.

“There is no such thing as a free return,” Sobie said. “It’s just a question of who’s subsidizing the transaction. Free return for a shopper means the merchant’s paying. What we’re seeing retailers say is, ‘I’m going to have the free or the subsidized option be the one which is cheapest for me.’”

Those with physical stores have that cheaper option. Direct-to-consumer (D2C) brands like Pact don’t, which is where Happy Returns’ 6,000 physical Return Bars take on the store associate’s role. Shortening return windows is another way of limiting returns without risking losing a customer.

It’s especially important for seasonal apparel. If a shopper returns a summer sundress as winter sets in, it means the retailer likely can’t reprocess and sell that item, eating the loss.

“You don’t always want to give customers the opportunity to return products you don’t necessarily want back,” Cook said. “I think there’s always some type of value exchange. Customers are paying for the ability to return a full-price item when they buy it in season.”

Data Makes a Difference

Data plays an increasingly important role in reducing returns by tracking where fit and color problems occur more often and getting that information to design teams.

Cook said shopper comments are also very useful, as consumers tend to trust other customers’ feedback more than they do the label’s own messaging. And when an issue of something running small or large happens, upfront messaging on the site helps in building brand trust.

“Happy Returns has a great data platform where we can pull the data in a way that’s very easy for us to use and manipulate,” he added. “We get that real-time feedback to our product team and our eCom team to manage messaging onsite and long-term product development.”

“Forward-thinking merchants are consuming [our] data and taking action,” Sobie said. “But we work with over 500 merchants, and I would say that not all of them do.”

That’s why both agreed when Sobie said, “returns are a growth market largely driven by the seismic shift from shopping in stores physically to shopping online,” and the critical part is offering easy options to the vast number of legit customers who just want a better fit.