How Returns Management Works: Process, Tips, & Best Practices

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Returns can be a major problem for the business. The costs of additional labour and customer support can dig into your profits, and identifying fraudulent returns is never easy. The returns management process ensures that all customer returns are handled promptly and efficiently.

This article explores how to bring down your return rate and save time with an optimised returns management process.

In this returns management guide

What is returns management?

Returns management is the process which governs returned goods from customers. It covers every aspect of dealing with customer returns, including policy management, reverse logistics, customer service, returned goods inventory management, and developing strategies to reduce return rates.

A good returns policy is crucial for ensuring a smooth customer experience. If you’re selling products, your customers should feel confident that they can negotiate with you in the event their purchased goods arrive damaged, incorrect, or are no longer required.

Should a returns policy be tight or lenient?

Some brands have found success after opening their policies, while others see customers take advantage of lenient policies to abuse or defraud the system.

One paper from the University of Texas at Arlington suggests that lenience may yield better results than strictness. A meta-analysis showed that open returns policies tended to result in higher sales, not higher returns.

However, that same year, software company Steam announced a new open refunds policy and it was immediately abused by online users. Controversy surrounding this policy continues nine years later.

Ultimately, the decision on whether to make your returns policy strict or lenient is up to you.

Returns management vs. reverse logistics

Returns management refers to managing the entire returns process. Reverse logistics, on the other hand, is a returns management activity focused on the process of ensuring returns can be moved along the supply chain in the most cost-effective way.

Although reverse logistics is a part of the returns management process, it isn’t exclusive to it. Reverse logistics is also used to manage end-of-life goods, repairs, delivery failure, and rentals and leasing.

returns management

How does the returns management process work?

The returns management process works to ensure fast and cost-effective handling of customer returns through policy control, communication, and efficient stock control. Let’s break this down into simple steps.

1. Establish and communicate your returns policy

The returns policy instructs customers on how to return unsuitable goods (and within what timeframe).

The first step in the returns management process is communicating how it works to your customers.

The terms and conditions of a company’s policy will usually be stated at the point of sale or on a relevant contract. For ecommerce businesses – or any business with an online presence – the returns policy may also be visible on the company’s website.

2. Request to return and reverse logistics

When a customer decides to return their purchase, they will initiate a returns request based on the seller’s returns policy. This can mean taking it back to the seller’s premises or contacting the relevant department.

Your business will need to know exactly how to get goods back to your premises (if they’re not to be dropped off in person) – this process is known as reverse logistics. This may involve freight partners.

Depending on the policy and reason for returning, some customers may expect you to pay the shipping costs. In most cases, this means creating a return shipping label in your system and sending it to the customer to attach to their package.

3. Receipt of goods, inspection, and processing

When returned goods arrive back, they should be inspected and marked as received in your inventory management system. The receiver should confirm any issues with the goods – such as damage or incorrect sizing – that have been reported by the customer as the reason for the return.

This inspection will decide, based on the returns policy, whether the customer is entitled to receive a refund or replacement for their goods.

Returned goods are then transported to the appropriate new location and, if necessary, stock adjustments are made to keep your inventory records accurate and up to date.

4. Restocking, refurbishment, or disposal

Goods are returned to a business for all sorts of reasons. Sometimes they don’t match the description advertised. Sometimes they’re broken or damaged. Often a customer simply changes their mind or no longer requires the item they ordered.

The reason for the return will determine how it is handled during the returns management process:

  • Restocked: In the event the returned item is in saleable condition, the item can be restocked on your shelves or relisted online to be sold again.
  • Refurbished: If it’s broken but fixable, your repair technicians might refurbish the item and then send it on for restocking.
  • Disposed: When neither of the above is possible, and the item is too damaged to be worth the cost to repair, it may be on-sold to a recycler or disposed of as waste.

5. Refund or replacement

Once the returned goods have been dealt with, the business must decide whether to issue a refund to the customer, send a replacement, or notify the customer that their return did not meet the conditions of the returns policy.

In some cases, store credit or an alternative replacement item may be offered instead of an exact replacement or cash refund – this should be communicated in the returns policy.

6. Customer communication

As a customer’s return progresses through your returns management process, it’s important to keep them informed of its status.

Customers may already be frustrated that a return is necessary, so careful management of their expectations and clear communication are vital factors for ensuring a positive brand experience.

Automation tools may be useful in saving time during the communication process, although there is a risk of further upsetting customers with a lack of human response. Chatbots and automated email flows are popular solutions for taking a more hands-free approach to returns management.

7. Data tracking

Returns data is essential to understanding your costs, cash flow, and profitability. It can also yield valuable insight into the quality of your products and how customers perceive them.

A system should be set up for tracking key returns metrics, such as the rate of return, refund rate, exchange rate, and time per return. These figures will be highly valuable when you’re drawing up reports and looking for evidence-based strategies to reduce costs.

An effective retail inventory management system will help ensure accurate tracking of your returns data.

8. Continuous improvement

At set intervals, create returns reports and investigate all the return reasons and associated costs from that period. This will unlock valuable insight into your products and help inform your business strategy.

For example, an above-expected return rate may indicate that you should change raw material suppliers to improve quality, find new shipping partners to speed up delivery or look to optimise the returns management process itself.

returns manager

Returns management process example

Let’s simplify the returns management process with an anecdotal example.

Rebecca, a customer, purchases a new electronic device online. She sees that the product is under warranty for one year. The merchant’s returns policy offers a 30-day return window for unsatisfied customers.

When the product arrives, Rebecca finds that the battery – advertised as lasting for up to six hours – dies after 30 minutes of use. Frustrated, Rebecca decides to return the faulty product.

Because she bought the product online, she can request a return directly through the company’s website. She explains the reason for returning the goods and is issued a return shipping label at the company’s expense. When asked if she would like a refund or a replacement, she requests a replacement.

A courier collects the unwanted item from Rebecca’s address and delivers it to the nearest storage facility for inspection.

The company investigates and agrees there is an issue with the battery life. The item is passed along to the refurbishment team, who will replace the battery with a new one. Meanwhile, an identical replacement item with a non-faulty battery is sent to Rebecca’s address.

The returned item is repaired and relisted for sale by the company.

An analysis of the returns data six months later finds that many similar items were returned for the same reason – faulty batteries. The company decides to issue a product recall and decides to use a different manufacturer for that product moving forward.

Benefits of good a returns management process

For product businesses, customer returns are inevitable. Shopify recently found the average return rate across sectors is as high as 20-30% – even in today’s highly automated retail environment. Returns management is essential for keeping costs down and meeting customer expectations.

Six benefits of effective returns management:

  • Improved customer experience: Customers don’t want to have to fight for their money back if they’re unsatisfied with a product. A better returns management process gives them clarity, efficiency, and the communication necessary to keep customers happy.
  • Reduce business costs: Additional labour and shipping costs make managing returns an expensive process. Items that can’t be repaired or resold are also a loss for the business.
  • Identify quality issues: Your returns process reveals how people perceive your products and how those products meet customer expectations. Tracking returns data can help you identify and resolve any issues with product quality or design.
  • Efficient inventory management: Your team needs to know exactly what to do when they receive a return. Effective returns management ensures this process is optimised to reduce downtime, lower your labour costs, and improve inventory accuracy.
  • Reduce risk: Unmitigated, returns fraud can lead to damaged profits and wasted time. An effective returns process can reduce the risk of fraud and so improve your bottom line.
  • Improve sustainability: Reducing the number of returns also lowers the total number of items being shipped, ultimately helping to minimise your carbon footprint.

Common challenges of returns management

Returns management can be a tricky process to nail down. It requires the involvement of multiple employees and can be a highly time-sensitive activity.

Here are five common returns management challenges:

  • Complex returns policy: Too many requirements and stipulations in a returns policy will confuse customers and staff. A common example of this is having a separate returns policy for individual categories of items, whereby customers (and staff) must determine which policy applies to their situation to complete each return.
  • Inefficient logistics: Reverse logistics is not a simple task. A common issue is the lack of space for returned goods. Poorly managed supplier relationships can make it difficult and costly to replace or repair goods fast enough to match customer expectations.
  • Budget constraints: Organisations with poor cash flow may struggle to manage returns cost-effectively. This is especially problematic for managing returns of low-margin products.
  • Fraud: Exploitation of returns policies, counterfeit returns, and other instances of fraud can be challenging and cost the business dearly. The fashion industry must also contend with ‘wardrobing’, where customers purchase items, wear them once, and then return them under the guise of dissatisfaction.
  • Poor data integration: A poorly integrated warehouse can’t collect the necessary data to improve and automate the task of reporting on analytics trends. This leads to uninformed business decisions and can contribute to a trend of poor customer experiences.

Returns management best practices

The returns management process will look different depending on a company’s industry and policy.

If you’re in the fashion retail sector, for example, you can expect a higher volume of returns. In the UK, Clothing and Shoes make up around 42% of all returned online purchases according to Statista data.

However, there are some ways of working that are useful for managing returns in most business models. Here are our top returns management best practices to follow.

1. Make your returns policy crystal clear

An easy-to-understand returns policy ensures both customers and staff know exactly what to do when during the returns process. A clear policy also makes it easier to manage disputes and, if necessary, resolve any legal issues related to the return.

Avoid complicated jargon and contradictory terms, as these can leave customers confused and frustrated.

2. Minimise rate of return with preventative measures

The fewer returns you must manage the easier returns management will become.

Ensure that your products arrive as advertised and are marketed honestly to improve customer satisfaction rates. Investigating how your logistics partners handle and deliver orders can help reduce returns related to goods damaged in transit.

Integrate your sales order processing system with your warehouse and logistics partners to reduce the risk that someone is shipped the wrong order.

3. Prioritise effective communication

Unsatisfied customers are the hardest to please – don’t pour salt on the wound by giving bad service when managing their returns. Develop a reliable system for communicating with customers about the status of their returned goods.

returns management system

How to optimise the returns management process

In addition to following returns management best practices, there are some steps you can take to optimise the process and improve the efficiency and cost of dealing with customer returns.

1. Use feedback to gather better data

Gather accurate returns data using integrated software systems and take advantage of customer feedback surveys and online sentiment analysis to gather feedback about your products. You can then use that data to make quality improvements and improve your rate of return.

2. Implement returns management software

Manually managing the returns process can add to your workload and increase the chance of making an error. To streamline your returns management activities, implement software that automates repetitive tasks and streamlines your workflows.

Returns management software – also known as inventory management software – ensures all your data is tracked and managed in one central location to boost the accuracy of your returns data and improve returns management efficiency.

3. Simplify the ordering process

Making the ordering process easier for customers will help them choose the right products for their needs on the first try.

Consider adding more photos or videos of your product so that customers have a clearer picture of exactly what they’re purchasing. Likewise, tightening product descriptions can help reduce customer dissatisfaction.

For complex offerings, product guides and whitepapers can help to provide customers with the information they need to make an informed purchase.

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Oliver Munro - Unleashed Software
Oliver Munro

Article by Oliver Munro in collaboration with our team of specialists. Oliver's background is in inventory management and content marketing. He's visited over 50 countries, lived aboard a circus ship, and once completed a Sudoku in under 3 minutes (allegedly).

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