Fighting Returns Abuse with Technology
By Ron Lembke, Associate Professor, Supply Chain Management, University of Nevada, Reno
Recently, Amazon found itself the recipient of unwelcome publicity after a Wall Street Journal article outlined complaints by many customers whose accounts had been closed for excessive returns. Amazon said that they may cancel people’s accounts for abusing their system. The infractions that can get someone banned include returning too many items, the wrong items, or items that have been used.
A subsequent National Public Radio story presented results from an NPR/Marist survey, which showed that 69% of Americans have purchased an item online, which some might find surprisingly low, given that almost 10% of all retail sales happen online, according to the U.S. Dept. of Commerce.
Size of Returns Fraud
According to the National Retail Federation and Appriss Retail, returns fraud cost US companies $10.8 to $22.8 billion annually in lost sales. From $5.7 trillion in retail sales last year, customers returned $385 billion, as estimated by Optoro, a company whose focus is on helping companies sell the products that people return.
A November 2017 NRF survey found that 67 percent of retailers experienced increased organized retail theft, and 29 percent had made changes to their returns policies to combat this fraud. They estimated that 10.0 percent of all sales would be returned, and that 10.8percent of returns are fraudulent. Fraudulent returns of stolen merchandise were the largest single concern.
Returns Not a New Problem
Retailers have always known that returns can be a problem, from the beginning of modern retail. In the 1950’s, State Street retailers in Chicago reported that their returns rate was 6 percent. That number has stayed fairly constant over time, while varying significantly across categories. For example, auto parts have lower return rates than clothing.
Strategic Value of Returns
Traditionally, catalog retailers experienced higher return rates than brick and mortar stores, because customers cannot see, touch, or try on the items. Many early dot-com retailers did not understand this basic reality of catalog retailing, and were not prepared for the volume of returns they faced.
Many retailers have come to realize that allowing fast and easy returns can be an important way to lower the barrier to purchasing and get customers to freely buy more products. Knowing they can return an item if they change their mind makes people more willing buy more.
By capturing the serial number at the point of sale, the retailer and manufacturer can know exactly when the item was sold, and via which retailer
Although companies know that customer-friendly returns policies generally help sell more products, they still hate dealing with the large volume of returns these policies generate, and have made efforts to reduce them. Over the last decade, many retailers have shortened the returns period and made shorter ones for technology products. They often only give a refund equal to the lowest recent sale price, without a receipt.
In February of this year, LL Bean reduced its lifetime returns policy to a one year period. This was in response to what it felt was abuse, as people brought in heavily-used, years-old items, demanding new replacements.
Tracking Return Activities
Major retailers also generally ask to see an ID before accepting a return without a receipt. Many of these retailers use a system like Retail Equation, which tracks the customers’ shopping and returns habits and raises an alert when the behavior becomes suspicious. Best Buy uses this service and said that less than one tenth of one percent of return transactions are stopped because of this policy.
Keeping Customers Informed
Based on the coverage of the Amazon story in various media outlets, it seems that customers do not mind companies tracking their returns activity so much as they mind not knowing what the rules are. A number of customers interviewed were frustrated because there was no warning, and their returns behavior did not seem unreasonable. As companies tightened returns windows in the past, as long as customers were informed about them, they generally felt that the policies were reasonable.
Point of Sale Serial Number Capture as Defense
In the 1990s, Nintendo struggled with a returns abuse situation in which customers returned old gaming console systems for full credit and exchanged them for newly released systems. Their new solution captured the serial number at the point of sale, so they could know exactly when a particular unit was sold. The system was so effective it was spun off into a separate business now offered by InComm.
By capturing the serial number at the point of sale, the retailer and manufacturer can know exactly when the item was sold, and via which retailer. When a “fraudster” tries to buy a unit from one retailer and return it to another retailer at a higher price, this information allows the abuse to be prevented.
Fighting Abuse with Technology – The Holy Grail of Single Scan
The only downside to PoS serial number capture is that it requires two barcodes to be scanned, one for the UPC, and then after receiving a PoS terminal prompt, the employee finds and scans the second bar code. This process requires additional time, which means additional labor expense, which retailers want to be compensated for. If both the UPC and serial number could be stored and scanned in a single barcode, the serial number could be captured at no additional cost.
Conventional one-dimensional (1D) barcodes cannot store all of this information in one barcode. However two-dimensional (2D) barcodes such as QR codes and Data Matrix codes are capable of storing thousands of characters and could easily do the job, however, a lack of standardization has prevented such a system from being implemented.
Recently, the Standards Committee of the Reverse Logistics Association has created an open standard for storing UPCs, serial numbers, and any other information in a 2D barcode. It has been given the 12N designation as part of the MH10.8.2 standard, and is ISO 15434 compliant. The RLA hopes that this open standard will help companies not only fight returns abuse, but improve customer service more broadly.
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