Marketing Strategy

Returning Customers:
California Management Review
2018, Vol. 60(2) 176–203
© The Regents of the
University of California 2017

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DOI: 10.1177/0008125617741125
https://doi.org/10.1177/0008125617741125

OPPORTUNITY OF RETURNS
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MANAGEMENT
Felix Johannes Röllecke1, Arnd Huchzermeier1, and David Schröder2

SUMMARY
Product returns are both a challenge and an opportunity for most retailers, since
more than US$640 billion in revenue is lost each year because of preventable
product returns. A major impediment to unlocking the full potential of these returns
is the firm’s returns management program: the policies governing the customer-
firm exchange process. Recent insights from research and practice have yielded
the unprecedented opportunity to open the “black box” of developing effective
programs. Yet, such development must address three main questions: What types
of returns management programs exist? What misunderstandings impede returns
management effectiveness? How can retailers develop effective programs? This
article distinguishes among different types of returns management programs and
discusses the managerial misunderstandings that reduce their effectiveness. It presents
a framework for developing, implementing, and controlling effective programs that
allow retailers to boost sales, reduce returns, and increase profitability.

KEYWORDS: returns management, marketing strategy, behavioral operations

management

P
roduct returns are an aggravation for most retailers and customers,
with worldwide retail returns at a staggering 8% of sales: US$642.6
billion worth of merchandise that entered the reverse supply chain
in 2015.1 These returns eat into retailers’ profit margins, since they
represent lost sales and substantially increase costs within retailer supply chains
(on average, US$11.30 per item for value decay and processing).2 Returns are
regarded with equal disdain by customers. In many cases, the luxury of changing

1WHU–Otto Beisheim School of Management, Vallendar, Germany

2Zalando SE, Berlin, Germany

176
Returning Customers: The Hidden Strategic Opportunity of Returns Management 177

one’s mind and returning undesired products—often despite perfect product

functionality—requires the customer to pay additional costs while encounter-
ing complicated returns processes designed, in some cases, to discourage that
very purpose. There is no doubt that product returns are a major challenge for
retailers, who must balance returns management with customer satisfaction.
Moreover, the return of products is a strategic touchpoint in the customer-firm
exchange process. An effective returns management program allows the retailer
to boost sales, reduce returns, and increase profitability.
Returns management programs constitute a set of tools that, whether
directly or indirectly, help lessen the negative effect of product returns—specifi-
cally, online retail returns—on profitability. Returns management involves mea-
sures, policies, and processes designed to increase sales or lower the cost or
quantity of product returns at all stages of the customer-firm exchange process:
prior to purchase, at purchase and order fulfillment, and after the purchase.
Effective returns management programs employ the right tools at the right stage
and so may become a competitive advantage for online retailers through lower
return rates, lower cost of returns, higher sales, and customer feedback—all of
which are important levers of firm profitability. Recent years have witnessed a
growing number of labels for returns management; examples include returns or
refund policies, product recovery, closed-loop supply chain management, and
more. We shall simplify the discussion by using the term returns management pro-
grams to refer to all processes via which retailers interact with customers to affect
product returns.
Most online retailers acknowledge returns management as integral part of
their service offering. Yet many returns management programs suffer from poor
design and implementation, circumstances due mainly to insufficient managerial
understanding of how best to design and develop such programs. This dissonance
regarding product returns is curious because they offer enormous potential for
reuse and are one of the most direct paths to customer interaction and informa-
tion exchange, including direct feedback.3 Notwithstanding that strategic oppor-
tunity and the large volume of returned merchandise, many retailers harbor
concerns about deployment of a returns management program. On the one hand,
retailers lament return volume and the costs arising from product returns; hence,
they are inclined to adopt restrictive return policies that lower the volume and
costs of returns by discouraging customers from even making returns. On the
other hand, retailers are concerned about customer satisfaction—yet costly and
complex returns processes will discourage not only returns but also future pur-
chases from those customers.
Insights from research and practice suggest that both of these views may be
correct. As a result, retailers may struggle to design management programs that
are effective at unlocking the value in returns. Motivated by these challenges, this
article addresses several key questions for managers. First, what are common
types of returns management programs? Second, what factors are known to limit
the effectiveness of returns management? Third, how can retailers develop
178 CALIFORNIA MANAGEMENT REVIEW 60(2)

effective returns management programs? We answer each of these questions and

describe the progress made by research and leading companies in the develop-
ment of effective programs as well as the challenges that remain. Finally, we offer
guidance concerning how retailers can unlock value from returns management
programs.

A Typology of Returns Management Programs

We distinguish three broad categories of returns management programs
(see Table 1). The distinguishing feature that drives this categorization is how
retailers manage customer lifetime value (CLV), which is determined by the com-
pany’s individual cost structure (see Figure 1). Type I programs focus on minimiz-
ing returns costs, usually at the expense of higher costs for customer acquisition
and activation. Type II programs balance these cost types. Type III programs focus
on maximizing CLV by reducing acquisition and activation costs while bearing
higher costs for returns.

Type I: Cost Focus

This typology of returns management programs allows for considerable
variation with respect to program design, implementation, and control. With the
strictest format, Type I, customers who wish to return an item can do so only by
paying for the return and undergoing a complicated and inconvenient returns
process. Requiring payment for a return is the most direct way for the firm to dis-
suade customers from returning products. Such payment can take many differ-
ent forms, which include a shipping and/or restocking fee as well as a deduction
from the refund amount to reflect “value decay.” A complicated return process
poses an additional obstacle to returning, albeit an indirect one since often it is
observed only during the actual return experience. Such processes amount to
a “hassle” cost for the consumer and may include registering returns with the
retailer, printing the return label, or refusing returns in the absence of a receipt.
The objective of Type I programs is to reduce the volume and cost of prod-
uct returns—that is, even if doing so reduces customer satisfaction. Given this
unequivocal target, many Type I programs involve straightforward processes and
often lack the data and technical support needed to improve the retailer’s returns
management program or to update its product portfolio. A recent study found
that, whereas four out of five retailers track the reasons for returns, only three in
five use these data to optimize their respective product returns programs.4
There are several crucial limitations to this type of program. One study
reports that, by forcing consumers to pay for their returns, Type I programs reduce
consumer postreturn spending at the focal retailer by 75% to 100%.5 Other stud-
ies have identified the negative effect of Type I returns management programs on
customer satisfaction and purchase rates.6 Furthermore, the vast majority of Type
I programs fail even to meet their objective of reducing returns volume and costs.7
Because the databases maintained by most firms employing Type I returns
Returning Customers: The Hidden Strategic Opportunity of Returns Management 179

Table 1. Typology of Returns Management Programs.

Program Type Program Characteristics Examples

Type I •• Firms view returns simply as a cost of doing Small online shops,
Customers experience business that needs to be minimized specialty retailers,
returns as costly and •• Customers are discouraged from returning Apple (pre 2011)
complicated process items by costs (e.g., charging various fees)
and hassle (e.g., complicated returns process,
policy with limited scope and refund
possibilities)
•• Firms do not track reasons for returns (or
make limited use of such information) and
do not maintain a database linking returns to
customers

Type II •• Program seeks fairness by balancing Amazon, Apple (post

Customers experience customer experience with reducing the 2011), H&M, J.C.
returns as a costly negative effect of returns Penney, L.L. Bean,
and/or complicated •• Customers “at fault” for their returns are Sears
process when returning discouraged (via costs or hassle) from
nondefective items making them

Type III •• Returns are viewed as an opportunity Costco, Nordstrom,

Customers experience to increase customer satisfaction (by Outfittery, Zalando,
returns as a free and offering uncompromised service) and as an Zappos
uncomplicated process additional source of revenue
•• Returns management serves as a strategic
lever for a customer-centric business strategy
with CLV as the driving force for activities
•• Company maintains a comprehensive
database about consumer purchase
and returns history, using these data for
optimization purposes
•• Requires an organization that is strongly
interlinked across departments

Note: CLV = customer lifetime value.

Figure 1.  Stylized perspective on CLV that includes returns.

Note: CLV = customer lifetime value.

management contain little more than a customer’s name and purchases, these
firms can neither link demographic or purchase data with return behavior nor
offer special deals targeted at their most profitable customers. Hence, these cus-
tomers suffer the same costly and inconvenient returns process as do occasional
customers and fraudulent returners.
180 CALIFORNIA MANAGEMENT REVIEW 60(2)

Figure 2.  Leniency and costs of selected returns management programs.

Note. EU = European Union; DE = Germany.

Type I policies are usually adopted by small online retailers that lack the
managerial commitment or resources to conduct a Type II or Type III program—or
as defensive action against the high cost and quantity of product returns entering
the reverse supply chain (see Figure 2). For example, a recent study found that
66% of 200 small and medium-sized online shops have adopted Type I returns
management programs.8 Yet, also some major brands (e.g., Apple, Zulily) rely or
relied on this format. Apple used to charge restocking fees of up to 15% for prod-
uct returns and required that returners endure a dreadful process.9 Although the
firm dropped the fees in 2011, the process still endures: first, customers must
request a “return material authorization” (RMA) number from the Apple website
or through its customer service hotline, where additional information (e.g., order
number, private address) is required to obtain the RMA. Next, customers receive
a returns ticket, which they must print and then affix to the returns package,
which must then be sent back to the manufacturer.

Type II: Balancing Cost and Customer Satisfaction

The other two forms of returns management programs (Types II and III)
attempt to increase future purchases from the company by putting a greater
emphasis on customer satisfaction throughout all stages of the customer-firm
exchange process. In a Type II returns management program, retailers trade-
off the objective of decreasing the volume and costs of returns with that of
increasing customer satisfaction. Also known as “equity-based return shipping
policies,”10 these programs take a more balanced approach to handling product
returns; thus, customers experience a combination of procedures that are either
Returning Customers: The Hidden Strategic Opportunity of Returns Management 181

costly and onerous or lenient and customer-friendly according as whether the

customer is or is not to blame for the return. For example, the online retailer
Amazon.com grants free shipping of returns from customers who received a
wrong, damaged, or defective item due to an Amazon error. Yet, for all other
items, Amazon charges nonrefundable return shipping fees consisting of a single
flat fee per shipment plus a smaller, item-based fee deducted from the customer’s
refund.11
Type II programs are usually found in product categories with low retailer
profit margins, such as consumer electronics, where costs for returns processing
and value decay exceed a customer’s marginal profit potential from future pur-
chases. At the same time, intense competition and high customer acquisition costs
makes retailers reluctant to adopt a (strict) Type I program. Hence retailers have
become creative in the design and use of Type II programs. In this format, there is
considerable variety in the “steering” options—that is, stratagems to discourage
returns without reducing sales. Examples include passive options, such as remind-
ing customers about the costs and environmental impact of returns at checkout
(Mirapodo.de) and providing useful product information in contextual pictures
(Amazon), and active options, such as allowing customers to print the returns
label (Dell.com), offering a full refund, including a US$5 bonus gift card when
returning for store credit instead of for cash refund (ModCloth.com), and closing
the customer accounts of individuals with high return rates (Amazon).12 Other
retailers offer hassle-free processes but hide the costs for returns; for instance,
H&M adds a surcharge to orders using return-prone payment methods (e.g.,
invoices). When chosen and administered wisely, Type II programs can accom-
plish their overarching goals; however, these programs typically involve substan-
tial development efforts to balance both objectives. Interfering as little as possible
with customer experience, while steering customers toward fewer returns, is a
massive undertaking that requires data analytics capabilities, management atten-
tion, and the continual experimentation with and testing of measures and pro-
cesses. Many Type II returns management programs lack this level of commitment;
unsurprisingly, they often favor one objective over the other. Any such lopsided-
ness raises doubts about the wisdom of the Type II approach because the pro-
gram’s focus is then often shifted to the detriment of customer experience. A
striking example is the media outcry over Amazon’s continuing to close German
and U.K. customer accounts in response to return behavior.13

Type III: Customer Satisfaction Focus

Under a Type III policy, customer experience is the first priority. Unlike
Type I and Type II programs, Type III programs avoid any negative interference
with the shopping experience through active or passive steering. Instead, this
format serves as strategic lever for fulfilling the company’s promised commitment
toward the customer. The key metric for managing such a program is CLV. Type
III programs are used by firms who believe that, if they are lenient and customer-
oriented with regard to returns, then the resulting increase in sales will exceed
the increased returns and so the net effect is positive. Here reducing returns is an
182 CALIFORNIA MANAGEMENT REVIEW 60(2)

ancillary objective connected to the firm’s overarching customer-centric mission:

even as free and easy returns (e.g., generous return conditions, long return win-
dows, lenient return processes) drive customer satisfaction and loyalty, the firm
employs “passive” measures to reduce the quantity and costs of returns. These
measures include meaningful product presentations, marketing optimization that
distinguishes among different customer types, operational excellence to reduce
the costs associated with product take-back and refurbishment, and a strategy
that continuously seeks the best possible salvaging opportunity for returned and
refurbished items.
Type III policies are frequently adopted in categories where customers need
to “touch and feel” the product (as with fashion and other “experience” goods) to
determine their fit. For these categories, not only the product but also the quality
of services is critical. It is in such categories that customers most expect an experi-
ence that is similar to its offline analogue, as with costless fitting rooms. Zalando,
Europe’s biggest and fastest-growing online retailer, is a case in point for running
a Type III program. Zalando bases all its business activities on the core business
goal of customer satisfaction. This strategy reflects the firm’s conviction that satis-
fied customers will continue shopping at Zalando, which drives customer loyalty
and retention, sales, and ultimately CLV. (Repeat customers are necessary also
because the high costs of customer acquisition preclude making a profit on any
customer’s first purchase.) Since its inception in 2008, Zalando’s returns manage-
ment program has been a key operational lever of their customer-centric strategy.
The overall goal of its returns program is to accommodate returns that increase
customer satisfaction and convenience while eliminating the need for returns that
are undesired by company and customer both. With regard to the former aspect,
Zalando is experimenting with a costless pickup service, “Instant Returns,”
whereby a customer can request that a returned product be picked up at any
address and within a one-hour time window. This service piloted in 2016 and is
now deployed in several European cities.14 With regard to the latter aspect,
Zalando aims to reduce the number of “wrong size” returns because they hurt
company performance and are a hassle for consumers. To minimize such returns,
Zalando has successfully implemented a number of measures—such as improved
information and better customer care (self-help centers, service chats, etc.)—that
have raised customer satisfaction while lowering the return volume. It is worth
noting that all these operational developments are driven by customer informa-
tion; thus data analytics and validated learning are used to ensure that each mea-
sure is properly tuned to maximize CLV. The fashion retailers Nordstrom,
Outfittery, and Zappos (among others) use similar Type III programs.
Much as with the Type II format, effective Type III programs place heavy
demands on sponsoring organizations in terms of design, implementation, and
management. And to an even greater extent than with Type II, the Type III format
relies on data and organizational capabilities to manage customers and returns
profitably. It requires integrated and up-to-date databases, which are needed to
administer the complex management of marketing communication and returns,
as well as a joint corporate mind-set for operational excellence and continuous
Returning Customers: The Hidden Strategic Opportunity of Returns Management 183

improvement. Another major challenge faced by Type III programs is the sheer
number of returns and their associated costs. Regardless of any attempts to reduce
the negative effect of returns, this format’s focus on making returns easy can only
increase the number of items that enter the reverse supply chain and need to be
managed. Hence, Type III returns management programs are unsuitable for small
retailers or product categories with narrow profit margins.
Type II and Type III programs often build on experiences with Type I for-
mats, as online retailers increasingly abandon the Type I approach15; the reason
for this trend is higher customer expectations and greater competition. The differ-
ence between the strategic, role-based definition of Type III programs and the
much simpler traditional view of returns management as cost center reflects a
huge shift in attitude. Once that leap has been made, the progression from Type I
to Type III programs mainly involves connecting the firm’s returns management
program to its overall business strategy as well as implementing and maintaining
the comprehensive database needed to source continuous improvements. Finally,
the transition requires a firm to develop a culture of continually updating and
tuning offerings and processes on the basis of its competition, investments, and
increased proficiency in managing returns.

Concern over Program Effectiveness

Despite the significance of returns management programs to online retail-
ing, several studies have raised concerns about their effectiveness. In particular,
substantial research has challenged the related measures and processes being
used by retailers. One study suggests that retailers hold incorrect beliefs about
how returns policy leniency influences customer purchase and return behav-
ior and finds that the various types of leniency have different effects, with some
actually increasing returns more than sales.16 In a similar vein, a series of studies
indicates that retailers—though acknowledging that better-informed customers
will make fewer returns—have too often chosen ineffective means of provid-
ing relevant information.17 More specifically, purchase decision reversals may
increase if the firm provides too much information18 or presents online customer
reviews.19 Conversely, providing the wrong type of information can lead con-
sumers to think less and order more of the same product.20
Other studies question the wisdom of Type I and Type II programs because
their direct and/or hassle costs reduce the satisfaction and loyalty of customers21
and also their repurchase intentions.22 The latter consequence reflects the alarming
“sticky problem” of poor returns management: consumers quietly decrease their
spending at the focal retailer—that is, without expressing any formal complaint—
and so the downsides of these programs are seldom immediately visible to retailers.
Moreover, a recent study suggests that recovering from such negative impressions
may require as many as 12 positive experiences.23 In an interview conducted by
the authors, David Schröder, Senior Vice President (SVP) Convenience at Zalando,
admits that even though a drop in CLV due to a poor returns experience recovers
over time, it never reaches prereturn levels (see Figure 3): “Our data revealed that
184 CALIFORNIA MANAGEMENT REVIEW 60(2)

Figure 3.  Effect of poor returns management on CLV: A “sticky problem.”

Note: CLV = customer lifetime value.

customers never truly recovered from a negative service experience such as hassle
returns.” A seminal study supports this view.24
A number of other academic and business studies have challenged the
effectiveness of many returns management programs on multiple grounds.
Among the criteria supporting these challenges are the effect of such programs on
a customer’s frequency of shopping at the focal online retailer; a customer’s aver-
age basket size per purchase; the value, likelihood, or frequency of product
returns; and a customer’s lifetime value. The following list summarizes some rep-
resentative studies conducted along these lines.

•• A Trusted Shops poll found that only 26% of online shops that charged fees
for returning a product could, indeed, lower their returns volume through
such customer-unfriendly measures.25
•• A business study conducted by the Retail Equation suggests that, on average,
retailers rate the effectiveness of their returns program as mediocre (3.31 on a
five-point scale ranging from “not very effective” to “very effective”).26
•• A United Parcel Service (UPS) study of 5,849 online shoppers found that
returns management programs still have room for improvement when it
comes to increasing customer satisfaction: just over half of all shoppers are
satisfied with the clarity of returns management programs and the ease of
shipping products back.27
•• A major German study of 134 online shops concluded that 85% of the par-
ticipating retailers were unable to reduce their returns volume over the past
three years, instead experiencing equal or higher product return rates.28
Returning Customers: The Hidden Strategic Opportunity of Returns Management 185

•• A global study conducted by DHL eCommerce (using a panel of 11,265 Inter-

net users across 20 countries) identified complicated return processes as one
of the top three main barriers to distance selling worldwide.29
•• A major academic study analyzed the role and value of perceived risk in the
customer-firm exchange process and concluded that “relatively few retail-
ers include metrics such as product returns in their customer selection and
optimal resource allocation algorithms when measuring and maximizing cus-
tomer value”; hence few firms are able to increase their short- and long-term
profits by targeting more profitable customers.30
•• A recent European study found that the majority of participating online
retailers have neither data analytics capabilities nor a culture of validated
learning, both of which are needed to develop effective product return pro-
grams.31

As a group, these studies cast doubt on the likelihood of product returns

management achieving any of the objectives described previously.

Benefits of Effective Returns Management Programs

Although the previous section suggested that many returns management
programs do not achieve their goals, a well-run program offers many benefits.
Research has emphasized the positive influence of lenient returns programs on
consumer demand. One study concluded that such lenient policies may increase
net category demand by more than 50%, depending on how much the con-
sumer values having an option to return a purchased product: the more highly
that consumers value the return option, the greater the increase in consumer net
demand due to returns leniency. This option value is largely determined by the
uncertainty of fit, which may vary widely across product categories.32 Another
study found that customers increased their spending with a retailer by as much
as 457% after returning a product under a lenient policy. Consumers with a bad
or costly returns experience have been found to reduce their future spending
with the focal retailer irrespective of cost fairness or of which party was at fault;
the implication is that equity-based (Type II) programs—in spite of their intent to
be fair—maybe detrimental to the firm in the long run.
There are several other potential benefits (i.e., beyond increasing consumer
demand) to a well-run returns management program. These benefits are increased
customer experience, satisfaction, and loyalty; lessened negative effect of product
returns; and access to information on consumer purchase and return behavior.

Increased Customer Experience, Satisfaction, and Loyalty

Returns policies and processes for take-back are the most direct touch-
points of returns management programs and, as such, shape consumer percep-
tions about the sponsoring organization. Hence, there is a substantial amount of
research that suggests improving the elements of those programs can significantly
186 CALIFORNIA MANAGEMENT REVIEW 60(2)

influence customers’ experience, satisfaction, loyalty, and retention—most likely

because such improvement strengthens a retailer’s value proposition and works
in tandem with various psychological triggers of persuasion.
Many of today’s online retailers already excel at retaining customers by
enhancing each customer’s shopping experience through clean and visually
appealing websites, fast and easy checkout processes, and nearly flawless execu-
tion of their day-to-day operations. With product returns as an integral part of
their service offering, retailers have another instrument for improving the cus-
tomer experience along an especially salient dimension—since two-thirds of all
online shoppers check the retailer’s returns policy before buying a product.33 The
same study reports that, when the risks and hassles of purchasing the wrong prod-
uct have been eliminated, consumers are as much as 82% more likely to make a
purchase. As Tesco chairman Sir Richard Broadbent states, “The company that
provides the best relationship with the customer will win—not through product,
but through the best experience.”34
Consumers who encounter a costless, smooth, and easy return experience
are also more satisfied and more loyal than those with a less positive returns expe-
rience. A consumer’s past shopping experience with returns—positive or nega-
tive—shapes that individual’s anticipation of future shopping encounters, and as
two researchers note, “this anticipation serves as a salient issue to customers
deciding whether they will purchase again from a retailer.”35 According to Zalando
chairman Robert Gentz, “customers who return much are the more profitable
ones. We analyzed it: those who return much are more loyal and purchase
again.”36 A recent study among online shoppers likewise found that, if compli-
cated delivery and returns processes were improved, then one out of five regular
shoppers (and one in four intensive shoppers) would buy more at the same online
retailer.37
In light of the resulting positive effect on customer perception and evalu-
ation, it is not surprising that many online retailers use a lenient returns policy
as a marketing tool; for instance, the website of U.S. fashion retailer Zappos
prominently displays its free-returns policy. Its promise of fast, free delivery and
returns is at the core of Zappos’s marketing strategy and has doubtless contrib-
uted to the firm’s success. The antiaging skin care company NuFACE conducted
A/B tests to see whether adding a free-returns shipping label to its website
affected product sales. Test results indicated that promotion of the company’s free
shipping had the effect of increasing the number of orders by as much as 90%
and the average order value by 7%.38 Other online retailers report similar results,
with improvements of up to 50% in the rate of converting website visitors to
actual shoppers.39

Lessened Negative Effect of Product Returns

Successful returns management programs enable a retailer to reduce the
negative effect of returns by limiting their volume and by reducing its cost of
handling returns. In addition, such programs can have a substantial positive
Returning Customers: The Hidden Strategic Opportunity of Returns Management 187

effect on the company’s resources and bottom line: activities undertaken to

recover lost revenues from returned merchandise allow retailers to realize hid-
den profits (e.g., via refurbishment and salvaging) and to minimize their liabili-
ties and required working capital (via reduced need for inventory).
Many companies are known to have reduced the product return rate by
refining their product descriptions—for example, by improving the product
information provided to customers before purchase. Thus Zalando improved
how it presented crucial product information (e.g., size and fit) by supplying
higher-quality pictures that showed the use and appearance of its fashion prod-
ucts in everyday-life contexts. This focus on photographic details is based on
eye-tracking experiments that show consumers, when making decisions, rely
far more on images than on textual information. According to David Schröder,
Zalando uses textual product descriptions “mainly for search engine optimiza-
tion, which is written in a very cryptic way. Thus, it cannot offer useful informa-
tion to our customers.”40 Indeed, a related study sheds some light on this debate
by describing how a free-returns policy reduces the consumer’s motivation to
deliberate: such programs can be said, in that sense, to “dumb down” distant
purchase encounters by making customers more susceptible to the environ-
ment’s affective cues (e.g., pictures).41 So larger and better product images
helped customers make better decisions prior to purchase, in turn reducing the
return rate while enhancing customer experience. Zalando cites content creation,
or the provision of high-quality information to customers, as one of the four key
services through which its operations department supports the firm’s overall
customer-centric strategy.42 Amazon recently introduced a different measure
with similar functionality to improve its pictorial product representation: it
shows products (e.g., a book) in front of a schematic body so that customers can
more accurately assess the product’s size.
Other measures to reduce returns include “home-try and buy,” under
which customers can experience goods at home before actually purchasing them.
For example, the online jeweler BlueStone practically eliminated returns by offer-
ing replicas of their solitaires and necklaces to try at home. “Since it’s a high-value
category [. . .], a ‘home try on’ more than covers the cost of bringing the samples
to a customer’s doorstep,” reports BlueStone CEO Gaurav Singh Kushwaha.43
Online furniture retailer Urban Ladder began sending potential customers
swatches of colors and fabric so they could determine their fit for use in custom-
izing furniture, for example, LensKart and WarbyParker offer innovative 3D
home-try services that enable customers to test virtual versions of their eyeglass
choices using their laptop (or other) cameras. When one also considers the benefit
of increasing average order volumes, these “home-try and buy” programs are
equally suitable for niche players and could help them compete with retail giants
without engaging in costly returns.
During product take-back, the focus of effective returns management pro-
grams shifts to reducing returns cost and recovering lost value from returns
through continuous improvement in reverse logistics, refurbishing, and salvaging.
188 CALIFORNIA MANAGEMENT REVIEW 60(2)

For instance, Amazon has successfully experimented with its “click and collect”
Amazon Locker, a self-service parcel delivery locker situated in partner shops, that
allows customers to pickup and return online orders at their convenience.44
Besides improving customer convenience, bundling the returns in these lockers
allows Amazon to reduce collection costs. Since the program’s inception in 2011,
Amazon has extended Amazon Locker to many U.S. and U.K. cities, partnering
with retail stores such as (respectively) 7-Eleven and Spar. Other retailers have
improved the design of their reverse logistics network to allow for faster reintro-
duction of undamaged items that would otherwise have entered the cost-, time-,
and value-consuming process of take-back and refurbishment.45
Refurbishment and salvaging add considerable (though usually hidden)
value to supply chains and so are key enablers of Type III programs. Whereas unpro-
cessed returns sell at 10-20 cents on the dollar, refurbished items can lift value
recovery to 40-70 cents.46 In addition to refurbishing efficiently, a key aspect of such
operations is selecting the appropriate channel for resale. Again, Zalando is a good
example: the company refurbishes returned merchandise and resells it multiple
times in its primary market.47 Only products of lower (i.e., less-than-perfect) quality
are sold in secondary markets—three offline stores (in Berlin, Cologne, and
Frankfurt) that the firm operates to maximize the revenues captured in these sec-
ondary markets—or destroyed. The benefits of this approach are twofold: Zalando
maximizes the revenue from returns by pursuing the best possible (i.e., above-unit
cost) salvage opportunity, and it lessens inventory risk. Managing returns in this
way reduces the amount of inventory needed to satisfy demand in the primary
market, since every unit reintroduced into the forward supply chain represents one
unit fewer that must be procured or manufactured.48 Refurbishing and salvaging
are therefore crucial activities that subsidize Zalando’s lenient Type III returns man-
agement program.49 Knowledge of such developments is far from new; however, a
recent study indicates that many retailers remain unaware of the positive effect that
returns can have on their resources and bottom line.50

Access to Information on Consumer Purchase and Return Behavior

Each time a consumer returns a product under a Type II or III returns
policy, the transaction is recorded in the firm’s database. That allows companies
to profile their customers and make informed decisions based on customers’ past
behavior vis-à-vis purchases and returns. A well-maintained database is valuable
because it enables the retailer to target specific customer groups, to assist cus-
tomers in decision making, and—most importantly—to evaluate the results of
a particular returns management program by using such metrics as CLV, addi-
tional sales, and returns across different channels. A recent study involving
26,000 customers of an anonymous online retailer tallied the benefits of main-
taining a database that captures both purchases and returns and then integrat-
ing that information into targeted marketing activities. The authors of the study
argue that incorporating such information into the algorithms used to identify
customers and allocate marketing resources could increase that retailer’s profits
Returning Customers: The Hidden Strategic Opportunity of Returns Management 189

by approximately US$300,000 by targeting more profitable customer segments.

The benefits of those optimized algorithms stem from the higher CLV resulting
from increased purchases and from lower marketing costs and effort and fewer
product returns. The output of such algorithms identifies high-CLV customers
(in terms of both purchases and returns), who then receive more targeted offers
through emails and catalogs than do those with a lower CLV.51
Fashion retail site Rue La La Boutiques uses customer data to tackle fit-
related product returns with the aid of software that helps customers make better
product selections. Steve Davis (the firm’s CEO) reports,

During selection, a customer who has repeatedly bought the same brand of dress
shirts in both a small and a medium could see a notice asking, “Are you sure you
want to order the small? The last five times you ordered both sizes, you only kept
the medium.”52

Fashion retailers ASOS, Oasis, and Stylebop use “virtual fitting” software
from the Swedish firm Virtusize to help customers compare the measurements of
items they intend to purchase with those of items they already own. The software
displays overlaid 2D silhouettes of both garments so that customers can more
accurately choose the best-fitting items. According to ASOS, this software cut fit-
related returns by nearly 50%.53 Footwear brands such as TOMS and Puma
achieved similar results using ShoeFitr, an app that allows users to compare the
size and shape of a desired shoe with a shoe the customer already owns.54
Collecting information on customer return behavior also enriches a com-
pany’s database. Traditionally acquired market research data is based on small
samples of self-reported information and relies on the active participation of
respondents. In contrast, every returned item generates transactional data points
that require no active customer involvement beyond, perhaps, indicating the
reason for a return. The resulting data sets are longitudinal in nature and offer a
lucrative field for data mining. For example, retailers can use these data to spot
behavioral trends and track customer groups over a long period of time. Using
such a data set—made available by a large European online retailer and including
5.9 million transactions of some 166,000 customers over five-year period—a
recent study sought to identify the scope of the “serial returner” problem. Analysis
revealed that 5% of shoppers return more than 80% of their initial purchases,
with one in five of those serial returners returning items at a 90% clip. The study
estimates that the costs of these particular returns can amount to as much as half
of the retailer’s total profits.55 A different analysis distinguishes between five
types of returners: heavy returners, crazy shoppers, normal returners, seldom
returners, and minimal returners. Each type differs in terms of past return behav-
ior and of the response to incentives not to return a product. These results strongly
suggest that returns management programs should differentiate customers by
return behavior and then use this information when crafting measures that tar-
get returns.56
190 CALIFORNIA MANAGEMENT REVIEW 60(2)

Benefits by Program Type

The ability of retailers to unlock the benefits just described varies widely
by program type. Since retailers that use a Type I program do not maintain a use-
ful returns database, they cannot confirm program effectiveness, target specific
customer groups, or test individual program measures. What is more, their lop-
sided stance on handling returns precludes receiving many of the benefits related
to customer satisfaction and loyalty; that deficiency, in turn, may well result in
fewer future purchases from—and higher activation costs for—customers who
have undergone such a retailer’s returns process.57
In general, Type II programs thrive when data analytics is used to tweak
them. If managed well, these returns management programs encourage repeat
purchases yet discourage returns through individual measures—though without
losing sight of customer satisfaction and loyalty.
Although Type III programs are the most costly to implement and main-
tain, they provide the most benefits to customers and sponsors. Type III programs
are constantly developing their use of CLV as a main driving force in the manner
of a “perpetual motion machine”: excellent customer experience—across the
entire customer-firm exchange process—increases customer satisfaction and loy-
alty, which then boosts future sales; additional sales (and returns), in turn, yield
data and knowledge about customers that retailers can leverage to improve cus-
tomer experience even further. Type III returns management programs offer com-
panies the greatest amount of marketing information and the best opportunity for
data mining and for developing insight into customer behavior.

Strategic Implications for Returns Management

The most effective returns management programs are customer-friendly
yet still manage to reduce the negative effect of returns. We identify three main
levers—aligned strategy, validated learning, and empowered organization—that
emerge as both opportunities and challenges for retailers looking to develop a
returns management program.

Lever 1: Aligned Strategy

Even though returns management programs have long been recognized
as a key part of the customer-firm exchange process and even though handling
returns, no less than marketing or sales, is crucial for the success of an online
business, many retailers still fail to give returns management its due. When
asked about their returns strategy, many retailers cannot describe a clear path
forward. This disregard often results in resources being allocated to departments
other than returns management, which leads to poor processes and high costs.
Home24, a leading European online retailer, is a case in point. With resources
flowing mainly into its European expansion (i.e., into marketing and sales), the
company struggled with returns costs in excess of US$4 million (almost 10% of
Returning Customers: The Hidden Strategic Opportunity of Returns Management 191

net sales) annually following its promotion of free returns.58 Not until the end
of 2015—after numerous customer complaints—did the firm elevate the returns
issue to a higher corporate level; since then the company has worked on a func-
tional strategy, including measures and processes, to reduce these costs.
An aligned strategy, or one that is connected to the company’s overall busi-
ness goals, is a cornerstone of any returns program that effectively shapes the role
of and attitudes toward returns management. With regard to the former, a clearly
communicated strategy that is aligned with corporate goals may serve as a guiding
light that informs the direction, selection, and evaluation of program measures
and policies. With regard to the latter, an aligned strategy influences the organiza-
tion’s attitude toward returns and creates a clear understanding of how returns
management supports the overall business strategy. As such, it is a source of con-
tinuous improvement and innovation. An aligned strategy organizes these com-
ponents with an eye toward success of the company, not the department, and it
creates an interconnected system that acts in concert across different functions. So
even though some research anecdotes suggest otherwise, such systems give their
users a competitive advantage and generate profits for retailers despite—or maybe
because of—return rates higher than 20%.59
Various examples suggest that retailers whose returns strategy is aligned
with corporate objectives outperform their competition in several ways. Zalando’s
customer-centric strategy rests on a deep understanding of CLV and the compa-
ny’s cost structure: given their high customer acquisition cost, the firm rarely
breaks even on a customer’s first few purchases. Instead, customer loyalty is key
for long-term success. The resulting focus on customer satisfaction and CLV is
deeply embedded in the company’s culture and operations strategy. Perhaps the
clearest manifestation of this strategy is Zalando’s program for managing free
returns, which aims to reduce the risk of online purchases while enhancing cus-
tomer experience through perfect execution of day-to-day operations (e.g., con-
tent creation, delivery, and returns). Although this approach entails a high number
of returns, Zalando’s strategy emphasizes its program’s ability to absorb the associ-
ated costs through continuous improvement, refurbishing, and salvaging. With a
market share of 1%, Zalando is Europe’s largest and fastest-growing online fash-
ion retailer.60 Zappos, one of the world’s biggest online shoe and fashion retailers,
shines with a similar focus and alignment. The company’s emphasis on customer
service reflects its deep understanding of returns programs as an integral part of
their service portfolio, and it has given rise to such innovative offers as “Happy
Returns.” This offer allowed customers to exchange unwanted presents for gift
cards regardless of where the present had been bought, thus showcasing a strate-
gic use of the firm’s returns management program. Kristin Richmer, member of
Zappos’s Awareness Marketing team, commented as follows:

At Zappos, we consider ourselves to be a customer service-focused company—

more than just an online retailer—and as such, we’re always looking for new and
exciting ways to engage with and give back to our customers in an effort to build
meaningful relationships. Happy Returns is an exciting spin on our already great
return policy.61
192 CALIFORNIA MANAGEMENT REVIEW 60(2)

Lever 2: Validated Learning

A number of studies have identified what we call the “sticky problem”
of ineffective returns management: after a poor return experience, customers
silently discontinue purchasing from that retailer. What follows is a steep decline
in CLV that only partially recovers over time, an outcome that calls for reviewing
the returns management program and looking for effective measures with less
severe consequences for the retailer. More generally, the challenge for retailers
is to spot similar hidden issues at the outset and to adapt their returns man-
agement program continually based on experience. In other words, the continu-
ous development of programs requires retailers to engage in validated learning to
make their programs more effective.
Validated learning is common practice, in marketing and Web analytics, for
(respectively) developing insight on user behavior and optimizing website fea-
tures; however, it has seldom been exploited to optimize returns management
programs. One problem, it seems, is that returns-related data are often neglected
in such processes. A seminal study found that only two of 56 surveyed retailers
used separate data on returns to inform their measures of customer value or their
algorithms used for the allocation of marketing resources.62 Prior concerns about
the effectiveness of returns management programs reflected doubts that firms had
well-established development processes in place for these programs. A recent
study suggests that retailers are only moderately confident about the effectiveness
of their returns program. When one considers that better use of data is at the
heart of validated learning initiatives, it is disturbing that 40% of all retailers
struggle with faulty product data.63
Companies are awash in information on both purchases and returns, and
superior results are shown by those that manage this information and mine it
effectively by means of validated learning. As mentioned previously, NuFACE
used validated learning in form of A/B tests to experiment and implement small
behavioral tweaks based on its website returns offering, which in turn boosted
sales. Flash sale retailer Zulily began to experiment with various shipping and
return programs, thus reconsidering its “no returns” policy after expanding its
product range from children’s toys to fashion. What gave rise to this experimenta-
tion was the company’s struggle to retain customers: many bought once and never
returned, leading to a sharp deceleration in the retailer’s sales growth.64 Zalando
continuously reaffirms its strategic stance on customer satisfaction and uses vali-
dated learning while continuously innovating its returns policy—for example, by
creating its Instant Returns service. Academic studies have also used validated
learning to discover more about returns management programs. For instance, the
authors of this article have used experiments to demonstrate that free-returns
policies “dumb down” customers, which leads to behavioral asymmetries in their
decision making. Another study concluded that some features of lenient returns
programs asymmetrically influence sales and returns.65 Companies can employ
validated learning to spot such asymmetries and then use that information to
their advantage.
Returning Customers: The Hidden Strategic Opportunity of Returns Management 193

Thus, validated learning is a powerful tool with which retailers can develop
more effective returns management programs. They must use their data and
information to uncover options performing poorly and reveal the hidden poten-
tial of their programs. As already mentioned, many drawbacks of returns policies
are not salient to retailers because consumers tend not to express their dissatisfac-
tion with returns processes. Validated learning can help the firm identify ineffec-
tive measures and make informed decisions about the development of improved
returns management programs. This approach enables more complex returns
management programs that vary along several (rather than just one or two)
dimensions and so can accommodate the differential effects of leniency factors.

Lever 3: Empowered Organization

An aligned strategy provides vision and direction to returns management
programs, and validated learning is the tool that steers the firm in a favorable
direction; ultimately, however, employees are the key to developing effective
programs. Yet a recent survey of online retailers from several different industries
revealed that, whereas returns management and business strategy were often
clear, the same cannot be said of the path to developing, implementing, and con-
trolling a more effective returns management program. The challenge in these
cases was to find a way of engaging their employees and letting them work col-
laboratively toward improving returns programs.66 An empowered organization can
advance these management programs by tapping employees’ resources and ideas.
Confronted with the day-to-day reality of handling returns, these employees are
most often the ones who suggest new ideas that can guide process improvements
and lead to new innovations.
Repeated communication is key to “cascading” the aligned strategy to all
parts of the organization because it ensures a shared understanding of the strate-
gic role played by returns management. Hence, some of the most successful com-
panies weave their communication efforts into their corporate culture. For
example, Zappos reminds employees about its ten core values (e.g., “Embrace and
Drive Change,” “Deliver WOW Through Service”) everywhere in the company,
from badges to posters on the walls. The firm also puts great effort into reminding
employees about the customer-centrism that drives all activities. New employees
spend four weeks in customer service, and every employee—including CEO Tony
Hsieh—takes at least ten hours of customer calls each year.67 Zalando uses several
formats to encourage bottom-up organization; these include information displays
on the shop floor, a “Zalando Operations Strategy Magazine,” and a corporate
strategy video. The company uses these channels to remind employees about the
firm’s customer-oriented mission and about how succeeding in that mission
requires focusing on flawless execution of day-to-day operations as well as exceed-
ing customer expectations and what is offered by the competition.
The overarching goal of these communication efforts is to empower associ-
ates to solve problems because they appreciate how critical are operational excel-
lence and innovation to the company’s aim: the highest possible customer
satisfaction. When its employee base is highly engaged and motivated, the
194 CALIFORNIA MANAGEMENT REVIEW 60(2)

empowered organization can continuously develop its returns management pro-

gram by way of improved processes and innovations driven by employees. Zappos
empowers its customer service employees to send out small gift boxes, known as
“Sunshine Boxes,” to customers as they see fit. The trigger can be a question
regarding returns or a negative returns experience, and usually the result is cus-
tomer satisfaction and loyalty; such appreciation is sometimes expressed via social
media or blogs, which adds value to the Zappos brand.68 The company also runs
an innovation lab in which cross-functional teams experiment with new ways of
deriving value from returns management programs, continuously pushing the
boundaries of these programs.69 Zalando’s similar focus on exceeding customer
expectations and outdoing the competition accounts for the company’s “Surprise
and Delight” program, which empowers call center workers to send out flowers,
chocolates, or sparkling wine to customers. In addition to these employee-driven
process improvements, Zalando’s attention to customer experience is another
motivator of returns program innovations. Offering free returns was once innova-
tive, but now the retailer is looking to go one step further through its Instant
Returns service. Initial results show that four-fifths of the test users were satisfied
with the service and that two-thirds were willing to pay as much as €2 for it.70
Zalando also operates several information technology (IT) centers in Berlin,
Dublin, and Helsinki, where cross-functional teams work on innovations such as
virtual fit solutions to reduce the return volume even further. It is worth empha-
sizing that these are scalable innovations that have been seamlessly integrated
into Zalando’s existing service offering. In the words of David Schröder, “Zalando
innovates operations and operates innovations.”

Pulling All Levers Together: Steps to Develop, Implement, and

Control Effective Returns Management Programs
There is no question that returns management programs, when man-
aged effectively, can be of considerable value to retailers. However, it may not be
enough for the firm simply to offer customers a lenient returns policy. It is nec-
essary, in other words, that firms implement returns management strategically,
mine data to develop insights, and continuously fine-tune their programs. The
role of management in this exercise is to unbundle the steps needed to develop
these programs and to navigate the design (and redesign) process so that they
are implemented successfully. This process offers a unique opportunity for retail-
ers seeking ways to develop more effective returns management programs; it is a
multifaceted approach to creating a more satisfied customer base while manag-
ing the cost and value of returns. For those retailers, we outline eight pragmatic
steps:

•• outlining program objectives,

•• selecting program options,
•• considering partnerships,
•• building organizational capabilities,
Returning Customers: The Hidden Strategic Opportunity of Returns Management 195

•• developing and maintaining a returns database,

•• managing data analytics capacity,
•• evaluating program effectiveness, and
•• learning and adapting.

These steps, which we detail next, are most applicable to Type II and Type
III returns management programs.

Outlining Program Objectives

In order to be effective, returns management programs require clear stra-
tegic objectives that guide subsequent efforts. These objectives can be based
on sales, profits, customer satisfaction, returns, increased consumer informa-
tion, and/or sustainability. Common specific objectives include increasing aver-
age sales per customer, increasing order frequency per customer, increasing the
number of customers, reducing customer attrition, increasing CLV, generating a
satisfactory return on investments made by the returns management program,
reducing the cost of returns, reducing the volume of returns, increasing salvage
value, receiving customer feedback or market research data, and reducing carbon
dioxide emissions. Recall that retailers pursuing Type II programs must ensure
that their strategy does not achieve one goal at the expense of the other. Type I
programs focus mainly on decreasing returns, so only Type II and Type III pro-
grams can gather feedback and generate market research data that can be used to
improve returns measures and processes and to target specific customer groups
with tailored promotions.

Selecting Program Options

Once the objectives of a returns management program are clear, retail-
ers must review and select appropriate options that are in line with these goals.
Retailers can resort to two classes of options depending on how each affects the
purchase and return behavior of customers. The first group of options are those
that actively steer customer behavior—for example, by exacting a direct fee or
hassle cost or by constraining the customer’s choices. Examples include charges
for shipping, returning, and restocking as well as complicated return processes
and restrictions on payment methods. The second group of options are ones
that passively steer, or “nudge,” customer behavior. These options seek to opti-
mize the choice architecture—the careful design of decision environments—and
silently induce consumers to make better decisions. For instance, providing high-
quality product information will naturally improve consumer decision making
and so should result in more satisfied consumers and fewer returns.
Even when the overall objectives of a returns management program do not
change, the purpose and selection of options may vary considerably across three
stages of the customer-firm exchange process (see Figure 4). Options at the pre-
purchase stage help customers make better decisions that avoid a wrongly selected
product, which would ultimately trigger a return later in the process. To minimize
196 CALIFORNIA MANAGEMENT REVIEW 60(2)

Figure 4.  Purpose and selection of program options by stage of the customer-firm
exchange process.

Note: CLV = customer lifetime value.

its interference with the customer decision process, a firm should employ mainly
passive options (e.g., providing better information via more contextual and
higher-quality pictures). In the purchase and order fulfillment stage, retailers can
usually lower the likelihood of returns through nudging and process improve-
ments. Passive options are used to increase ease and speed of checkout and deliv-
ery and may further reduce returns by refusing return-prone payment methods
(e.g., invoices) to customers with a high-returns profile. The strategic purpose and
dominant option type vary most at the postpurchase stage. Here, the type of
returns management program determines the dominant type of returns. Whereas
Type I and Type II formats dissuade returns by mixing active measures (e.g., fees
and a complicated returns process) into their portfolio of options, Type III pro-
grams nearly always rely on passive measures (e.g., preprinted return labels that
can be peeled off and affixed directly to the return delivery box) to make product
returns more convenient for the customer.
Most Type I programs include active options designed to prevent returns
by dissuasion. These programs make limited use of passive steering options, in
part because they lack the data and analytics needed to analyze the connection
between these options and program objectives. Type II and III programs require
a more sophisticated analysis and mix of options. Sponsors of these types of
return management programs must remain cognizant of the potentially negative
consequences of using active measures because they are salient to customers,
who generally prefer not to be steered or constrained in choice. Hence, selecting
program options involves a trade-off between program effectiveness and cus-
tomer satisfaction.
Returning Customers: The Hidden Strategic Opportunity of Returns Management 197

Considering Partnerships
Regardless of their respective returns program types, retailers lacking in
size or resources can increase returns management effectiveness by cooperating
with third-party firms. Such partnerships can reduce the costs of setting up and
running a returns management program, and an organization’s strengths and
weaknesses are complemented by multipartner cooperations. Retailers can coop-
erate with partners (e.g., PayPal) so they can offer free returns or with firms to
develop and enforce standards (e.g., for packaging boxes) to reduce the cost of
returns. Partner firms may also be able to access the sponsor’s database toward
the end of developing insights on customer behavior and thereby identifying
improvement opportunities for the sponsor’s program.
Examples of successful program partnerships include Otto.de (Germany’s
second-largest online shop) cooperating with Blue Yonder (a leading provider of
cloud-based predictive services) to reduce returns through data analytics that
inform replenishment optimization. As noted by Alexander Pompös, the former’s
project manager, “Connections have been found in previously structured and
unstructured data with direct ties to returns. The resulting analysis possibilities
offer us a lot of potential.”71 Another example is Zalando, which implements its
Instant Returns service through partnerships with local courier services such as
tiramizoo—allowing the retailer to offer return pickups within an hour. The U.K.
supermarket retailer Asda provides third-party online retailers with a service that
allows customers to either collect or return their online orders through one of
Asda’s 614 stores. This service, which is expected to attract up to 40 million extra
store visits each year, increases customer convenience while reducing returns
costs of participating online retailers.72

Building Organizational Capabilities

The main ingredient of effective returns management programs is an
empowered organization with talented employees who can effectively plan,
implement, and develop the program. Achieving these outcomes requires the
firm to ensure that its strategy has cascaded to the employee level and that feed-
back and ideas have been generated and tested. Zalando has implemented a
bottom-up organizational design whereby cross-functional teams of employees
define their own quarterly goals (within the firm’s operations strategy) following
an “objectives and key resources” approach. Teams align their goals with teams
from other departments and share these goals on a company-wide intranet.
New ideas, such as the Instant Return service, originate from employees and
are developed, implemented, and tested with validated learning, which ensures
continuous CLV-based development of Zalando’s returns management program.
Zalando’s employees, such as those at Zappos, can rotate jobs to gain firsthand
experience with customers—for example, by managing the firm’s hotline or par-
ticipating in the pickup and delivery of parcels.
Organizations can also consider outsourcing activities in which they have
little expertise or a partner firm has complementary skills. As mentioned, two
198 CALIFORNIA MANAGEMENT REVIEW 60(2)

activities that lend themselves to outsourcing are data mining and managing the
reverse supply chain—that is, the take-back, sorting, refurbishing, and salvaging
of returned products.

Developing and Maintaining a Returns Database

Many online retailers collect and analyze returns-related data derived
from sales and returns, not from customers. Moreover, returns data are often
stored in multiple computer systems that update with different frequencies and
are not integrated with each other. Retailers need to recognize that returns are
an important source of information about customer behavior. Absent a database
that connects individual shopping with return behavior, firms—especially those
sponsoring Type II and Type III formats—cannot unlock the full potential of their
returns management programs. A returns database must capture and process
detailed information on customer returns, including the reason for and condition
of individual returns, and also on aggregated data such as the return history of a
customer. A returns database is most useful when integrated into the firm’s cus-
tomer database, so it can complement existing customer profiles to identify their
behavior throughout the customer-firm exchange process.
There are multiple uses for aggregated data. Firms can use them to answer
such questions as: Who has returned how much? What are the main reasons for
product returns? What is a customer’s lifetime value (including returns)?
Information from aggregated data can be used to target customers with individual
offers as a function of their preferences and the firm’s profit. Data can also be used
to steer the entire returns process while increasing transparency so that customers
can always see the status of their returns and refunds. For example, Amazon’s
integrated return system allows customers to revisit their site and process a return
in a few easy steps. The software then handles the logistics, which includes gen-
erating return shipping labels and tracking numbers as well as real-time tracking
of the package.

Managing Data Analytics Capacity

Besides developing and managing a returns database, retailers sponsor-
ing Type II or Type III programs must manage their data analytics capacity and
mine customer data on purchase and return behavior for insights that can be
used to broaden and deepen the decision-making skills needed to drive organiza-
tional change. Such insights could enable retailers to predict how consumers will
respond to certain products or returns options and hence should inform decision
making for purposes of promotion, development, and segmentation. Zalando
mines data in order to segment customers based on CLV, and it uses this informa-
tion to individualize promotions and payment options (e.g., allowing payment
via invoice only for individuals in profitable customer groups). The retailer also
experiments with predicting future demand patterns based on customers’ “wish
list” items, shipping these items to local warehouses prior to their actual pur-
chase. Having the desired item in place allows Zalando to ensure availability and
faster delivery, in turn maximizing CLV through higher customer satisfaction and
Returning Customers: The Hidden Strategic Opportunity of Returns Management 199

lower likelihood of product return. The U.K. department store House of Fraser
recently launched True Fit, an easy-to-use sizing tool, as part of its redesigned,
touch screen-optimized website that lets customers enter details about body size
and favorite brands to receive individualized fit recommendations. The tool was
introduced as the company shifted to a “mobile first” strategy (when it saw more
than half its traffic coming from mobile devices) and anticipated a rise in returns
because the website’s greater ease of use would likely result in more “mindless”
shopping behavior by customers.73

Evaluating Program Effectiveness

The final phase of developing an effective returns management program
involves evaluating the effectiveness either of particular returns management
options or of the overall program. Most retailers use several measures when
assessing the success or failure of their returns management program, and these
measures differ across program types. Type I programs typically focus evaluation
on such return-specific measures such as return rate and cost of returns. Given
their more strategic focus, Type II and Type III programs usually employ metrics
other than returns; examples include increased basket size, increased net sales,
and increased CLV. Program sponsors also put greater emphasis on measures of
customer satisfaction. For example, Amazon, Zalando, and Zappos use the widely
recognized Net Promoter Score to evaluate returns management programs and
options and to individualize their option portfolio.
Returns management effectiveness may vary significantly by customer seg-
ment. Measures that prove effective for one customer segment maybe futile for
another. The same can be said with regard to different countries, whose various
cultures, consumer tastes, and circumstances (e.g., infrastructure) affect customer
perceptions of a program or option and hence its effectiveness. The firm should
engage in a thorough and detailed assessment when fine-tuning the options in its
program’s portfolio. In particular, firms must select a proper time horizon, assess
options from different perspectives, and compare performance with that of an
appropriate control group. The time horizon should be long enough that the pro-
gram’s goals can be fulfilled, and it must include the time needed for communicat-
ing any new procedures and for letting customers become accustomed to them.
Analyzing options from different perspectives involves assessment using various
key performance indicators (KPIs), such as CLV, which are then compared with an
appropriate control group of customers. This approach allows for the detailed mea-
surement and comparison of options by tracking performance differences between
the groups. Neglecting that task will likely lead to misperceptions about option
effectiveness, resulting in suboptimal programs. For instance, managers who see
only the short-term profit (i.e., gross profit less costs for returns) from adopting less
lenient returns policies might miss the long-term “sticky problem” of such policies
that becomes evident only after long-term sales effects are analyzed.
Once the evaluation results are clear, they should be communicated
throughout the entire organization. A retailer that follows through in this way
200 CALIFORNIA MANAGEMENT REVIEW 60(2)

emphasizes the strategic importance of returns management while shaping

employees’ attitudes toward their respective roles in the achievement of program
objectives and while encouraging them to share ideas and improve further.

Learning and Adapting

The final step in developing effective returns management programs
is that of learning and adapting, especially if a program falls short of expecta-
tions. Whereas the previous step identified options that do not add value to a
program, in this step the retailer must take the corrective actions necessary to
adapt its returns management program. The extent of adaptation can range from
changing specific options in a program’s option portfolio to changing the entire
program type—that is, changing a program’s scope and restarting the process
described in this section. Specific corrective actions depend on program type and
the firm’s related objectives. Compared with Type I programs, Type II and III pro-
grams are more complex and so the range of corrective actions is much larger
for these latter two formats. In any case, corrective actions should always tar-
get improvements in firm-level KPIs by identifying areas of customer confusion
and frustration and by generating additional feedback through experimentation,
learning, and adapting.

Conclusion
Returns management is still in its infancy. The conditions giving rise to its
strategic role have existed for no more than about two decades, driven as they
were by the unprecedented growth of e-commerce. However, several concerns
bring into question the effectiveness of current returns management programs.
Having sought out the latest research findings and examples of excellence in
practice, in this article we summarized the potential benefits of effective returns
management programs and then distilled best practices into three strategic levers
that retailers can pull when developing their own programs. The common thread
throughout our approach was that returns management—when viewed from
the top as an integrated, end-to-end system that is constantly being developed
and validated—can have a hugely positive effect on business even when return
volumes and costs are high. Competitive breakthroughs are made by firms that
have elevated the mission of returns management above its traditional role as a
mere cost center. Returns management, done right, can make all the difference.
Retailers that wish to develop more effective returns management pro-
grams should let careful evaluation and validation guide that development. They
must first evaluate each type of returns management program for suitability and
then carefully plan, implement, and constantly revise their version of the chosen
format. In so doing, retailers should not forget that broad initiatives affect every
shopper; since not only bad, but also good customers may suffer adverse effects,
overall customer satisfaction may well decline. An effective returns management
program keeps track of the different reasons for returns and tackles each one with
Returning Customers: The Hidden Strategic Opportunity of Returns Management 201

a distinct and appropriate strategy that is fine-tuned via continuous experimenta-

tion and validated learning.

Author Biographies
Felix Johannes Röllecke is Cofounder and Chief Operating Officer at vetevo
GmbH, Berlin, Germany (email: [email protected]).
Arnd Huchzermeier is Chaired Professor of Production Management at the WHU–
Otto Beisheim School of Management, Vallendar, Germany (email: arnd.huchzer-
[email protected]).
David Schröder is Senior Vice President Convenience at Zalando SE, Berlin,
Germany (email: [email protected]).

Notes
  1. “Retailers and the Ghost Economy: US$1.75 Trillion Reasons to Be Afraid,” IHL, May 6, 2015,
http://engage.dynamicaction.com/WS-2015-05-IHL-Retailers-Ghost-Economy-AR_LP.html.
  2. “Versand- und Retourenmanagement im E-Commerce 2015,” EHI Retail Institute, November 25,
2015, https://www.ehi.org/de/studien/versand-und-retourenmanagement-im-e-commerce-
2015/.
 3. J. D. Abbey, M. G. Meloy, J. Blackburn, and V. D. R. Guide, Jr., “Consumer Markets for
Remanufactured and Refurbished Products,” California Management Review, 57/4 (Summer
2015): 26-42.
  4. “Versand- und Retourenmanagement im E-Commerce 2015,” op. cit.
 5. A. B. Bower and J. G. Maxham, “Return Shipping Policies of Online Retailers: Normative
Assumptions and the Long-Term Consequences of Fee and Free Returns,” Journal of
Marketing, 76/5 (September 2012): 110-124.
  6. “Bestellen im Internet,” Paketbutler, April 6, 2016, https://www.haendlerbund.de/de/news/
presse/2044-ueber-die-haelfte-der-online-kaeufer-aergert-sich-ueber-komplizierte-rueck-
sendungen.
 7. “Kleine Onlinehändler wenig kulant bei Retouren,” Absatzwirtschaft, November 6, 2014,
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 8. Ibid.
  9. “Returns & Refunds,” Apple, 2016, http://www.apple.com/sg/shop/help/returns_refund.
10. Bower and Maxham, op. cit.
11. “Return Shipping Costs,” Amazon, 2016, https://www.amazon.com/gp/help/customer/dis-
play.html/ref=hp_901926_costreturn?&nodeId=3484071.
12. M. Brignall, “Banned by Amazon for returning faulty goods,” The Guardian, March 18,
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13. Ibid.
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fabeau.de/wp-content/uploads/2016/03/zalando_cmd_2016_operations_1.pdf.
15. L. Chao, “More Retailers Offering Free Shipping on Returns,” The Wall Street Journal,
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online-orders-1444402553.
16. N. Janakiraman, H. A. Syrdal, and R. Freling, “The Effect of Return Policy Leniency on
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17. “Versand- und Retourenmanagement im E-Commerce 2015,” op. cit.
18. J. D. Shulman, M. C. Cunha, and J. K. Saint Clair, “Consumer Uncertainty and Purchase
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Online Customer Reviews on Product Returns,” Journal of Retailing, 92/3 (September 2016):
253-267.
202 CALIFORNIA MANAGEMENT REVIEW 60(2)

20. F. Röllecke and A. Huchzermeier, “Shopping Fast and Returning Plenty: How Returns
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22. Bower and Maxham, op. cit.
23. N. Halpin, “The Customer Service Report: Why Great Customer Service Matters Even More
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24. S. L. Wood, “Remote Purchase Environments: The Influence of Return Policy Leniency on
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25. “Kleine Onlinehändler wenig kulant bei Retouren,” op. cit.
26. “Consumer Returns in the Retail Industry,” The Retail Equation, 2015, p. 10, https://nrf.
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27. “UPS Pulse of the Online Shopper,” UPS, 2015, p. 33. https://pressroom.ups.com/assets/
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37. “Bestellen im Internet,” op. cit.
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Returning Customers: The Hidden Strategic Opportunity of Returns Management 203

49. D. Seeberger, A. Huchzermeier, and D. Schroeder, “Competitive Returns Management with

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size-to-help-reduce-returns/.
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66. Röllecke and Huchzermeier, “Returns 2020 Survey.”
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68. http://lifewithdogsandcats.com/good-to-know/zappos-delivers-box-of-sunshine/#sthash.
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