How To Not Lose It All In An Online-First World

High angle view of a young Asian woman shopping online on laptop, making payment with credit card. … [+]

Recently I wrote about how retail is neck-deep in an “online-first” world. With online sales of U.S. merchants up 44 percent last year, and e-commerce penetration hitting 21.3 percent in 2020, up from 15.8 percent in 2019 and 14.3 percent in 2018, it begs the question: if online-first is so great, why isn’t everybody doing it?

Simple. Online retail does not make money. Even the vast majority of established, successful, digitally native and direct-to-consumer brands have yet to reach profitability. And it’s largely because of — yep — returns. Here’s why.

Consumers return significantly more when shopping online (as much as 5 times more than in-store purchases). That is 5X the return rate. An astronomically high number considering shipping costs.

Estimates for returns of online purchases during the last holiday season ranged from 15 to over 30 percent as consumers stayed away from stores during the pandemic, with apparel at the high end of that range. This compares with return rate estimates ranging from three to 10 percent for in-store purchases during that same period. Shopify predicted in 2020 that an e-commerce return rate of 30% would cost online retailers a collective $550 billion in 2020.

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For retailers, this compares to holding a product in-store and then marking it down – which has traditionally been less expensive than managing returns because of shipping costs. According to a 2019 study by Coresight Research, by comparison, retailers in 2018 lost $300 billion in revenue, or 12 percent of total retail sales, due to markdowns.

However, with consumers increasingly more comfortable shopping online and returning items through the mail, the cost of selling online is going to get exponentially higher…because of “bracketing.”

Bracketing is the New Dressing Room.

When you buy something online, you can’t try it on first. So many consumers are buying multiple sizes and styles of a similar garment — known as bracketing — which costs them nothing since shipping is often free and offers an experience more akin to shopping in-store. The consumer keeps what they want, and then returns the rest (on the retailer’s dime).

According to Narvar, 62% of consumers reported bracketing last year — representing a 50% increase in just three years.

Retailers paid an average of $10 per return even before the pandemic. As bracketing becomes more commonplace, the cost of returns will only grow. And unfortunately, there’s no going back, as consumers now expect free shipping as part of the online shopping experience. According to Digital Commerce 360 research, most consumers check return policies while shopping and 87% of consumers specifically rank free returns shipping as a top priority.

And return policies and experiences have a significant impact on customer loyalty and positive shopping experience. In a survey of consumers conducted by Doddle, 84% said a positive returns experience encourages them to shop with a retailer again. Conversely, 73 percent of consumers responding to a survey by Returnly said they would not shop with a brand again after a poor returns experience.

So what is a Retailer or Brand to do? There are a couple options.

1. Reallocate Funds Toward Consumer Experiences. Listening to the Voice of Consumers to create products, brands, customer and employee engagement experiences that match with consumer expectations can also deliver growth to both top and bottom lines.

So some think you should bite the bullet and pull back on free returns in exchange for building consumer loyalty in other ways. Michael Felice, a principal in the consumer practice of Kearney, said retailers could pull back on free shipping and suggests retailers “… reinvest 10 percent to 20 percent into consumer experience and building the brand, which will also build that repeatability of the purchase and the overall customer loyalty.”

Another option?

2. Prevent returns from ever happening. This may feel like a hard nut to crack. But it’s actually not, particularly as we have seen a surge in augmented reality virtual fitting room technology companies gaining momentum thanks to the pandemic. The virtual fitting room market size is predicted to reach USD 9.99 billion by 2027, according to Fortune Business Insights.

Amazon AMZN +0.8% had already started investing in virtual fitting technology with a string of purchases of startups dating back years. Amazon purchased Shoefitr in 2015, a startup based in my hometown of Pittsburgh, that had developed 3D technology to help match online shoppers with shoes that will fit them better.

Data-capturing startup Body Labs, purchased by Amazon in 2017, enabled Amazon to announce a virtual fit tech platform last year called “Made for You” to personalize the fit of t-shirt. Made for You asks shoppers to snap two photos through its mobile app and submit height, weight and body style to build their avatar and model different t-shirt styles. According to Sourcing Journal, Instagram icon Blake Scott touts his “Made for You” t-shirt as “my new favorite” while “plus-size” style-setter Caralyn Mirand says her “tee is like magic.”

3. Make it Personal. Changing the Model from (Design – Make – Sell) to (Design – Sell – Make).

Again, Retailers here tapping Voice of Consumer data and fitting technology can ensure that retailers and brands are gathering insights into items to meet the expectations of items on style and pricing before they are manufactured.

But it can also turn the design process on its head through personalization, and virtually eliminate the costs to design products, and the need to return items at all. Rather than designing large batches of products, consider how new technologies enable a consumer to purchase what they like and ensure perfect fit before a product is even made. Manufacturers can design the product bespoke unique to the shopper, from design to size and fit. However, in terms of tapping the right consumer data, Voice of Consumer and “fit tech” go well beyond to a person’s design preference and body shape….to also “fit” their lifestyle, persona.

A recent report by BCG noted that adoption of advanced analytics will be among the fashion industry’s most significant changes in the coming decade.

“Data will become an even more important competitive advantage: the brands with the most usable data will win. The biggest winners will be the brands that can codify data from all sales channels and consolidate it onto a single analytics platform to improve decision making on such core processes as planning, buying, promotions, markdowns, and in-season inventory management. Creating a market-leading e-commerce platform is another part of building out a more robust tech backbone.”

In an online-first world, it is critical that retailers find ways to embrace e-commerce while also minimizing extraneous costs, whether that be shipping/returns, manufacturing or markdowns.

New technologies focused on gathering consumer insight should sit at the center of every decision to ensure that investments are being made in the right tools and processes to maximize every dollar being spent, giving consumers confidence to make purchases and minimizing bracketing and the number of items coming back.

Alternatively, I guess you could just “wing it”.

Early on, Greg Petro realized there was a better way for companies to make decisions with high degrees of variability or uncertainty. He devoted himself to

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