Are Generous Coupon and Return Policies Hurting the Bottom Line?

The cost of returns is weighing on retailers’ bottom lines, to the point where 67% said they generally make back less than half the value of returned items in a survey by Riskified, which polled over 300 global firms with revenues exceeding $500 million. However, it’s not simply a matter of tightening up policies to discourage returns — 93% of retailers said that “generous refund and return policies” were important to engaging and retaining customers.

A major challenge that comes with generous return policies is fraud, both malicious and “friendly.” Nine out of 10 retailers say they’ve incurred “significant” costs due to fraud and abuse of their policies, and 70% see more abuse during the summer shopping season, while 67% experience an increase in the post-holiday season. Busy periods bring challenges as well as opportunities.

When otherwise loyal customers take unethical actions, such as creating temporary emails to access one-time-only promotions more than once, Riskified calls this friendly fraud. The cost incurred by these friendly fraudsters can be considered as part of doing business because letting them take advantage of the occasional loophole means they (and other regular customers) benefit from generous, loyalty-driving policies.

In contrast, “serial fraudsters” are legitimate bad actors who either pay others to abuse policies or take part in organized fraud. Riskified believes that professional fraudsters can generate $50,000 in weekly revenue with a $30,000 investment, largely at the cost of the retailers whose policies are being abused. Examples of fraudulent activities include returning empty packages for refunds or using multiple bots to purchase and resell limited-edition items at a premium, as seen with certain sneaker releases and Taylor Swift’s Eras Tour tickets.

While only one kind of fraud is malicious, both types take their toll. Riskified’s survey found that 86% of retailers experience somewhat or very significant costs from promo code or loyalty program abuse, while 87% see somewhat or very significant costs from abuse by unauthorized resellers. Altogether, these policy abuses cost the retail industry more than $100 billion annually.

Instances of fraud can take many forms. One common issue is item not received (INR) abuse, where a person claims they never received a product after purchasing it when they did. The individual then asks for a refund for the purchase. A majority (57%) of retailers saw the costs incurred by INR rise between 2021 and 2022, while 38% noted that it stayed the same.

The prevalence of promo code and loyalty program abuse was the same in 2022 as in 2021 for most retailers, at 55%. However, 38% saw the losses associated with promotion abuse rise during that period. In one example analyzed by Riskified, a large merchant identified 137,000 fake accounts that were created by 4,000 abusive customers who were taking advantage of a deep 35% “first-time customer” promotion. The result? It was estimated to cost the marketing department more than $14 million annually.

Returns in general remain an expensive proposition as well. One respondent told Riskified, “We would have been better off financially if the customer had broken into our warehouse and stolen the item versus the expense of returning it.”

Retailers aiming to curtail these growing problems will need to look for ways to prevent fraud and abuse without hurting innocent customers. Some retailers are already pulling back on their return policies to combat rising costs in general, but this can have a negative impact on brand loyalty. Companies will need to find ways to balance the demands of their shoppers with the needs of the bottom line to combat fraud.