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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.
Discussion Questions
What do you think the best approach to fighting promotion and return fraud is for retailers? How can retailers thwart professional fraudsters and discourage friendly fraud without coming across as draconian to their loyal customers?
Poll
Loading …BrainTrust
Jasmine Glasheen
Content Marketing Manager, Surefront
Janet Dorenkott
President, Jadeco
It’s a delicate and complicated balance. Retailers must be mindful about the loopholes they create in their promotional programs and returns policies and do a better job of enforcing their own policies. Fraudsters who are stealing from retailers should be blacklisted and pursued, however, more discretion is required for legitimate customers who are simply taking advantage of loose rules on promotions or returns. Ultimately, it’s the retailers responsibility to protect themselves and they can decide to sell or not sell to a customer at their discretion.
Completely agree, Mark. This is undoubtedly a complex challenge. While retailers should indeed protect themselves, they also have a unique opportunity to turn “friendly” returns into future loyal customers by providing exceptional service and products. It’s about finding that sweet spot where fairness and business protection coexist.
This is, in many ways, a problem of the retail industry’s own making. Offering free shipping to promote online channels, promoting products through social media influencers and not making brick and mortar the default shopping channel has set the stage for rampant returns fraud as well as reduced profit margins. It’s hard to walk back shopper behavior that has become accepted as a norm, so it will take a concerted effort by retailers to convince consumers to make returns at the store to defray shipping costs and make it harder for professional fraud abusers to avoid discovery. But this will be a necessary change if retailers hope to survive in the longer term.
Hoisted by their own petard.
Balancing customer engagment and strategies to win market share with managing fraud and limiting returns is a difficult proposition. The approach I’ve always liked is to limit generous return policies to the best, most loyal customers (see CRM), and use promotions that are meaningful to build market share, and find more “best” customers.
Friendly fraud is still fraud, just like friendly fire doesn’t end well for the “friend.” Fraud by any other name is just theft. Retailers have every right to stop doing business with thieves, or at least call them out without fearing that they’ll lose a “good” customer.
I believe technology is part of that answer to these problems. By leveraging RFID’s serialized inventory capabilities you can at the very least insure that the item being returned is one you sold. You can also introduce a drop-and-go returns capability to reduce the cost of processing. Advanced barcodes on promotions are also an option, as is customer education. Maybe we need to be more up front with the consumer in our battle to thwart theft and keep prices low, possibly even communicate this in ads. I do believe this could eventually discourage friendly fraud.Â
We need to look at returns, coupon mania, reverse logistics, and lifetime value of customers as part of the same story. As a retailer, how do you gain and retain loyal customers without obsessively throwing coupons at them? (see also Bed Bath & Beyond) And when some customers insist on going to the dark side when trying to steal a discount, can’t we think of more clever ways to keep them as customers without enabling their coupon crimes?
There are ways (sophisticated ways) to reduce, yet not eliminate, any type of return fraud but the systems need to be enhanced in order to succeed. As in many other situations, rightfully, retailers should clamp down fraud and tighten the rules of return while trying to not upset their franchise. It is not a win/win situation.
Returns are a trillion-dollar problem for retail. It is essential that retailers find out the root causes of returns — defective merchandise, inaccurate product descriptions, fraud — and then address those issues. Simply managing returns isn’t enough.
Good return policies really are necessary to keep consumers around, so this is a struggle of a topic, and same goes for discounts. I do think discounts could be less severe to retain customers, which would help retailers in the long-run, but return policies simply must be flexible these days. Retailers will have to leverage technology to decrease return rates overall, versus making the policies more restrictive.
The only way for retailers to limit returns without damaging loyalty is to flag and limit serial returners. Most customers aren’t binge returning or trying their hand at fraud, and they’ll resent being penalized. Most returns, on the other hand, are coming from the same people.
Why impose restrictions upon loyal customers who have done nothing wrong (and risk losing them)? With modern inventory management tools, it’s just as easy to flag serial returners and put restrictions on their purchasing activity.
Marketing with coupons is a lazy way to gain customers. It is rampant. Employees know them on the salesfloor and encourage people to use them. We call it a race to the bottom see JCP and BBB
Start with ‘fair’ and escalate to ‘draconian’ when it’s called for. Nominal fees for returns are completely fair and reasonable. The customer is paying for the convenience and not being penalized in any way. Serial returners are easily identified and can be invited to shop elsewhere.
Free shipping and returns became table stakes for a while until everybody realized how unbelievably expensive that was. It’s not just the cost of the return itself, it’s the processing for resale that becomes the killer. Acquire new customers by offering 3 free returns. In apparel it’s about fit and feel and quality. Once a customer embraces fit and quality, they ought to be able to shop with a minimum of returns.
Amazon created this entitled mindset, but even they are now imposing modest fees. Everybody loves ecommerce, but at some point it has to be profitable to be sustainable.
A fine line exists between providing an outstanding customer experience with aggressive promotions and liberal return policies. Customers expect these goodwill gestures as they go a long way to ensure lifetime relationships and loyalty. However, both aggressive promotions and liberal free return policies come at a significant operating expense and have a direct impact on the ROI and EBITDA.
Adding to these challenges and complexity is that, unfortunately, fraudsters will find ways to take advantage of these promotional codes. It’s very concerning to see that a prominent merchant identified 137,000 fake accounts created by 4,000 abusive customers who took advantage of a 35% “first-time customer” promotion.
Retailers and brands must take the necessary steps to protect their bottom line. It will be next to impossible to prevent fraud in the digital age. However, some guardrails and protections could be implemented to avoid fraud by blocking these individuals or requiring more advanced sign-in procedures.
This is a question that gets asked year after year (it seems). Unfortunately, fraud happens. Understanding the data helps price merchandise accordingly. The retail price of the item has to cover the cost of the item and the cost to operate the business, which includes the cost of fraud and returns. While nobody likes to be taken advantage of – or a victim of a crime – it’s part of the cost of doing business. Either find ways to prevent or bake it into the price.
“Friendly fraud” is no more friendly than outright shoplifting. It is plain and simple theft.
I am actually surprised by this data-driven category that the thieves can’t be identified. (BTW, I use the word “thieves” for the smallest infraction.) The online retailers seem to know everything about me. Surely, they can tell if I am ripping them off. That is, if they look.
The answer is not stopping free returns. Free returns communicate that I, the retailer, beleive in my products and want my customers to be totally satisfied. Charging for return says, “Customer, it is your fault.”
It’s a shame that online fraud and identity theft are just considered part of the norm. Retailers have a right to protect themselves. A database that keeps track of IP addresses would be a good start. This would help identify people who are just trying to leverage loopholes to get the best deal as well as thieves who are using the system to make money. Technology is expensive, but so is loosing money on marketing programs.
No loyalty plan/return plan/first time savings plan is foolproof. The “uncleansed, unscrupulous” amongst us will find ways through, period, which is sad but true.
Assuming that you are never going to completely outthink fraudulent returns, etc., I believe the pragmatic way forward is to build that assumed cost into the promotion. If your model states the promotion (or the return policy, etc.) is still a net positive then run it. If not, then you need to figure out another way to promote loyalty.
Also-I think it would not hurt for retailers to promote these loses as a way to educate “the public”….I just read that Target is closing nine stores in NYC, SF, Portland and (I think) Chicago…because of organized retail crime. Good–people should know why this is happening, and perhaps that will lead to better outcomes. Do not make it easy for someone on the fence to rationalize their bad behavior-“Starbucks is huge and they will not feel the loss of the almonds I just walked out with, etc.”
Invest in technology & systems to minimize the “fraudster” impact. Use AI & other technology to better address the shopping needs of your “loyal” customers.
Sorry: If you’re utilizing a loophole – “taking advantage” if you will – then it’s not fraud; it’s a poorly designed promotion. This may seem like (just) a matter of semantics, and in cases where people do something bizarre it probably is, but I think it’s also a cover for the fact that there is often a poor understanding of consumer behavior; the idea that tolerating bad behavior “encourages loyalty” strikes me as particularly naive (perhaps, but I see it encouraging (even) more of the same). Btu with decades of (IMHO adolescent) thinking that revenue is all important, and costs are a mere detail, I guess this is where we end up.
100%. Poorly designed promotions, without considering next steps and toward an end goal (a customer relationship) will yield just what they put into it. Can’t fault the customer if it isn’t thought out.
A different take on the term “friendly fraud”, as a misnomer:
Sometimes a one-time discount isn’t enough to change shopping habits, create customer momentum or even loyalty. If retailers are spending resources red flagging people who create another email account to get a second introductory discount, its possible potential customers don’t see enough value in the product and services offered. And the retailer could be lazily on a one-off proposition. Is this the customers fault?
Retailers and marketers must own this as a customer journey, a relationship. Invest in testing, make promises, see what steps and actions they need to try in order to bring customers along, and make them primary shoppers.
Real fraud is another matter, whether money exchanging hands by deception and losses, or theft.