Solving the Returns Crisis: Strategies for Retailers to Minimize Margin Erosion

Returns have become a trillion-dollar challenge for retailers, especially as e-commerce volumes surge and consumer expectations for seamless, no-hassle returns remain high. For many, the cost of returns is not just a logistical headache—it’s a direct threat to profitability. As the retail landscape evolves, minimizing both the frequency and cost of returns is now a strategic imperative for executives seeking to protect margins and drive operational efficiency.

The True Cost of Returns

Returns are more than a line item on the balance sheet. For some categories, such as apparel, return rates can reach 40-50% of orders. The costs are multifaceted: shipping, reverse logistics, restocking, potential markdowns, and the risk that returned goods may never be resold. Add to this the expectation for free or easy returns, and the margin impact is clear. In a climate where e-commerce profitability is already under pressure from rising shipping and fulfillment costs, unchecked returns can erode margins at an alarming rate.

Two Sides of the Returns Equation

Retailers must address returns on two fronts:

Minimizing the frequency of returns—ensuring customers get what they want the first time.
Minimizing the cost and impact of returns—making the process as efficient and cost-effective as possible when returns do occur.

1. Reducing the Frequency of Returns

The best return is the one that never happens. Retailers can leverage data and technology to help customers make better purchase decisions upfront:

Enhanced Product Information: Rich, accurate product data—including high-definition images, videos, and detailed descriptions—reduces surprises and mismatches. For apparel, showing model dimensions and fit notes helps set expectations.
AI-Powered Fit and Sizing Tools: By analyzing past purchase and return data, AI can recommend the best size or style for each customer, reducing the common practice of ordering multiple sizes with the intent to return most.
Personalized Recommendations: Using customer data to suggest products that are more likely to meet individual needs can lower the likelihood of returns.
Leveraging Reviews and Social Proof: Third-party reviews and user-generated content build confidence and help shoppers make informed choices.
Identifying Serial Returners: Data can flag customers with high return rates, enabling retailers to test targeted interventions—such as charging for returns or encouraging in-store try-ons—while balancing customer experience and brand perception.

2. Minimizing the Cost and Impact of Returns

Even with the best digital experience, some returns are inevitable. The focus then shifts to optimizing the reverse logistics process and making smart decisions about how returns are handled:

Dynamic Return Routing: Use data to direct returns to the most cost-effective location—whether that’s a warehouse, a store in need of inventory, or even directly to another customer. Dynamic labels can automate this process, reducing unnecessary shipping legs.
Incentivizing Low-Cost Return Channels: Encourage customers to return items in-store or at designated drop-off points, which can be less expensive than mail-in returns. Incentives, such as discounts on future purchases, can nudge behavior.
Smart Return Policies: Consider dynamic or tiered return policies based on customer value or return history. For example, offer free returns to high-value, low-return customers, while charging fees to serial returners.
Keep-It Policies: For low-value or hard-to-resell items, it may be more cost-effective to let customers keep the product rather than pay for return shipping and processing. This approach is already used by some budget retailers and can be expanded with the right data triggers.
Sustainability Messaging: As consumers become more eco-conscious, retailers can use messaging about the carbon impact of returns to encourage more responsible shopping and return behaviors.

The Role of Data and Analytics

Data is the backbone of any effective returns strategy. Retailers must break down silos and integrate data across channels—e-commerce, stores, supply chain, and customer service—to gain a holistic view of returns drivers and costs. Advanced analytics can:

Identify patterns in returns by product, customer segment, or channel
Inform inventory and assortment decisions
Optimize return routing and restocking
Support dynamic policy management

Operational Excellence and Organizational Alignment

While most retail leaders know what needs to be done to improve profitability, execution often lags due to organizational silos, legacy systems, and data complexity. Addressing the returns crisis requires cross-functional collaboration—merchandising, supply chain, technology, and customer service must work together to design and implement solutions.

Case in Point: Leading Retailers

Retailers that have invested in digital capabilities and data-driven operations are already seeing results. For example, leading big-box retailers have implemented micro-fulfillment centers and advanced analytics to optimize both outbound and reverse logistics. Others have experimented with AI-powered fit tools and dynamic return policies, reducing return rates and improving customer satisfaction.

The Path Forward

Returns are not going away, but their impact on margins can be managed—and even turned into a competitive advantage. Retailers that:

Invest in data and analytics
Leverage AI for personalization and fit
Optimize reverse logistics
Experiment with dynamic, customer-centric return policies

will be best positioned to protect profitability and deliver a superior customer experience.

The returns crisis is a complex, multi-dimensional challenge, but with the right strategies and organizational focus, retailers can minimize margin erosion and build a more resilient, customer-centric business for the future.

Ready to transform your returns strategy? Publicis Sapient partners with leading retailers to design and implement data-driven solutions that protect margins and delight customers. Contact us to learn more about how we can help you solve the returns crisis.