Returns Management in the Digital Era: Profitability, Technology, and Customer Experience

The explosive growth of e-commerce has unlocked new opportunities for retailers, but it has also brought a persistent and costly challenge to the forefront: returns management. For non-grocery retailers, return rates can reach as high as 30% to 50% in categories like apparel—far outpacing the single-digit rates seen in traditional stores. This surge in returns is driven by factors such as the inability to try before buying, inconsistent sizing, and evolving consumer behaviors like bracketing (ordering multiple sizes or colors with the intent to return most of them). The result? A significant drain on margins, operational complexity, and a new set of customer expectations that demand both convenience and transparency.

The True Cost of Returns in E-Commerce

Returns are no longer a back-office issue—they are a boardroom priority. Each return incurs costs for shipping, processing, restocking, and, in some cases, markdowns or liquidation. The expectation of free and frictionless returns, popularized by digital-native brands and marketplaces, has become table stakes for customer loyalty but is a major contributor to margin erosion. Compounding the challenge are new health and safety regulations, which may require returned items to be sanitized and quarantined before resale, further slowing inventory turnover and increasing costs.

Operational and Technological Innovations in Returns Management

To address these challenges, leading retailers are reimagining their reverse logistics operations with a focus on efficiency, agility, and customer experience. Key innovations include:

Centralized Returns Processing: By investing in dedicated facilities or processes for returns, retailers can reduce the burden on individual stores, speed up restocking, and optimize the flow of goods into secondary channels such as resale or donation.
Dark Stores and Hybrid Fulfillment Models: The rise of dark stores—locations closed to the public and used exclusively for fulfillment—enables more efficient handling of both outbound and inbound logistics. Hybrid models, where stores serve as both customer-facing locations and mini-fulfillment centers, offer flexibility in managing returns and inventory.
Contactless and Automated Returns: Self-service kiosks, mobile app-based returns, and automated lockers streamline the process for customers, reduce labor costs, and minimize in-person contact.
AI and Data-Driven Optimization: Artificial intelligence and machine learning are being deployed to analyze returns data, identify patterns, and optimize processes. AI can predict which products are most likely to be returned, enabling better demand planning, inventory allocation, and even dynamic pricing or promotions to move at-risk inventory more efficiently.

Reducing Return Rates Through Digital Experience and Personalization

While operational efficiency is critical, the most sustainable way to improve profitability is to reduce the volume of returns in the first place. Digital tools and data-driven strategies are at the forefront of this effort:

AI-Powered Sizing and Recommendations: Retailers are leveraging customer data and AI to provide more accurate sizing guidance and personalized product recommendations. By analyzing past purchases, returns, and browsing behavior, these systems can suggest the right size or style, reducing the likelihood of a mismatch.
Augmented Reality and Virtual Try-On: Especially in apparel and accessories, AR tools allow customers to visualize products on themselves before purchasing, increasing confidence and reducing the need for bracketing.
Enhanced Product Content: High-quality images, videos, and detailed product descriptions help set accurate expectations, minimizing surprises that lead to returns.
Customer Segmentation and Return Policies: Some retailers are using data to identify serial returners and adjust policies accordingly, such as offering incentives for in-store returns (which are less costly) or flagging accounts with excessive return rates for review.

Navigating Regulatory and Sustainability Considerations

The pandemic and growing environmental awareness have introduced new complexities to returns management. Health and safety regulations may require additional steps, such as sanitizing returned items and holding them before restocking. Retailers are exploring technologies like ultraviolet light sanitation and improved tracking systems to comply efficiently. Sustainability is also a growing concern: returns contribute to increased transportation emissions and product waste. Retailers are increasingly adopting circular economy models—such as resale, rental, and refurbishment—to extend product life cycles and reduce environmental impact. Optimizing the path to resale can also result in significant transportation cost reductions.

Actionable Strategies for Profitability and Customer Experience

To turn returns management from a cost center into a source of competitive advantage, retailers should:

Invest in End-to-End Returns Analytics: Understand the true cost of returns, including the impact on margin after multiple cycles of return and resale. Use these insights to inform product design, merchandising, and pricing strategies.
Optimize Reverse Logistics: Centralize and automate returns processing where possible, and leverage technology to route returns to the most profitable channel—whether that’s restocking, resale, or donation.
Enhance the Digital Experience: Use AI, AR, and data-driven personalization to help customers make better choices up front, reducing the likelihood of returns.
Align Return Policies with Business Goals: Consider tiered return policies that reward loyal, profitable customers while discouraging excessive or unprofitable returns. Encourage in-store returns to reduce shipping costs and drive additional sales.
Collaborate Across the Value Chain: Break down silos between merchandising, supply chain, and customer experience teams to create a holistic approach to returns management.

The Publicis Sapient Approach

At Publicis Sapient, we help retailers tackle the returns challenge through a combination of digital optimization, supply chain modernization, and customer experience innovation. Our expertise spans the design and implementation of AI-powered recommendation engines, omnichannel fulfillment strategies, and data-driven returns analytics. We work with clients to build resilient, agile operations that not only reduce the cost of returns but also turn them into an opportunity to deepen customer relationships and drive long-term profitability.

In the digital era, returns management is a defining challenge for retailers. Those who invest in the right technology, processes, and customer experience will not only protect their margins but also build the trust and loyalty that underpin sustainable growth.