1. Module 6 Video 4 Fulfilling omni-channel demand
Handling product returns and importance of information

2. Intro
The share of orders that are placed online has been increasing during the last years. Customers placing online orders face more uncertainty than customers buying at brick and mortar stores. As a consequence of this, product returns have been increasing
We present the problem of product uncertainty when buying online, and how that uncertainty affects returns.
We discuss the costs and challenges associated with handling returns.
Finally, we talk about the importance of providing customers with rich information about the products they are considering, and discuss several initiatives retailers are taking in this space.

3. Buying a suit (example)
Let’s start with an example. Consider the problem of Michael, a college student that wants to buy a suit for his first job interview. Michael could go to a brick and mortar store and try several suits in the store’s fitting room and choose to buy the one that fits better. If Michael prefers to buy online, or if the retailer he wants to buy from does not have physical presence in Michael’s area, he could go online and browse through their suit offering. He would be able to access a wealth of information about the suit, the materials, previous reviews, and so on. However, it would be hard for Michael to visualize how the product will fit because Michael cannot try on the product. A suit is an example of a product with what we call “nondigital attributes”.
Digital attributes are those that can be represented online with no information loss.
For example, the number of pages of a book can be represented online with no information loss. In contrast, non digital attributes cannot be accurately communicated online. For example, think about texture, fit, feel. So Michael will face what we call product fit uncertainty.
In this situation, Michael may desist and choose to buy the suit from a brick and mortar store of a competitor, where he can try the product.
This would be bad for the online retailer as they would lose a sale.
Alternatively, he may choose to place the order online anyway and hope it will fit well. This would not be bad for Michael or for the online retailer if it ends up fitting well, but if it doesn’t, and Michael decides to return the product, the retailer will lose the sale and will incur additional costs.

4. Free returns
Because retailers recognize that product fit uncertainty may prevent some customers from placing orders, there has been a trend towards offering free returns
Some customers abuse this policy.
There have been reports about customers ordering products in multiple sizes and colors to try them at home, only to return most of them
About one fourth of the products bought online end up being returned. In some categories and countries, this may be even close to one third.

5. Free for who? The costs of returns
Of course, free returns are only free for customers. For retailers, returned orders can be very expensive
First, the retailer shipped that order to the customer. If the retailer offers free shipping, that cost was subsidized by the retailer without deriving any benefit.
Then there is also an inventory cost. While the product was with the customer, that product could not be sold. It may take weeks for that product to be sellable again.
If the retailer is offering free returns, they have to pay the inbound shipping costs too.
Then they have additional handling and restocking costs, and in some cases the product may have been damaged and it is not possible to sell it, or the product has to be discounted because the package is not in the original condition.
There are substantial challenges associated with processing returns.
The distribution network of retailers is optimized to take products to customers, not to receive products from them.
Reverse logistics can be complicated.
For example, for a retailer using a dropshipping model, it may be hard to return the product to the manufacturer, and they may be stuck with a unit of a product they do not actually carry.
Actually, many retailers are not equipped to handle returns. Instead, the returned goods are collected and sorted by logistics companies and then resold to liquidators at a deep discount.

6. Designing a return policy
Designing an adequate return policy can be difficult. On one end, customers value the option of being able to return. On the other hand, it is very costly for retailers.
If the retailer has a brick and mortar presence, it is usually a good idea to encourage returns at the store. This results in less transportation costs for the retailer. Furthermore, the product may be available for resale sooner, and the customer may end up buying another product in their visit to the store.
We have created a tool that you can use to explore how different return policies can affect the retailer profitability.

7. Information to customers
A way in which retailers can reduce their return rates and, consequently, their fulfillment costs, is by providing their customers with better information.
If customers had perfect information before placing an order, they would buy products they are more likely to keep.
Online retailers offer a wealth of information in the form of product characteristics, reviews, recommendations, and so on that help customers make the right choice. However, in categories where nondigital attributes are important, such as apparel, this is harder to do.
There have been recent initiatives that help in this dimension.
For example, eyewear retailer Warby Parker offers the possibility of doing a Home Try On.
If you are interested in buying a pair of glasses but you are unsure about how they fit, you can place an order for a Home Try On box. You can choose five frames and they will ship them to you with a blank prescription. You can try them for five days and after that you can decide whether you want to place an order or not. This reduces the product fit uncertainty. However, it is still an expensive way, because we still have to ship products back and forth.
Another thing they did was what they call “The Class Trip” bus, a school bus they repurposed as a moving showroom that was touring different cities in the US. They would announce the stops of the bus and let potential customers know they could try their glasses there. This is an example of an original strategy that reduces product fit uncertainty, and increases brand awareness.

8. Information to customers
Another innovation in this space that helps overcome the information gap that customers have when buying online are virtual fitting tools These are tools that provide a virtual fitting room experience.
For example, one such tool is offered with Metail, a UK-based firm that has created a tool by which women can provide some key measurements to create a 3D representation of themselves on which they can virtually try clothes on.
Based on the measurements, they also provide size recommendation. We partnered with Metail to assess whether the tool had any effects in reducing returns. We run a series of randomized experiments where some customers had access to the tool and some customers didn’t and we found that those customers with access to the tool where more likely to buy and less likely to return products.
This example confirms that it is possible to reduce fulfillment costs by providing richer information to our customers. The better the information our customers have when placing orders, the lower the fulfillment costs we will incur