Returns are not a game of risk management and insurance

Most ecommerce brands are afraid of return fraud, but should they be? Even though this is a largely unfounded fear, it’s one that leads to businesses prioritizing risk management over the customer experience. 

In response, many return apps have tried to build features that mitigate your risk as a brand while also serving your customers. But the truth is that most solutions that help you “insure” the risk, are the ones creating it for you.

Allowing customers to exchange for a new product quickly or instantly is a great customer experience, but not one that you need to pay an insurance premium on.

Why you don't need insurance

Before we get any further, let's establish an important truth: only 5% of returns are fraudulent. That's why we emphasize the importance of building an awesome customer experience for the 95% rather than the minority. 

However, this statistic still doesn’t stop brands from worrying about receiving a box of rocks during the exchange process. In response, some return-focused apps have introduced a feature called “instant credit,” which allows customers to receive their new product before shipping back the old product.

This, of course, presents the risk that the customer sends back a damaged product or, worse, nothing at all. To protect brands from these scenarios, some return platforms offer “insurance” to take on the risk. On the surface, this sounds great. But the truth? You end up paying more than you protect. 

Let’s take a closer look to understand why. These return tools typically charge brands a premium of 10% to 15% of the returns value. We’ll assume the premium is 10% per return processed and that your brand sees 1,000 returns per month with an average return item value of $20. At a 5% fraud rate, 50 of them will be fraudulent.

If we do the math below, you’ll see that the cost of “insuring” your returns is double the amount of not doing anything.

Cost of return fraud

1,000 returns x 5% = 50 fraudulent returns

50 returns x $20 = $1,000 lost to fraud

Cost of “insuring” returns

1,000 returns at $20 = $20,000 in return value

$20,000 x 10% = $2,000 to protect against fraud

Bottom line: these return apps create more risk and get merchants to give up a significant portion of their retained revenue for "insurance" they don't need.

Keep the experience, ditch the risk

Seeing that this old way of approaching returns wasn’t working, we wanted to find a way for brands to reap all the rewards of having a customer-centric approach to returns - without all the additional risk.

That’s why Loop is thrilled to launch Instant Exchanges. This feature lets customers have their exchange sent to them before they send their old items back. But the main difference is that we’re allowing customers to choose whether or not they want to opt into Instant Exchanges.

If the customer does choose the Instant Exchange option, all they have to do is input their credit card information for pre-authorization. It's the same process that you go through at a hotel. A merchant places a temporary hold on a customer's credit card to ensure funds are available to cover the cost of the item if it's not returned. As soon as the old item is in the mail, Loop releases the hold on the funds and the customer doesn’t get charged.

Here’s the reasoning behind our thinking: At Loop, we believe the customer has a responsibility to return products on time and in good condition. And the customer shouldn't receive a better experience by creating risk for the brand. They should receive a better experience by accepting responsibility. Your good customers will opt-in and benefit from our feature. Your bad customers will simply avoid it - with no additional risk to you.

There are tons of other benefits to Instant Exchanges as well. Specifically, this approach:

• Creates a better customer experience by shipping exchange items faster and ensuring the products the shopper wants don’t go out of stock. 

• Makes it more likely that the customer will purchase again, tell a friend, and leave a review.

• Drives more exchanges and retained revenue because of the added incentive of receiving items sooner.

We totally get it. You want to protect your business from bad actors and not experience sunk costs on returns. But there’s a wrong and right way to mitigate your risk. Going to the extreme on risk management hurts your customer experience, and choosing the insurance route hurts your business. Use Loop’s Instant Exchange feature to reap all the rewards, with no risk. Learn more here.