Navigating the Returns Challenge: Technology and Strategies to Protect Your Ecommerce Margins

Key Takeaways for Ecommerce Brands:

1. The returns challenge is growing significantly, with retailers expecting a 17% higher return rate following the 2024 holiday season and returns projected to reach $890 billion.
2. Technology is emerging as a central solution to the returns problem, with retailers leveraging generative AI, AR/VR experiences, and AI-driven product categorization to improve pre-purchase experiences.
3. Return rate is a critical inventory management KPI that directly impacts DTC brands' financial health. Beyond processing costs (20-39% of an item's original price), returns affect inventory turnover, carrying costs, and overall operational efficiency. 

To start off 2025, resale marketplace Poshmark and Loop, an ecommerce operations platform, announced a new partnership. The partnership allows consumers to resell non-returnable items on Poshmark. It benefits all the parties involved: shoppers recoup their expenses, Poshmark adds inventory to its site, Loop's merchants cut return handling costs, and the program reduces waste and promotes sustainability.

The announcement's timing was not a coincidence. Dubbed “Returnuary," January is traditionally the month that sees the most returns. A study conducted by the National Retail Federation (NRF) found that for the 2024 holiday season, retailers expected their return rate to be 17% higher, on average, than their annual return rate. 

Of course, returns are a major theme in the ecommerce space all year round. Another NRF report – in collaboration with reverse logistics company Happy Returns – revealed that returns were expected to amount to 17% of all retail sales, equating to $890 billion. Additional findings include:

• 76% of consumers consider free returns a key factor in deciding where to shop, and 67% say a negative return experience would discourage them from shopping with a retailer again. 

• 68% of retailers say they are prioritizing upgrading their returns capabilities within the next six months. 

• Improving the returns experience and reducing the return rate are two of the most important elements for businesses in 2025.

Technology's Role in Taming the Returns Beast

It's clear why brands are eager to reduce their return rate; Per returns solution company Optoro, processing a return costs retailers between 20%-39% of an item’s original price. And that's without mentioning fraud or policy abuse. A survey by Loop found that 99% of retailers in the U.S., U.K., and Australia have experienced some type of returns fraud or policy abuse in 2024. 

Industry experts are counting on technology to save the day. “Retailers need to continue to focus on enhancing the digital product discovery experience,” said Al Williams, General Manager of B2C at BigCommerce. “By leveraging emerging technologies and fine-tuning product presentations, retailers can reduce the need for returns, improve customer satisfaction, and protect their bottom line.”

According to Williams, there are several proactive solutions for brand operators looking to improve pre-purchase experiences.

These solutions include: 

• Leveraging generative AI for smarter, more focused product reviews

• Offering AR/VR experiences that enable customers to interact with products in ways previously reserved for in-store experiences

• AI-driven product categorization and optimization, ensuring clear, consistent, and high-quality descriptions across each digital channel

• Personalized product recommendations based on customer behavior and preferences

Other, more practical ways to combat the returns trend include tightening return policies and implementing return fees. However, at the end of the day, there is no magic solution. “I hope there is a world in which you can reduce the percent of returns,” said Amena Ali, Optoro's CEO, “but the problem is not going to abate any time soon.”

Measuring the Return Rate: A Key to DTC Financial Health

Given that returns can't be eradicated, it's vital to understand how this epidemic impacts DTC brands beyond the costs of processing a return. It starts with smart ecommerce inventory management. The return rate is one of the most crucial KPIs in online store inventory management, of which there are two types: 

1. Inventory sales KPIs, such as inventory turnover, stock-to-sales ratio, sell-through rate (STR), backorder rate, and days sales in inventory (DSI).

2. Inventory operations KPIs like lead time, carrying costs, dead inventory/spoilage, and return rate.

Defined as the percentage of purchased items that customers send back to the retailer, return rate is calculated by dividing the number of returned products by the total products sold over a specific period:

Rate of returns = [(# of items returned)/(total # of items shipped)] x 100

DTC brands should regularly track this metric to identify increases or potential patterns. A high return rate might indicate that there is a problem with your online store inventory management. Even a minor discrepancy, such as a misrepresented color in a product image or an inaccurate sizing guide, can contribute to a significant jump in the return rate.

Unfortunately, not tracking your return rate is a common financial blind spot – areas within your financial operations that go unnoticed until they cause significant issues – in ecommerce accounting. Changing that requires, first and foremost, awareness and in-depth knowledge of ecommerce accounting – something not many brand founders bring to the table – and an ecommerce inventory management software.

As we move further into 2025, it's clear that returns management will remain a critical challenge for ecommerce brands. While technological solutions like AI and AR/VR show promise in reducing return rates, and partnerships like Poshmark-Loop offer innovative approaches to handling non-returnable items, the fundamental challenge persists. 

For DTC brands to thrive in this environment, they must adopt a multi-faceted approach: leveraging technology to improve the pre-purchase experience, implementing ecommerce inventory management software, and maintaining oversight of their returns metrics. Success in the current retail landscape isn't just about preventing returns – it's about building an efficient system to manage them while maintaining customer satisfaction and protecting profit margins.