July 17, 2013

1992: Returns Matter

Here's five popular songs from 1992:

  • "I Will Always Love You" - Whitney Houston
  • "Smells Like Teen Spirit" - Nirvanna
  • "End of the Road" - Boyz II Men
  • "Rhythm is a Dancer" - Snap!
  • "To Be With You" - Mr. Big
Returns kill e-commerce, catalog, and retail brands.  Imagine working at Zappos, where +/- a third of all shoes are returned!?  That's a big number.

A big, fat, unprofitable number.

Returns hurt us at Lands' End, back in 1992.  My boss, and my Director, wanted me to do something about it.

What can a lowly statistical analyst do about it?

Simple.

Do not market to customers who return A LOT of merchandise!

How?

The Hyperbolic Tangent Function (click here, geeky followers)!

Now, you never, EVER, share the details of the math you use with folks at a Director level and above.  It's just not good practice.

But the geeky math makes all the difference in the world.

To over-simply the issue, the math suggested that customers who return at least 67% of their merchandise over at least three purchases should not be mailed catalogs.  Why?  Well, these customers were predicted to have at least a 50% future return rate, making all of their future purchases unprofitable.

You are not under any obligation to mail customers who, or will be, unprofitable.

This yielded another $700,000 in incremental, annual profit ... on top of the $1,000,000 in incremental, annual profit generated by the statistical models that I used to select customers for catalog mailings.

Yes, my work was starting to be noticed.  In a company of 5,000 employees, I was responsible for $1,700,000 of annual profit - greatly overshadowing the $29,600 annual salary I was being paid (about $50,000 in current dollars).

All analysts, early in a career, must find ways to get noticed.  3-D color contour plots make a difference.  Profit makes a much bigger difference.

If you work for a catalog brand, e-commerce brand, or retail brand, you are under NO OBLIGATION to send catalogs or email campaigns to customers who return a lot of merchandise.  Why would you purposely cause your company to be less profitable?

I'm waiting for your answer ...

Stop emailing customers who return the majority of the merchandise they purchase.  Quantify the impact on annual profit.  Your career, and the profitability of your company, depends upon you making smart decisions.