July 27, 2015

Returns - Are You Committing Two Tactical Mistakes?

A tale of two items.
  • Item #1 = 100 units sold, $50 price, 40% return rate, 50% gross margin, $1,500 gross margin dollars kept.
  • Item #2 = 80 units sold, $50 price, 10% return rate, 50% gross margin, $1,800 gross margin dollars kept.
Which item would you prefer, if you could only run with one item?

In some of my Merchandise Forensics projects, merchandise productivity is fine, but gross margin productivity is awful ... it's awful because of returns.

Make sure your merchandising team looks at reports that evaluate return rates by item. If an item consistently exhibits high returns rates, ask yourself why you feature that item? If volume is high, then fine. But if volume is average or poor, this item is hurting profitability.

In other projects, an odd dynamic happens. The client is acquiring customers who are pre-disposed to return merchandise.

Can I tell you a brief story? It's 1993. My boss and my Director ask me to create a statistical model that minimizes catalog mailings to customers who return a lot of merchandise. I utilized the Hyperbolic Tangent Function (click here), ultimately determining customers who purchased at least three times and returned 70% or more of his/her merchandise were likely to return at least 60% of his/her future merchandise, and therefore, be unprofitable customers.

Well, I implement this model. There's a couple hundred thousand customers impacted. They no longer receive catalogs. And these customers become really, really angry. They call our contact center, asking for catalogs.

Soon enough, a contact center manager is joined at my hip. "Are you the reason this customer is not being mailed catalogs anymore?" I'd perform some research. I'd say "yes". Then I'd get yelled at. "This customer purchased five times last year, this is one of our best customers! You are an idiot!" I'd respond that this customer returned 80% of her merchandise, and therefore, is really a one-time a year buyer who costs the company $25 a year in returns processing fees. Then we'd agree to disagree.

Suppressing catalogs to that audience increased profit by $1,000,000 per year.

Well, it's not 1993 anymore. That customer has access to your business 24/7/365. The customer can buy from you regardless of your marketing strategy. So why waste company resources?

  • Do not mail catalogs to high returns customers. These customers can purchase from your website regardless. Why waste money?
  • Do not send email campaigns to high returns customers. These customers can purchase from your website regardless. Why waste money?
  • Do not utilize in-app messaging to high returns customers. These customers can purchase from your mobile presence regardless. Why waste money?
You are under no obligation to enable those who want to rip off your business.

Please, do not commit these two tactical mistakes. Do not continue to promote average/below-average items with high return rates. Do not continue to market to customers who return a lot of merchandise.