Please Read This

You are capable of excellence like this (click here). 

Notice that the stuff that adds up to excellence here is largely tactical ... but also requires quick and decisive decisions. The latter is such a challenge, especially as a company gets older. I repeatedly see "older" companies where a 28 year old employee wants to make a decision (not a big one) and somebody who is 58 years old says NO. One wonders what the person who always says "NO" gets in exchange for squashing ideas?

It's Not Their Fault

Last week I posted a quiz question on Twitter (click here to see it). I presented a fabulous customer (from a demand standpoint), but the customer returns 80% of the merchandise the customer purchases, rendering the customer unprofitable. I asked the audience whether the email marketer should continue to send email campaigns to this customer?

48% of those who responded said YES, keep emailing the customer even though the customer returned $800 of $1,000 purchased, causing the customer to become unprofitable.

I asked readers WHY they would keep marketing to the customer?

One reader suggested that email marketing is no place for a brand to focus on an individual customer. What?

A second reader said analyzing returns was fun for "geeks" but without Executive buy-in it represented pointless research. I'm sorry for being a "geek", folks. I just want you to be more profitable.

Another reader said that returns are the fault of the brand, and are not the fault of the customer. In other words, the brand messed up, causing the customer to return the merchandise. How does a brand mess up so badly that 80% of what the customer wanted is returned for a refund? It's pretty much impossible, isn't it?

Let's say your company return rate is 20%. How far above 20% is the "brand" responsible for, and how far above 20% must the individual customer return rate be before it is the fault of the customer?

Let the data decide for you. Anytime the customer is "predicted" to return 60%+ of merchandise after "x" purchases you have a problem customer ... it "is" the fault of the customer.

There is no rule that says you must market to customers who return too much merchandise. None. Not one.

You can let the high returns customer buy from you and mess with your p&l all you want ... but don't force the customer to buy anything. No emails. No print. No Friends-And-Family events. None of it. Your job is to protect your p&l. Protect it!

Returns and Email Targeting: Actionable Outcomes

Here's a paraphrased quote from one of my followers on Twitter.

• "You must be nuts to think that your client base would want to analyze email behavior across individuals. Nobody wants to do that. You keep talking like somebody who wants to do things like big companies do them."

#OhBoy.

I'm not talking "Big Company" strategy here ... I'm talking common sense. Either you want to do the right thing and make your company more profit and boost your career, or you want to be lazy.

You get to make the choice.

Here's a choice I'd make a hundred times out of a hundred. This company possesses the following metrics:

• If an item is returned, the item costs the company $10 of lost profit to ship the item back and process it appropriately.
• 45% of sales independent of returns convert to profit.
• Each email delivered costs the company $0.003.
• The company has a "Low Returns" segment ... future return rate = 10%. Most customers are here.
• The company has a "Medium Returns" segment ... future return rate = 30%. Some customers reside here.
• The company has a "High Returns" segment ... future return rate = 60%. Some customers reside here.

So let's overlay an Email QuickScore (remember those ... click here now) against the Returns Segment. Then let's measure demand, sales, expense, and profit in the next thirty days. Ready???

Email / Returns Profit

What do you observe?

At a demand-level, high returns customers are the "most valuable". This is where online marketers measure stuff, and as you are about to see that's not a great idea.

When I back out return rates from the next month, we see that high returns segments are not worth nearly as much.

Next, I subtract email costs (minimal) and returns costs (not minimal). Oh oh.

And finally, the bottom portion of the table shows us what profit looks like. High returns customers are uniformly unprofitable in email marketing campaigns.

Why in the heck are you sending email marketing campaigns to high returns customers?

Let's get busy doing something about this!

And if you don't have the resources to do something about this, contact me right now (kevinh@minethatdata.com) and I'll get busy creating actionable ways to combine email marketing and returns to generate your company more profit.

It's Time Again: The June Run of the MineThatData Elite Program

We near five years of MineThatData Elite Program runs ... and now we find ourselves with a run in the middle of a pandemic. 

So yes, this is probably the most important run in the history of the program. I'll explore how your customer base changed behavior in March and beyond. I'll explain if your best customers hung in there with you, or if your sales increases came from new customers (and if that happened I'll look to see if they bought again quickly). If your sales dropped by 40%, I'll help you understand the dynamics that caused that and see if there is hope in your customer data.

Key Analysis Dates:

• Tell me right now if you are in/out, so I can plan properly.
• $1,000 for existing Elite Program members, $1,800 for first-time participants.
• Payment must arrive no later than June 15, 2020.
• Data must arrive no later than June 15, 2020.
• Analysis will be completed by June 30, 2020.

Get yourself in the program now ... given high demand expected during this run, I'm likely to limit the number of participants so that I can get through all of the work promptly.

A Delicate Balance

So here's the challenge you have. Remember our table from yesterday, one that showed how customers who bought 3+ times and returned a historically high rate of merchandise were likely to return a high rate of merchandise in the future?

So let's look at a customer with three purchases in the past year.

• 55% chance of buying again next year.
• Will purchase 2.5 times if the customer purchases.
• Will spend $100 per order next year ... 4 items at $25 each.
• 40% of sales flow-through to profit.
• $20 of marketing expense expected next year.
• Each item returned costs the brand $10.

We now have what we need to figure out whether we should "market" to the high returns customer.

Let's say that the customer historically returned 0% of his/her merchandise. 

• Expected Spend = 0.55 * 2.5 * 100 = $137.50.
• Flow-Through to Profit = 0.40 * $137.50 = $55.00.
• Marketing Expense = $20.00.
• Profit at 0% Returns = $55.00 - $20.00 = $35.00.

That's a profitable customer! Nice job.

If the customer returns 20% of what s/he purchased historically, then we have to assume the following, given that in the above table the customer will be expected to return 20% of future merchandise:

• $137.50 * 0.20 = $27.50. That's an average of 1.1 items.
• Each item returned costs you $10.
• 1.1 items * $10 = $11 of profit out the window.
• Profit becomes $35.00 - $11.00 = $24.00.

If the customer returns 40% of what s/he purchased historically, then we have to assume the following, given that in the above table the customer will be expected to return 36% of future merchandise:

• $137.50 * 0.36 = $49.50. That's an average of 1.98 items.
• Each item returned costs you $10.00.
• 1.98 items * $10 = $19.80 of profit out the window.
• Profit becomes $35.00 - $19.80 = $15.20.

If the customer returns 60% of what s/he purchased historically, then we have to assume the following, given that in the above table the customer will be expected to return 52% of future merchandise:

• $137.50 * 0.52 = $71.50. That's an average of 2.86 items.
• Each item returned costs you $10.
• 2.86 items * $10 = $28.60 of profit out the window.
• Profit becomes $35.00 - $28.60 = $6.40.

Do you see where this is going?

If the customer returns 28% of what s/he purchased historically, then we have to assume the following, given that in the above table the customer will be expected to return 68% of future merchandise:

• $137.50 * 0.68 = $93.50. That's an average of 3.74 items.
• Each item returned costs you $10.
• 3.74 items * $10 = $37.40 of profit out the window.
• Profit becomes $35.00 - $37.40 = ($2.40).
• YOU ARE LIKELY TO LOSE MONEY MARKETING TO THIS CUSTOMER NEXT YEAR.

Did you know that I polled my Twitter followers, and about HALF of those who answered the poll thought it was ok to lose money emailing customers who abuse returns and cause the customer relationship to result in a loss ... even if the customer from a demand standpoint is fabulous?

Returns require a delicate balance ... you want to encourage returns because customers become more loyal ... but SOME customers simply take advantage of you. 

• There is no rule that says you must continue to email these customers. 
• There is no rule that says you must include the customer in your loyalty program.
• There is no rule that says you must include the customer in your Friends & Family campaign.

The only person that stands between doing what is right for your brand and the customer who is costing you profit and consequently reducing the size of your salary increase and/or annual bonus and/or profit sharing and/or 401k contribution is you.

You decide if you're willing to lose money or not.

What say you??

A Backstory About Returns

Hint - you're going to hear more about returns in upcoming days. Why? Because they're the opposite of what the pundits tell you about them ... they aren't part of a seamless shopping experience ... they're a drain on resources and a profit black hole. And it's your job to do something about it.

Let's go in the "way back time machine" ... to 1993. 

It was my job to suppress customers who returned too much merchandise. If I wanted a decent performance appraisal, I had to increase profit by decreasing returns ... to the tune of a million or more dollars a year. I was told to write the objective, based on what I felt was possible. In other words, the objective was completely self-guided, and I determined for myself if I got a raise or not.

That's what accountability looks like, for those of you in the studio audience who are now telling my clients what they must do to "be successful in the era of COVID". You write the objective. You do the work. You test the results. And if you exceed your expectations, you get a raise.

So off I went to earn my raise.

Here's the thing about returns.

1. They absolutely destroy profitability.
2. You have to accept them, and accept them with grace.
3. You can make a difference as a marketer ... you can slow down returns.

How does the marketer slow down returns?

I wanted to earn a raise. So I had to dig deep into a math book to solve returns issues. There is a function called the "Hyperbolic Tangent Function", and it turns out that the function applies well to customers who return merchandise. On a geeky level, I'd use the function to predict future returns.

On a human level, I had to explain what I was doing without ever allowing a person to see something that looked like TANH(z) = SINH(z)/COSH(z). How did I do that? With a simple table, showing what customers did in the subsequent year based on purchase history.

See what's going on there?

When a customer purchases for the first time, it doesn't make a ton of difference whether the customer kept the entire order or returned the entire order ... the customer is pretty likely to return a similar amount of merchandise.

Now look at a customer who purchased three or more times (the bottom third of the table). If that customer had a historical return rate of 80%, we can expect the customer to return 68% of next year's merchandise.

The secret, then, was to only penalize customers with many purchases and many returns ... if the customer returned 70% of historical volume and bought three times, that customer would be penalized.

How did we penalize the customer?

• We stopped mailing catalogs to the customer.

How did that work out?

• It was GREAT for lowering company return rates.
• It was GREAT for profitability. We got the million dollars of profit I promised, which ultimately led to a promotion to Manager, which coincided with a healthy salary increase and a doubling of my bonus rate.
• It was HORRIBLE for the call center.

Think about it this way. A previously "Great" customer (one who bought a lot of stuff) was now an "Unprofitable" customer, and was no longer getting catalogs. That customer was HOT. Angry. Upset.

• "You say you gladly accept returns in every catalog you send and as a result you penalize me? Ta Heck with you!!"

It took a week or so before I got really tired of seeing the Call Center Director stop by and tell me what a moron I was.

• "How can you do this to the customer? The customer spent $1,150 last year!"

I'd explain that the customer returned 85% of what the customer bought, so the customer was really a $165 customer ... and after you ding'd the customer $4 for every item we had to inspect and repackage ... or send to liquidations ... because the customer constantly returned our stuff, we were losing money by mailing the customer.

We'd just go back-and-forth ... the Call Center Director sick and tired of telling customers on the phone that they were unprofitable ... me sick and tired of explaining that we were losing money contacting customers who returned nearly everything.

Here's a funny thing ... we eventually found a balance.

• Instead of mailing high returns customers 40 times a year, I'd mail them 4 times a year.
• If the customer stopped returning everything, the customer got 40 catalogs a year.
• High returns customers generally "learned" how much they could return.
• Everybody won.

Just because a vendor tells you that you must accept returns in an omnichannel environment ... just because they tell you it is "table stakes" or they say something equally vapid and meaningless ... doesn't mean you have to MARKET to customers who return everything.

There is no rule saying you have to send 250 email campaigns a year to a customer who returns 70% of what s/he buys. No rule. None.

There is no rule saying you must invite the high returns customer to your FRIENDS AND FAMILY event. No rule. None.

There is no rule saying you must offer 40% off plus free shipping to the high returns customers. No rule. None.

Amazon knows how costly returns are ... or they wouldn't pawn the job off on Kohl's and UPS to process them.

As a marketer, your job is to do what is right for your brand.

It is not right to lose a fortune allowing customers to abuse your returns policy just so that you comply with a thesis promoted by vendors who make money selling software solutions that make returns easier.

.

Then Discounting Just Ruins Everything

We have our example from yesterday.  Let's say you have a $100 average order value ... you sell five items at $20 each, to make the math easy. Let's also make the math easy ... say it costs you $7 to have the item seamlessly returned to you, and we'll say it costs $5 to reprocess the item in your distribution center ... you lose $12 on every item that is returned.

• Let's also say that your cost of goods sold is 40%.
• Let's also say that pick/pack/ship expenses are 10% of gross sales.

Pretend that the customer keeps 100% of this order.

• $100 average order value.
• Cost of Goods = 0.40*$100 = $40.00.
• Pick/Pack/Ship Expense = 0.10*$100 = $10.00.
• Contribution / Variable Profit = $100.00 - $40.00 - $10.00 = $50.00.

Pretend that the customer returns one item.

• $100 average order value.
• Net Sales = $80.00.
• Cost of Goods = 0.40*$80.00 = $32.00.
• Pick/Pack/Ship Expense = 0.10*$100 = $10.00.
• Net Returns Expense on One Item = 1 * ($5 + $7) = $12.00.
• Contribution / Variable Profit = $80.00 - $32.00 - $10.00 - $12.00 = $26.00.

Pretend that the customer returns two items.

• $100 average order value.
• Net Sales = $60.00.
• Cost of Goods = 0.40*$60.00 = $24.00.
• Pick/Pack/Ship Expense = 0.10*$100 = $10.00.
• Net Returns Expense on Two Items = 2 * ($5 + $7) = $24.00.
• Contribution / Variable Profit = $60.00 - $24.00 - $10.00 - $24.00 = $2.00.

Now your vendor partners are going to ask you to take 20% off to "stimulate" a purchase. Of course they're going to ask you to do that ... the promotion makes their software/solutions look even more important and even more valuable.

Pretend that the customer keeps 100% of this order.

• $100 average order value.
• Cost of Goods = 0.40*$100 = $40.00.
• Promotional Amount = $20.00.
• Pick/Pack/Ship Expense = 0.10*$100 = $10.00.
• Contribution / Variable Profit = $100.00 - $40.00 - $10.00 - $20.00 = $30.00.

Pretend that the customer returns one item.

• $100 average order value.
• Net Sales = $80.00.
• Cost of Goods = 0.40*$80.00 = $32.00.
• Promotional Amount = $16.00.
• Pick/Pack/Ship Expense = 0.10*$100 = $10.00.
• Net Returns Expense on One Item = 1 * ($5 + $7) = $12.00.
• Contribution / Variable Profit = $80.00 - $32.00 - $10.00 - $12.00 - $16.00 = $10.00.

Pretend that the customer returns two items.

• $100 average order value.
• Net Sales = $60.00.
• Cost of Goods = 0.40*$60.00 = $24.00.
• Promotional Amount = $12.00.
• Pick/Pack/Ship Expense = 0.10*$100 = $10.00.
• Net Returns Expense on Two Items = 2 * ($5 + $7) = $24.00.
• Contribution / Variable Profit = $60.00 - $24.00 - $10.00 - $24.00 - $12.00 = ($10.00).

Without discounts/promotions, we earned:

• 0 Items Returned = $50.00 Profit.
• 1 Item Returned = $26.00 Profit.
• 2 Items Returned = $2.00 Profit.

With 20% off? Oh Boy!!

• 0 Items Returned = $30.00 Profit.
• 1 Item Returned = $10.00 Profit.
• 2 Items Returned = ($10.00) Profit.

Your vendor partners and pundits and all the other folks who want you to do things that cause them to make money cause you to make less money.

Now I get it ... the pundits will tell you that the promotion will cause more customers to buy, thereby increasing profit. Woooooo!!! But if the customer returns anything (and yes, customers return stuff), profit evaporates at an ever-increasing rate.

Why are we so stupid?

Well, we don't run the math ahead of time, for starters.

Is there a way to stop customers from returning stuff? Maybe not.

Is there a way to mitigate returns via email marketing and print? ABSOLUTELY! More on that topic in upcoming posts.