July 09, 2007

Customers Who Return Too Much Merchandise

Click on the image to enlarge it.

The year was 1993, the company was Lands' End. It was my job to identify customers who "returned too much merchandise".

A deep dive into the database indicated that a small number of households purchased frequently and returned more than 75% of their purchases.

The analysis indicated that these customers were very likely to purchase in the future, and if they purchased, they would return at least 67% of the merchandise they bought.

And if customers ordered frequently and returned at least 67% of the merchandise, it was an unprofitable customer relationship. In other words, after adding the cost of fulfilling orders, marketing to the customer, and processing returns, we would lose a substantial amount of profit.

If we didn't market to the customer, we'd lose top-line sales, but increase profitability.

We made the decision to stop mailing catalogs to these customers, reserving the right to mail maybe one catalog per quarter to these households.

It didn't take long for these customers to realize that they weren't getting catalogs. It didn't take long for these customers to voice their displeasure about not getting catalogs. It didn't take long for the "customer advocate", an employee responsible for taking the side of the customer, to become frustrated with my analysis.

There's a fine line you walk when you accept any returns, no matter the situation. Customers are entitled to return merchandise. However, the company has a responsibility to maximize profitability for ownership/shareholders. We let customers return whatever they wanted to return. We retained the right to decide who we marketed to, and how often we marketed to the customer.

Here's my question for you, the loyal reader ... what is the right balance between marketing strategy and customers who return a lot of merchandise?

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