May 20, 2020

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.


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