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??