Unlocking the Value of Retail Returns
The practice of buying via mail order is nothing new. In fact, records suggest that the concept of remotely ordering goods predates the invention of the telephone by well over a century, going back some 250 years. You would think that a business model thought up while King George II was on the throne would be watertight by now.
by Steve Denby
But with the birth of the internet and subsequent huge growth in online retail over the last 10 years, there is one aspect of mail order that is still leaving retailers short changed and, as a result, has the potential to negatively impact on their profits. This is the issue surrounding retail returns.
When we purchase a product via mail order, or indeed through any of the other ‘remote selling’ channels, we have the right to return items through the Consumer Protection (Distance Selling) Regulations 2000. When ordering from a catalogue or online, there may be any number of reasons why a product may need to be sent back – it could be faulty, the wrong size, unflattering (in the case of clothing) or may simply not be what we were expecting. As a result retailers have long facilitated the returning of goods and may even absorb the postage and administrative costs involved.
The wider process of returns is vast, and yet retailers are still failing to take advantage of the huge benefits available through the use of data and analytics, tools which when implemented correctly can make a huge difference to a company’s bottom line.
With the endless supply of online stores and catalogue services, there are now more customers ordering more stock, from more retailers, than ever before. As such the increase in returns generated from online retail is a significant operational task for retailers, especially when some customers have begun to take advantage of the convenience of the returns process. Although providing a returns service is a statutory right for customers, there is an argument to suggest that a proportion of customers are now simply taking advantage of the system, and returning disproportionate numbers of items.
But while this scenario has the potential to be an issue for retailers, it can also be regarded as an opportunity; one which could have a commercial value to the retailer, if handled correctly. To understand this, retailers must first consider customer behaviour, and the reasons why products are returned.
In his piece on this site a few weeks ago GasboxDMG’s Chris Hancock identified the importance of asking customers ‘why?’, and examined the valuable customer insight unlocked by such interactions. He surmised that engaging customers in this way can be a hugely worthwhile process, with the information generated helping retailers to understand the motivations behind customer returns.
The next step for smart retailers is to adopt a more analytical and data-driven approach, to analyse each individual’s returns history as a means of understanding more about them and how they use the returns process. For example, are there many customers who simply use the retailer as a ‘library service’, ordering goods only to take a look and return them, with only a slim chance of ever actually making a purchase? Which customers are ordering 100 items and only keeping, say, 10 percent of them? Once identified, these customers can then be compared with other groups which demonstrate a ‘lower risk’ of abusing the returns process – those who only ever return goods when faulty or when they have a genuine reason to ask for an exchange or a refund. Understanding each individual customer in this way can be instrumental in governing how the returns process is offered to them, avoiding a blanket returns approach in favour of an optimised one.
For instance, with those customers that return to such an extent that they cease to become profitable, the retailer could look to introduce postage charges as a way of offsetting the operational costs and discouraging constant returning, add a returns administration fee, or even restrict the quantities available per order.
Furthermore, as a way of ‘rewarding’ customers at the opposite, more favourable end of the spectrum, a tiered system could be introduced to elevate those customers to priority status with the introduction of a free returns policy. By engaging with individual customers and making them feel valued in this way, the retailer is able to support loyalty and encourage further spending.
However, it’s vital that retailers find the right balance when implementing such policies – if you begin to charge certain customers, you open up the risk of them taking their custom elsewhere. Therefore when introducing such policies, it’s important to remember to place value over profits – undoubtedly a tricky thing to master, but invaluable when done well.
There are examples of retailers that are beginning to address the issue of returns and have moved away from an ‘open door policy’. Perhaps mindful of the value of its stock and target market, high-end fashion retailer Net-A-Porter uses a system whereby each order comes complete with a £10 delivery fee, designed to discourage people from ordering garments to wear once and return. However, such a system would not be suitable for all retailers, as a £10 delivery charge could only realistically be applicable for high value goods and might even deter the customer from making the purchase in the first place, which serves to emphasise further the need for an analytical, individual approach.
Retailers are already well versed in the application of customer analytics in marketing relevant products based on individual purchase history, needs, wants and behaviour. By developing a more individual approach to customer returns, measures can be taken to help reduce unnecessary operational costs, whilst improving customer experience. If, for example, a particular customer is seen to be overusing the returns process it can adjust its processes with the aim of converting a potentially loss making relationship into a profitable one.
Underlying this analytical approach should be a greater appreciation of customer value. It remains true that a customer ordering 100 items and returning 50 is still more profitable than a customer who orders five items without making a single return, so a clear cut strategy may not necessarily be the most profitable one. Creating an approach to retail returns with the prospect of elevating certain customers to premium status can be a valid goal, but it should be carried out with a wider view of each customer’s value firmly in place.
Understanding consumer behaviour is absolutely crucial to improving business processes. As they purchase and interact with the brand in other ways, like when returning items, the customer provides a wealth of data that can be translated into invaluable insight. With the analytical technologies now available the potential benefits of reducing operational costs whilst better engaging customers are huge. So much so that, 250 years on, we can align processes to individual customer values, transforming what was previously a substantial cost burden into a worthwhile investment for retailers.
Steve Denby, CEO at JaywingDMG
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