Some Happy Returns

By cutting return rates, marketers can increase sales and profits CONSUMER direct marketers are scrambling to find innovative approaches to reduce the cost of merchandise returns. With the rapid rise of product sales conducted through catalog, Internet and other direct marketing channels, businesses have been forced to confront not only fulfillment challenges but also the escalating significance of processing unwanted items. It won’t be easy: Consumer DMers and e-tailers had to handle roughly $14 billion in returns last year.

Unfortunately, some reasons for returned merchandise are out of the merchant’s hands. Unmet customer expectations, competitors’ offers of lower prices and consumer indiscretion in sampling multiple items are hard to combat. But firms can and should address areas like customer service, pick-and-pack accuracy and precise product description and visualization.

Inattention to these issues can cause significant swings in return allowances. Depending on product categories, some companies’ return rates can reach 25%. For online marketers, the problem can be particularly alarming. Their merchandise returns as a percentage of revenue are about 10% overall, and for some categories are much higher, especially for apparel and consumer electronics.

Even modest reductions in return rates can produce dramatic increases in both net sales (through lower return allowances) and operating profit – from the combination of higher sales and lower returns processing charges. For example, fulfillment expenses for a $50 apparel item routinely range between $8 and $9 including the cost of order processing and picking, packing and shipping. But the cost to a retailer for the same postage-paid returned package is $11 to $12. Higher credit processing and restocking or disposal charges result in punishing and often unnecessary hits to a company’s bottom line. In addition to diminished net sales, fulfillment of one returned item, in this example, can cost as much as $20.

Over the course of a year, efficient returns management can substantially improve a direct marketer’s operating profit. With just a 3% drop in returns from 19% to 16%, a $60 million apparel DMer could preserve otherwise dismissed net sales of $1.8 million – using the same $50 average order example – and lower returns processing and shipping charges by nearly $450,000. For a merchant otherwise generating an operating margin of 10%, that means a 1.3% profit gain and a healthier margin of 11.3%.

The steps that drive this sort of earnings growth occur both in front-end and back-end sales.

Front end: – Returns policies should be clearly specified at the point of purchase.

– Apparel and consumer electronics e-marketers ought to employ virtual modeling where possible to illustrate product features in three dimensions.

– Order-takers should receive customer service training.

– Profiling and database segmentation must be maximized to present offers that are relevant and readily understood by both prospects and customers.

Back end: – Alternative postal depots and easy online credit processing should be used to retain customers.

– Smaller firms should consider third-party returns management.

– Merchants should cover return shipping costs for high-margin products. Shipping charges for low-margin returns might be shared by both the consumer and merchant.

One of the easiest steps companies can take to reduce returns is to optimize their policies and provide convenient means for customers to return items when necessary. Consumer confusion with a returns policy can lead to irritation. Good customer service and retention demand clear specifications of the terms under which merchandise can be returned for credit or other consideration. Better that the customer return an item hassle-free than grow frustrated with the process and never buy from the company again.

Likewise, providing consumers with postal packaging and drop-off convenience earns consumer confidence and loyalty. It also enhances back-end warehouse and data processing efficiency.

On the processing side, many small to midsize marketers are employing third-party providers such as UPS and FedEx. Returns management specialists are becoming more prevalent for seasonal firms, even those that use outside fulfillment.

Whatever the appropriate practice, DMers must take steps to mitigate returns and optimize the process when it’s called for. This often-overlooked area is increasingly significant to customer acquisition and retention, and represents an important frontier in the quest for greater net sales and profits.