How to reduce customer returns – and their costs The rapid rise of e-commerce has led to an increase in the rate of returns, or so say some industry observers. At the very least, it’s safe to say that return rates for some e-commerce ventures are much higher than anticipated – largely because so many of them were uninformed to begin with and had no idea that customers would return or exchange anything. Nor did they understand the important role that efficient returns handling plays in building customer trust and boosting lifetime value.
But even if you’re a seasoned direct marketing veteran and your return rate is holding steady, you can’t be complacent about returns.
Returns are expensive. They tax your resources and lower your profit margin. And without a concerted, all-out company effort, returns are likely to creep upward each year, largely due to factors beyond your control.
First is increasing customer sophistication. Customers’ expectations are continually rising, and buyers are increasingly aware of quality and price/value relationships. Particularly with apparel, customers are more likely than ever to shop by ordering multiple products, colors, and sizes from the outset, selecting the ones they want, and returning the rest.
Another reason for increasing return rates is the merchandise itself. Garments may look different in the catalog and on the Web page than in the hand and may not meet customers’ color and size expectations. In addition, the quality of merchandise often fluctuates, particularly since the vendor marketplace is constantly changing.
Fortunately, some reasons for returns are well within your control. For example, unclear copy and graphics or hard-to-understand sizing descriptions in the catalog or on the Website can contribute to the problem. Your operations divisions can also make order entry or distribution center errors that contribute to excessive returns. Or the buying process may be at fault, through lack of quality control or insufficient inventory, leading to a high backorder rate, which in turn may increase returns. For instance, an item purchased for spring might no longer be needed by the consumer if it arrived in late summer.
Companies that are successful in reducing the number of returns attack the problem on a companywide basis with a three-part process:
- Measuring and analyzing causes of returns.
- Calculating the actual cost of returns.
- Creating a plan to reduce those costs while maintaining high levels of customer service.
Identifying reasons for returns Some return patterns are entirely predictable. Industry surveys tell us that certain merchandise categories are more likely to generate returns than others. (See Figure 1, opposite page.) Not surprisingly, the category with the highest rate of return is fashion apparel, at a whopping 25%-40%. In comparison, business products are rarely returned. It’s easy to see that items that involve size, color, fashion, or that unquantifiable “it’s not me” factor are more likely to be returned.
This makes it even more important, particularly when dealing in these high-return categories, that you get a handle on the factors you can control. Many catalogers have made this simple by collecting information from the customer at the time of the return and then categorizing this information by offer, vendor, item, and reason.
Once you analyze the data you collect, you’ll typically find that many departments, from merchandising right through to shipping, influence returns. (See Figure 2, below right.) Some returns result from the poor quality or design of the merchandise or damage incurred in manufacturing or delivery. Order entry, picking, packing, and shipping errors can also produce returns, as can delays necessitated by lack of inventory. And finally, vague or misleading presentations, pricing, and promotional materials can cause customer disillusionment with “the real thing” and ultimately lead to returns.
You can find out which departments and procedures within your own organization are contributing to costly returns by analyzing your compiled data. Perhaps a particular vendor or shipper is causing a problem. Or maybe you’ll see that too many errors are being made in the picking department and wrong merchandise is being shipped out.
Calculating the cost of returns Once you have identified the reasons your customers return merchandise, the next step is to calculate what each variable costs you. That means isolating various components of the returns process and figuring their costs. For example, there’s the cost of material for packing and repackaging; the manhours involved in receiving and processing returns; the staff time involved in adjusting the customer, credit card, and inventory files.
These costs will vary from company to company, but here is a typical example. (See Figure 3, below right.). Assume you ship a two-line order with a total sale of $50. Once you deduct your cost of the manufactured goods (in this case, 50%), you have a $25 margin to cover all costs and – if all goes as planned – make a profit. Industry surveys show that the average cost of processing and fulfilling a two-line order is typically $8-$10. Other costs (marketing, merchandising, accounting, IT, and all other general and administrative overhead) typically add another $8-$10. This brings the total cost to $16-$20, leaving an acceptable profit margin of $5-$9.
Now assume that you shipped the wrong item, and your customer chooses to exchange it. Again, our industry surveys show that average front-end cost for handling the return – the customer service call plus the credit and exchange process – is $2. Because your company’s error prompted the customer to ship the item back to you, you pay the shipping – another $3. Back-end costs add an additional $2-$3. So far, total cost of the return is about $7-$8. Suddenly your profit is pretty much gone.
But you’re not finished yet. Again, because your company is responsible for the mistake, you have to bear the cost of reshipment. Picking and packing cost $3-$4. Reauthorization of credit and order reentry costs $1.50, and shipping out the new item adds another $3, for a total of $7.50-$8.50. That brings the total cost of the return and the shipment of the new item to an average of $14.50-$16.50. The result: a net loss of $8.50.
And there are yet more costs to consider. If you’re lucky, the returned item will be resalable and can go back into inventory. But if the product was damaged in transit or by the customer, you absorb the lost margin and recover only a percentage of its cost, since damaged goods are often sold at discounted prices. Another cost that is hard to quantify, but real nevertheless, is the damage to customer relationships and the reduction of a customer’s lifetime value that can occur when he or she is forced to return a purchase – particularly if the return process isn’t handled to his or her satisfaction.
Reducing returns and their cost Once you have a clear idea of how returns are affecting your bottom line and why they take place, you can begin working on an action plan to address the problem. (See “Springing into action,” left.)
We advise a two-part plan with a goal of simultaneously preventing as many returns as possible and efficiently processing those that can’t be prevented. This latter point can’t be made too strongly. If you don’t make returns easy for the customer, you imperil all future business with this customer.
Of course, these steps for reducing catalog returns are not applicable to e-commerce companies that don’t ship product from their own distribution centers in the first place and don’t have space to receive returns. Yet, if anything, efficient processing of returns is even more important to Internet shoppers, who typically demand instant gratification. One study showed that ease of returns was a key factor in determining satisfaction for some 85% of Web shoppers, yet 50% reported that they had been dissatisfied with their returns processing. Clearly, virtual enterprises still have to worry about the impact of returns on both the bottom line and customer loyalty.
As ever, the marketplace has stepped in to meet this new demand, and there are companies that handle fulfillment and returns for e-commerce ventures (and other marketers) that cannot or do not want to handle them inhouse. If you go this route, it’s important to make sure that the company you choose can carry out the necessary action plan steps; it’s your reputation that’s on the line here.
Returns are an unavoidable part of direct marketing. They can cost a bundle in the short term, and if you handle them poorly, they’ll cost even more in customer trust and loyalty over the long run. But by taking control of the returns process, you can minimize losses and satisfy your customers.
PREVENT OR REDUCE THE INCIDENCE OF RETURNS BY FOLLOWING THESE STEPS:
- Make returns a strategic priority for every department in the company, from the warehouse to the boardroom, and provide necessary resources.
- Set goals and publicize them among all the departments.
- Reduce mailings to chronic returners.
- Review product descriptions and depictions of products for accuracy and perception, and if necessary, refine and clarify.
- Review order forms, guarantees, policy statements, package inserts, and catalog inserts for clarity, and if necessary, revise.
- Reduce backorders; improve forecasting and mid-season replenishment arrangements with vendors.
- Ship orders quickly after receipt, before consumers have time to change their minds.
- Create or step up quality assurance for merchandise inspection programs and vendor compliance.
- Improve packaging and procedures to eliminate or reduce damage in transit, and use only carriers with good track records.
- Train customer service representatives to try to “save the sale” by converting returns into exchanges or forestalling a return by talking customers through product questions or installation.
TO PROCESS RETURNS MORE EFFICIENTLY: – Start with the premise that returns are an opportunity to build customer trust and lifetime value; the process should be easy and hasslefree for the customer.
- Design clear, understandable return forms that are easy for both the customer and your staff to use.
- Institute a simple, three-part transaction: process credit refunds or exchanges, update the customer file, and determine product disposition.
- Design your work stations for maximum efficiency (including space for removal of returned boxes).
- Provide adequate work and staging areas for returns.
- Designate senior or experienced personnel to make decisions on routing of returned merchandise, and assign junior or less experienced (and less costly) personnel to repetitive keying and packaging functions.
- Train your staff on handling returns – then train them again.
- Review written policies and procedures for returns, and be sure they are accessible to all personnel at all times.
- Use bar codes as much as possible to identify product so that it can be returned to inventory or otherwise disposed of quickly and efficiently.
- Define return-to-stock procedures and be sure they are carried out in 8-hour to 24-hour cycles.
- Cross-dock returns whenever possible: If the returned item is on backorder for another customer, ship it immediately to the waiting customer rather than restocking it.