On the Return Trip: Managing Reverse Logistics

May 28, 2008 7:05 PM  By

Multichannel marketers need to pay just as much attention to reverse logistics, or the process taking goods back into “forward-available” inventory, as they do getting goods out the door to customers.

Why? Because returns are a fact of life: Return rates commonly range from 5% for hard goods and gifts to more than 25% for shoes and apparel. Therefore merchants of all sizes must become adept at reverse logistics if they are to attract and retain customers; maximize and extend the value of goods sold; and minimize the impact of returns on profits.

Rather than view returns as a necessary evil, merchants should look at it as opportunity to turn reverse logistics operational challenges into competitive advantages and increased sales. After all, the relationship between return policies and consumer purchasing is well documented through surveys and research. Consider the following numbers:

–95% of customers say they are likely to shop with an online or catalog merchant if the returns process is convenient and 85% say they will stop buying from a retailer if the returns process is a hassle (Harris Interactive)
–75% of consumers surveyed said a simple return policy was a deciding factor in their shopping behavior (KPMG)
–89% of online buyers say return policies influence their decision to shop (BizRate.com), and 40% of shoppers don’t buy online due to returns difficulty (Jupiter Research)
–Customers who have their complaint resolved quickly have a repurchase intention rate of 82% (McKinsey)
–Customers will spend 5 to 20 times the initial sales price on subsequent services and consumables (AMR Research)

While an easy returns policy may be important to consumers, returns management is extremely complex and costly for shippers. The goal for many companies is fewer returns whenever possible.

The paradox, of course, is that the easier it is to return an item, the more returns you’ll have. Online shoes merchant Zappos.com, for example, offers one of the most generous returns policies in the apparel industry: Returns are free, with no questions asked. The result? A 35% return rate.

But just as staggering are Zappos’ consistently high consumer ratings — not to mention its double- to triple-digit annual growth. Zappos is able to charge full retail prices for its products, since then company’s return policy and commitment to customer service are competitive differentiators.

So what factors should merchants consider when developing returns policies? Well, perhaps most importantly your corporate reverse logistics team should balance customer satisfaction as well as corporate profitability. You have to consider several other factors as well: Why is the product being returned? For example, you may offer free returns for products returned because the wrong product was shipped, but charge a fee for product returns due to change of heart.

Take into account the time elapsed between purchase and return, the dollar value (“is it worth returning?”), and the characteristics of the product itself (“what’s the cost to return the item?”). Consider the added shipping costs of bulky or heavy items, and for returns from international customers.

The customer life cycle is also important. What’s the likelihood the customer will order from you in the future? What’s the financial impact of a happy customer over the years?

Best practices in returns management include the following steps:

1. Develop return instructions that are clear and easy to follow.

2. Include a returns form with instructs customers to provide a reason for the return, and if they want an exchange or credit. The reason for the return can help the returns team determine how to handle the item (restock, repackage, repair, etc.). The returns form should capture the original purchase information (barcode, purchase order or other identifier) to validate the return and authorize credit. Develop a return label with prepaid postage/shipping, and a method to deduct the freight charge from the customer (if appropriate).

3. Work with your shippers. Parcel carriers DHL, FedEx, United Parcel Service, and the U.S. Postal Service offer a variety of services, costs and labeling options for handling returns. There are several third-party logistics providers (3PLs) and parcel aggregators that specialize in handling returns.

4. Monitor returns closely. Understand which products are returned the most and for what reason. Track the percentage of returns by SKU sales.

Once you’ve identified the products with the highest return rates – and the primary reasons for the returns – you try different approaches to reduce or eliminate return rates. For instance you might modify or close out the product, change order instructions or packaging techniques, and so on.

Rob Martinez is a partner at Navigo Consulting Group, which provides contract benchmarking, distribution analysis, and carrier negotiations.