How to Reduce the Negative Impact of Returns on Retail Profits

By Steven Ledgerwood, Managing Director UK, Emarsys — October 18, 2016

Customer experience today is as much about being able to easily return a product as it is about buying what you want when you want. This is particularly true for online consumers.

Retailers have built the foundations of their e-commerce operations on convenience and speed. Consumers rarely think twice about ordering several different sizes or colours of the same item, as they know they can easily return those they don't want. Added to this is the impulsiveness of online shoppers, encouraged by the ease of arranging delivery at a time that suits them and the ability to send items back often free of charge.

While all sectors have to deal with the logistical challenges of returns, none faces it more acutely than retailers in the fashion and apparel industry. According to a survey conducted for Radio 4's You and Yours programme, 63 percent of 1,000 interviewed online shoppers had returned an item of women's clothing, and with the bedroom increasingly being regarded as the new "fitting room," this figure is set to rise.

Absorbing costs for long-term loyalty
Nowadays, retailers are developing high-impact personalized promotions and campaigns based on geolocated marketing messages to attract digitally savvy consumers. These campaigns trade heavily on competitive same-day and next-day delivery services and free returns. Retailers know that keeping customers loyal means constant nurturing, even if that means absorbing increasingly high delivery and return costs.

The real cost issue in relation to returns is not the condition of products — items might return damaged, but the majority are usually in a condition to be re-sold. The higher cost is the outlay involved in courier services, warehouse staff and logistics. For this reason, maintaining a healthy balance between market competitiveness and customer loyalty is a constant challenge to retailers.

Even taking into account those shoppers who do buy with the intention of returning items, a larger number are more likely to order and keep a product that is right for them. Returning an item, even free of charge, is inconvenient.

Complex financial scenarios
In our omnichannel retail environment, also important is the impact of returns for retailers that operate both physical and online stores. The following case study illustrates the point:

One of our clients has a customer who finds it difficult to find jeans that fit her properly. She recently purchased a pair after browsing on her tablet and arranged a "click-and-collect" delivery from the retailer's local store. She was happy with the jeans, but then saw the same pair at a better price from another online retailer, purchased them and returned the original pair to the store.

For the retailer, this not only meant a lost sale but also triggered a complex financial scenario, which is hard to calculate in relation to lifetime customer value. Should the jeans remain in the store, or be allocated back into the warehouse for online consumers? 

This is why a wide range of possible scenarios must be assessed to calculate the total cost of returns. Some customers might affect revenue from a "cost per acquisition" perspective, but their lifetime value could be much higher to the retailer.

Clearly, the relevance of customer offers, the efficiency of personalization engines and the provision of quality customer service helps to keep customers loyal and happy. Quantifying each of these aspects is equally crucial within the context of returns.

To avoid a negative impact on the bottom line, retailers should also invest in identifying and securing the right customers by using intelligence tools. What channels do our most loyal shoppers use; which products do they respond most positively to; how much do they spend on average; how do they respond to offers and promotions? The answers to these questions will give an accurate assessment of a customer's lifetime value which can be calculated against the net cost of returns. 

There is no magic wand that will stop a customer from sending back an item, but retailers can address the challenge of returns by understanding the buying patterns of their customers. Data-driven intelligence shows past and present customer behaviour through a new lens and projects future actions with powerful accuracy. This combination, once integrated with commercial data, should provide you with a much clearer understanding of how much your returns are really costing the business.

Steven Ledgerwood is managing director UK for Emarsys, a provider of marketing automation software.


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