The Unexpected Benefits of Product Returns
Bottom Line: Product returns are typically seen as a necessary headache
and a cost drain. But companies can use their return policies to enhance
customer loyalty and increase profits.
When
customers send back a product they’ve bought, managers usually view the
transaction in a purely negative light. After all, researchers have estimated that
manufacturers and retailers spend more than US$100 billion each year on
return-related logistics, an average revenue drain of nearly 4 percent per
year. And that number is probably conservative, because even if some
returned products can be resold through subsidiary outlets that specialize in
unloading used items, the loss in profit on the original sale can be
substantial.
Nevertheless,
major retailers such as Zappos have implemented liberal return policies that
make it very easy for customers to return merchandise. Such policies can have
the effect of inviting consumers to take a chance on products they might
otherwise hesitate to buy. And these permissive return policies may be
advantageous — firms may be able to build loyalty with consumers through their
interactions regarding returned products, attracting more positive word of
mouth and repeat purchases as a result.
So
can firms actually use return policies to improve their business? According to
a new study by J. Andrew Petersen
of the University of North Carolina at Chapel Hill and V. Kumar of Georgia
State University, the answer is a resounding yes. Breaking with tradition and
realigning corporate resources in favor of leniency toward customer returns not
only benefits firms in the near term but can significantly increase their
profits over the long term.
The
authors began by surveying managers from retailers operating in three different
industries and found that the number of returns they received was relatively
high. For example, one apparel catalog reported that 70 percent of its regular
customers had returned a product; the numbers were similarly eye-popping for a
high-tech business-to-business firm (64 percent) and a general merchandise
outlet (75 percent).
Clearly,
the returns these companies had to deal with weren’t outliers to be endured on
occasion, but a necessary part of doing business. However, the firms seemed
slow to catch on to returns’ significance. In the second stage of the study,
Petersen and Kumar surveyed 56 retailers and found that less than half of them
considered product returns to be a fundamental part of their marketing appeals
to consumers or their allocation of corporate resources.
The
central phase of the study focused on 26,000 customers of a large retailer that
sells apparel, footwear, and accessories through both an online store and a
mail-order catalog. The company has a generous return policy, giving customers
their money back for any reason if they want to return a product. Nevertheless,
the firm bases its marketing outreach purely on purchase behavior: How recently
and frequently customers shop at the store, and how much they spend.
The
authors divided the customers into five groups: a control cohort that received
no catalogs or e-mails; a subset that was targeted through the firm’s current
strategy; two benchmark groups that received various blends of marketing
approaches and return policies; and a faction that was targeted according to
the authors’ proposed model — a customer lifetime value (CLV) metric that
balanced a consideration of customers’ perceived risk against the
return-related costs incurred by the company.
Over
a six-month period, Petersen and Kumar tracked the number of emails sent and
catalogs mailed to customers in each group. They also analyzed the purchase
record and return behavior of every customer. Three years later, the authors
compared the CLV — essentially, an estimate of how much each customer
contributed to the firm’s coffers — to the actual profit each customer produced
for the company.
The
authors found that the firm was able to boost profits in both the short and
long run when using their model. Profits shot up by more than 45 percent per
customer, on average, over the six-month window, and by 29 percent at the end
of the three-year span for consumers in the researchers’ proposed algorithm.
Here
is how the numbers compare: After three years, the firm earned about $1.22
million from the control group; $1.25 million from the subset targeted by the
company’s strategy; and $1.42 million and $1.53 million from the benchmark
groups. Meanwhile, customers targeted via the authors’ proposed structure
brought in $1.83 million, a gain of about $300,000 over the next-best resource
allocation framework, or more than $58 per customer.
“This
finding suggests that understanding the dynamics between product return
behavior and purchase behavior over time enables firms to distinguish customers
who are likely to increase purchase behavior at a faster rate relative to
product return behavior rather than focus only on the net profit from purchase
behavior — all at a lower marketing cost,” the authors write.
Still,
many firms have gone the other way, introducing fees, deadlines, or other rules
to discourage customers from returning products. Unfortunately for those
companies, because stringent return policies tend to raise the risks
for customers, they decrease consumers’ willingness to buy a product — not a
huge problem if only a small number of consumers consider making returns, but a
significant one in light of the authors’ findings that a high percentage of
customers often send back their purchases.
In
short, firms that ignore or downplay the area of customer returns are missing a
huge opportunity to bond with customers and enhance their profitability. The
trajectory of a customer’s value to the firm changes drastically when companies
embrace product returns as well as purchases in their calculation of consumers’
long-term value.
And
the findings have implications far beyond just retail firms. The profitability
framework proposed and tested in the study should also be applicable to
companies that primarily sell services. A previous study by Petersen and Kumar found that product returns
and service-related complaints have comparable effects on customers’ future
attitudes and behavior — their willingness to refer the company to friends, for
example. Managers in the service sector who want to build a similar framework
should substitute the costs incurred due to customer grievances for the outlay
associated with product returns. In this way they can more precisely capture
the complexity of the firm–customer relationship, the authors write.
http://www.strategy-business.com/blog/The-Unexpected-Benefits-of-Product-Returns?gko=fea64
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