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The True Cost of Returns
Steven Ledgerwood, MD of Esmarsys, shares how retailers can reduce the impact of returns.

By Steven Ledgerwood

29 August 2016

For every clothing item successfully bought online, another fails to excite the customer. Approximately 50% of fashion and apparel goods are sent back to the retailer. This is a huge percentage. Next time when you go out for dinner, imagine if you sent back every meal…
 
One of the reasons behind this figure is because shoppers across the world have changed their buying habits. The promise of online shopping has always been speed. Everyone wants convenience: see an item and then receive it the next day. 
 
This concept is reality. However, with easier shopping comes more impulsiveness. Consumers take the time to research and compare products, and know that if they do not like an item they buy, they can return it free of charge. 
 
Thankfully for retailers, 95 per cent of items sent back are ‘resellable’, although even when a product is in good condition, there are still substantial costs associated with couriers, staffing and logistics. Retailers need to carefully balance costs against the benefits of customer acquisition and retention. 
 
With the other 5% of products, these are either damaged in transit or need additional packaging, care or attention before they can be resold – if they can be resold. This is a substantial proportion of expenditure associated with returns. Interestingly, various business groups have issued warnings to consumers in which their actions are driving up prices for everyone. 
 
This is true to an extent. Brands must tread carefully in changing policies too quickly. Free returns can be a major differentiator. Introducing stricter policies or charging customers for returns can have a negative effect in the long-term. Put simply, passing costs onto customers jeopardises future sales. Or worse, sends the shopper to a competitor with a better returns policy.  
 
These negative outcomes are compounded further when the customer experience associated with returning an item is poor. Any negativity at the start of a customer relationship is particularly damaging. Frustrated customers are less likely to buy from you again and charging for returns reduces repeat sales, which in turn affects Customer Lifetime Value (CLV). 
 
The right approach
So, in our omni-channel industry, what can retailers do? Balance customer service with the bottom line by understanding that most customers do not actually want to return an item. They would much rather have the correct size and product first time round.
 
There will always be a proportion of customers that cannot make their mind up, so action needs to focus on customers who are dissatisfied or underwhelmed by a product. 
 
This is possible by improving the relevance of customer offers, greater personalisation with customers and effective cross-channel campaign management. This equates to new customer on-boarding programmes, better product information and visuals and clearer policy wording. 
 
A fitting use case
Another consideration relating to returns is when multiple channels are involved, especially for retailers managing physical stores and an online presence. 
 
One of our employees is an avid shopper. However, she often struggles to find the right size of clothing. She recently found a dress on her mobile and ‘click-and-collected’ the product from her local shop. Satisfied with her choice, she decided to buy the same dress in more colours. Having searched online, she found the dress cheaper from an e-commerce retailer. She bought several more dresses in many colours and then returned the original from the first retailer. 
 
For the original retailer, this was a lost sale. It is also a complex financial scenario that some companies do not calculate effectively. Should the retailer keep the product at the original store or allocate it to a warehouse for online shoppers? These scenarios must be analysed when assessing the cost of returns. After all, some customers cost money from a cost per acquisition perspective, although their lifetime value could eventually end up being higher. 
 
There is no right answer with returns, however, retailers should make sure they are investing in the right customers by tracking customer lifetime value net of returns. 
 
Measuring this KPI is vital if a business is to accurately count the cost of returns and improve customer intelligence over the long-term. This KPI will also prove invaluable when assessing product performance and the impact of returns on the business’s bottom line in real terms. 
 
You can’t stop a customer from sending back an item, but you can reduce the financial and logistical impact by knowing that the reason behind the return is related to personal taste, not how your products are presented online. 
 
Steven Ledgerwood is Managing Director UK at Emarsys.


 
 
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