Customer Returns: Catalogers Can Save Money Here Too!

Customers who return merchandise are an enigma. Some like to thwart returns policies. Some just don't like the merchandise. Some need money. Some feel ripped off due to shoddy quality or style issues.

It has been my experience that customers with consistent returns behavior tend to have predictable returns behavior in the future.

A simple rule-of-thumb is this: If the customer has placed three or more orders, and has returned more than 2/3 of his/her merchandise, the customer should not be marketed to. In other words, stop mailing catalogs to this customer, and stop sending e-mail marketing campaigns to this customer.

This isn't 1994, mind you. The customer can still order from your website. But why waste marketing resources on a customer that is going to cost your business profit?

In fact, if you want to really see if orders happen organically, this is a low-risk audience to "do a test", if you will. Just stop mailing catalogs and stop sending e-mail campaigns, and see if the customer continues to purchase. If the customer continues to purchase, those catalogs and e-mail marketing campaigns are probably not driving the volume we think they're driving.

E-Mail Marketing And Customers Who Return A Lot Of Merchandise

Sometimes, our instant access to metrics cause us to screw up.

This happens to most of us.

1. We execute an e-mail campaign on a Tuesday morning at 9:00am.
2. By 10:27am, we have a forecast for how well the e-mail campaign will perform. We know open rates (or render rates as the experts now say), click-through rates, and conversion rates. We may even know $ per e-mail.

Three weeks later, twenty percent of the customers who purchased from the e-mail campaign returned their merchandise for a refund.

Did the e-mail marketing campaign work?

One of the things we can do is identify customers who are "high returners". I've done this analysis for many companies. Typically, a small subset of the audience (maybe 1% to 5% of your twelve month buyer file) are responsible for a disproportionate amount of returns.

An easy way to address this problem is to identify customers with a high return rate, and see if those customers will have a high return rate in the future. If so, you run a profit and loss statement on future sales. You talk to your folks in finance, folks who know the actual cost to process each item returned to a company.

At Eddie Bauer, we knew that if a customer had ordered at least three times in the past, and returned two-thirds or more of the merchandise she purchased, she would be unprofitable to market to in the future.

In e-mail marketing, this one is a slam dunk! You simply create a suppression list for this tiny subset of the customer file, and don't send e-mail marketing campaigns to this segment.

And then you bask in the glow of the increase in profit you obtain because of your strategy.

You are likely to see a drop in your metrics --- high returns customers are typically your most active customers --- they open e-mails, they click-through to the website, they buy stuff. And given your returns policy, you should let them buy stuff. However, there is no rule that says you must also market to the customer. So generate additional profit for your company. Stop e-mailing customers who return too much merchandise!

Customers Who Return Too Much Merchandise

Click on the image to enlarge it.

The year was 1993, the company was Lands' End. It was my job to identify customers who "returned too much merchandise".

A deep dive into the database indicated that a small number of households purchased frequently and returned more than 75% of their purchases.

The analysis indicated that these customers were very likely to purchase in the future, and if they purchased, they would return at least 67% of the merchandise they bought.

And if customers ordered frequently and returned at least 67% of the merchandise, it was an unprofitable customer relationship. In other words, after adding the cost of fulfilling orders, marketing to the customer, and processing returns, we would lose a substantial amount of profit.

If we didn't market to the customer, we'd lose top-line sales, but increase profitability.

We made the decision to stop mailing catalogs to these customers, reserving the right to mail maybe one catalog per quarter to these households.

It didn't take long for these customers to realize that they weren't getting catalogs. It didn't take long for these customers to voice their displeasure about not getting catalogs. It didn't take long for the "customer advocate", an employee responsible for taking the side of the customer, to become frustrated with my analysis.

There's a fine line you walk when you accept any returns, no matter the situation. Customers are entitled to return merchandise. However, the company has a responsibility to maximize profitability for ownership/shareholders. We let customers return whatever they wanted to return. We retained the right to decide who we marketed to, and how often we marketed to the customer.

Here's my question for you, the loyal reader ... what is the right balance between marketing strategy and customers who return a lot of merchandise?

Costco Returns

KING5 News reported that Costco altered the return policy on electronic merchandise (iPods, HDTV televisions etc.).

Previously, a customer could return an iPod anytime after purchasing the item.

Due to rampant fraud, Costco changed the return policy to a 90 day window.

Is this an acceptable compromise, or is this a greedy company protecting razor-thin gross margins?

I think this is an acceptable compromise.