Can Product Returns Make You Money?
Can product returns actually make you money? This is the age-old question that has loomed in the minds of e-retailers, in an industry that is fiercely competitive amongst itself and with brick and mortar retailers.
But can product returns really make you money? The question for all the marbles has been repeatedly asked, time and time again, and finally there are solid answers in sight.
A Wall Street Journal report says that product returns have the potential to enable e-retailers to maximize on profits. The report emphasizes that each e-retailer has an optimal rate of returns. Meaning that some customers should be less encouraged to make returns whereas others should be.
Sounds confusing, right?
Here’s the breakdown. An optimal rate of returns means that your business is optimizing the reverse sales funnel from returns to the point where re-targeted, reverse logistics re-buying is actually feeding your profit cycle.
In so many words: Monitoring certain consumer buying habits and then seeing what they later convert to, after the fact, on future purchases, post return, and assessing that data to feed your bottom line. Read our related article in Entrepreneur Magazine: Why Retailers Should Embrace the Returns Policy.
Six Years of Data Studied
The WSJ report in question took aggregate data that was pooled over six years. The data was culled from a national catalog retailer that offered a lenient returns policy. The study compared the cost that the entity had to absorb from returns versus profits that were earned from customers who had made returns.
- While the e-retailer had an average return rate of 16%, the study concluded that in order for it to maximize on profits, the ideal return rate would be a trimmer 13%.
- Returns were found to be reduced when customers bought discounted items.
- Higher return rates were found when consumers purchased across multiple channels, buying something that they wouldn’t normally purchase, like accessories from an outerwear catalog.
- The rate of returns spiked when customers purchased a new product from a new distribution channel that they were unfamiliar with.
Case in Point
To better illustrate the study’s findings, an example can be provided. Presume that a shopper who would typically buy the clothing they want from a local brick and mortar retailer chose instead to buy that clothing online because they received a coupon that gave them a special discount. The study concluded that this consumer would have a reduced rate of returns due to familiarity with this product and brand.
But, the study also found that the consumer would be likely to spend more when presented with a newer and more exciting distribution channel. But the e-retailer would have to work towards reducing the rate of returns in this instance because it would be higher than the optimal rate.
Even more interesting is that the company would still want a return rate of at least 5%, according to the study, because otherwise the company would be losing out on future sales from that same consumer. In essence, you want consumers to return a certain amount of products that they buy from your store online, otherwise you are not maximizing the full profit potential of the consumer in your sales funnel.
Making Returns Profitable
The study concludes that, in this particular case, the company stopped sending catalogs to consumers who had high rates of returns. In turn, this caused their profits to dip. By making slight adjustments in how they advertised to consumers who had high rates of returns, the company was able to improve profits and trim return rates to acceptable levels that were conducive to improving long term profit yields.
So… yes. When done properly, you can in fact profit from returns. But a little bit of A/B testing is required on your part. And you’ll also need to adjust your marketing tactics to consumers that have high rates of returns to capitalize on these returns.
Following in Zappos' Footsteps
Two prominent e-retailers that exemplify this study – but that are not related to the aforementioned study, yet share a relevant subject matter – are Zalando and Zappos. Both offer a lenient, hassle-free and cost-free returns policy. Consumers can simply send products back with free return shipping and no restocking fees, with Zappos allowing consumers to return products for up to a year post purchase.
According to Rubin Ritter, managing director of Zalando, returns are just part of e-retailing.
“A world without returns would be nice, but it’s unrealistic. For us, the question is: can the business be profitable with returns? And we are certain that we can. And to end the discussion, I will tell you: the overall return rate for Zalando is 50%,” Ritter explained in a recent interview.
Craig Adkins, Vice President of operations at Zappos, says their return rate is 35%, but with some of their customers it can reach as much as 50%. He emphasizes that Zappos “loves these (high return) customers.”
Why? Because the consumers who are returning in upwards of 50% of the products that they purchase from Zappos are also buying the higher end wares. And it costs Zappos the same amount to eat return shipping on a pair of shoes no matter the retail price tag of the shoes.
This means that their average spend easily defeats any other average shopper. So one higher end item purchased makes the company more money than ten items that are sold to ten other consumers. Even if the customer needs to make a return once in a while, the company still earmarks sweet profit margins from the customer over time. Meanwhile, other shoppers tend to return fewer items but buy just as often, thus cycling into the re-buying profit margin that’s created from offering a generous returns policy.
“Our best customers have the highest return rates, but they are also the ones that spend the most money with us and are our most profitable customers,” Adkins says.