Executive Briefings

Balancing Cost and Customer Expectations for Profitable Apparel Returns

Analyst Insight: Online retailers must make the returns process convenient for their customers which, in turn, increases the amount of product returned. But every company must find a balance between cost and customer expectations. Should you encourage customers to return products to the store? To the DC? To a 3PL? The answer depends on your brand, culture, infrastructure and average unit price. – Bruce Baring and Jason Denmon, Apparel Industry Leaders, Fortna Inc.

Balancing Cost and Customer Expectations for Profitable Apparel Returns

Retailers encourage online purchasing by offering free shipping and lenient returns policies. A recent survey revealed 85 percent of customers wouldn’t buy again from a company with a difficult returns process. With exponential growth of online sales comes increased returns. Nearly 62 percent of consumers returned or exchanged items in 2013, 20 percent more than 2012. Returns are complex and unpredictable – causing logistics headaches and potential service failures. How do you balance customer expectations with the cost of providing a seamless experience and easy returns?

For some companies returns are a critical element of their brand promise. Zappos considers its one-year, free-return-shipping policy key to building loyalty.  L.L.Bean considers reverse logistics a core competency and an integral part of its brand marketing. Unfortunately, for many companies, returns are a necessary evil that gets attention only when they start to impede the business. Returns can tie up costly resources across multiple functions of the business – from customer service to warehousing to accounting. Receiving, evaluating and re-packaging are labor-intensive. Systems must be able to track the merchandise (receipts, value) and support the issuing of credits and disposition of inventory.

Retailers with physical stores can accept returns in-store, but then what? Put them on the sales floor at full price? Mark them down? Ship them back to the DC? What if the store doesn’t carry that SKU? Some companies prefer store returns because they offer additional sales opportunities. Other brand owners destroy returned merchandise because of high handling and re-packaging costs or because the brand image might suffer by discounting.

How do you turn handling returns from necessary evil into opportunity for competitive advantage?

1. Decide whether or not to outsource returns. With outsourcing you don't have the headaches, but you recoup far less of your investment. Logistics providers specializing in returns have processes and standards for disposition that rival most outbound operations.

2. Determine what returns are worth. What’s the value of the product? How much margin do you have to work with to try to re-sell it? What is the cost of return shipping? These things determine what you can invest and whether or not you centralize returns in a multi-site network. You must balance economies of scale with transportation cost.

3. Determine your metrics and management. Institute the same management and control over returns as your other inventory. How long does it take to cycle through returns? What is the cost per unit of returns processed?

4. Mitigate the need for returns. Companies are investing in fitting technology and enhanced product comparison guides to minimize the need for returns. Detailed product attribute information and reviews can also diminish returns as shoppers make better-informed decisions.

5. Consider return policies. Return policies should incentivize the lowest cost return option and discourage returns for consumers on the fence about a return. You train your customers with your policies. 

                                                      The Outlook

Expect returns to increase as online sales grow. Companies that strategically approach handling returns will continue to delight customers without negative impact to profitability. Those who fail to apply discipline to this aspect of their business will see reverse logistics costs rise. Balancing cost and customer expectations is challenging. While returns are often resource intensive, they can play a valuable role in increasing sales and competitive advantage as part of your brand promise.

Retailers encourage online purchasing by offering free shipping and lenient returns policies. A recent survey revealed 85 percent of customers wouldn’t buy again from a company with a difficult returns process. With exponential growth of online sales comes increased returns. Nearly 62 percent of consumers returned or exchanged items in 2013, 20 percent more than 2012. Returns are complex and unpredictable – causing logistics headaches and potential service failures. How do you balance customer expectations with the cost of providing a seamless experience and easy returns?

For some companies returns are a critical element of their brand promise. Zappos considers its one-year, free-return-shipping policy key to building loyalty.  L.L.Bean considers reverse logistics a core competency and an integral part of its brand marketing. Unfortunately, for many companies, returns are a necessary evil that gets attention only when they start to impede the business. Returns can tie up costly resources across multiple functions of the business – from customer service to warehousing to accounting. Receiving, evaluating and re-packaging are labor-intensive. Systems must be able to track the merchandise (receipts, value) and support the issuing of credits and disposition of inventory.

Retailers with physical stores can accept returns in-store, but then what? Put them on the sales floor at full price? Mark them down? Ship them back to the DC? What if the store doesn’t carry that SKU? Some companies prefer store returns because they offer additional sales opportunities. Other brand owners destroy returned merchandise because of high handling and re-packaging costs or because the brand image might suffer by discounting.

How do you turn handling returns from necessary evil into opportunity for competitive advantage?

1. Decide whether or not to outsource returns. With outsourcing you don't have the headaches, but you recoup far less of your investment. Logistics providers specializing in returns have processes and standards for disposition that rival most outbound operations.

2. Determine what returns are worth. What’s the value of the product? How much margin do you have to work with to try to re-sell it? What is the cost of return shipping? These things determine what you can invest and whether or not you centralize returns in a multi-site network. You must balance economies of scale with transportation cost.

3. Determine your metrics and management. Institute the same management and control over returns as your other inventory. How long does it take to cycle through returns? What is the cost per unit of returns processed?

4. Mitigate the need for returns. Companies are investing in fitting technology and enhanced product comparison guides to minimize the need for returns. Detailed product attribute information and reviews can also diminish returns as shoppers make better-informed decisions.

5. Consider return policies. Return policies should incentivize the lowest cost return option and discourage returns for consumers on the fence about a return. You train your customers with your policies. 

                                                      The Outlook

Expect returns to increase as online sales grow. Companies that strategically approach handling returns will continue to delight customers without negative impact to profitability. Those who fail to apply discipline to this aspect of their business will see reverse logistics costs rise. Balancing cost and customer expectations is challenging. While returns are often resource intensive, they can play a valuable role in increasing sales and competitive advantage as part of your brand promise.

Balancing Cost and Customer Expectations for Profitable Apparel Returns