Returns Are Vital to Truly Understanding and Improving Profitability

Understanding where your profits are coming from is impossible if you don’t have access to the complete picture. That includes everything after a purchase has been made, including online.

It’s dangerously easy to focus entirely on traffic and top-line performance, especially during the growth phase of a retail business. That’s understandable, because websites generate tons of valuable and interesting data, allowing you to get a view of your profitability and ROI — right?

Unfortunately, limiting the data you use like this obscures important aspects of customer behavior and profitability. The path to understanding and investing in your profitability involves diving deeper into the detail.

In short: Returns and associated post-purchase costs shouldn’t just be tallied up and subtracted from the total revenue number like a fixed cost. They should be investigated on a product-by-product and segment-by-segment basis.

Getting granular with your product lines

Do you have an accurate handle on your real inventory cost? Amazon calls unprofitable inventory “CRaP” (Can’t Realize a Profit). To weed out “CRaP,” they examine the individual performance of products, incorporating every associated cost to understand value at the most granular level. If you ignore downstream costs involved in supporting a product (such as returns handling or customer service) it’s impossible to know whether an item is valuable to your inventory or just “CRaP.”

ASOS is another great example of a company doing this right. They knew returns performance couldn’t be effectively measured and changed with the traditional label-based return process. These typically tell retailers relatively little about a return, and certainly don’t allow them to swiftly extract patterns of data to help prevent a product from becoming loss-making. These processes can’t help you pick out when a product has an inherent fault, is being routinely returned and replaced, or causing more customer service contacts than other items.

With a digital returns solution, ASOS was able to integrate the data from customers’ returns journeys into the wider business, enabling it to quickly identify and influence everything from inaccurate sizing, misleading photography, uncompetitive pricing or even unprofitable customers. As a result, ASOS reported nearly $60 million worth of savings, attributed to a massive decrease in returns.

Customer (super)modelling

The same logic applies to the profitability of customers, too. For example, you may have two seemingly excellent high-value customers. They’re both treated equally – routinely qualifying for free shipping, reward discounts and targeted campaigns. The difference is in the detail:

• Customer A purchases new seasonal items year-round, quite often buys two sizes and returns one, and overall returns maybe 40% of her purchases.
• Customer B only shops during sales but spends big. She doesn’t always return, although some things don’t work out and end up coming back – about 20% of the time.

A simplistic analysis would say that because Customer A is returning at a high rate, she’s a problem customer, and that Customer B is well within normal limits for returns.

However, while Customer A might be returning nearly half of everything she buys, she’s clearly a fan of the brand. She’s buying full-price items, and her returns behavior is largely due to lacking confidence in the sizing.

More consistent sizing and better tools to help her navigate size choices could help reduce her return rates. She’s also likely generating more profit for you than Customer B – who is buying low-margin sale items and still sometimes returning them.

As this demonstrates, you may have whole groups of customers who are very similar in top-line spend, but their profitability is very different when you factor in what they buy and what they return. Their purchase behavior also dictates different responses when it comes to managing those returns.

Treating both the same dilutes your profitability, when you could be maximizing the value of Customer A’s repeat purchasing and minimizing the costs to make Customer B’s price-conscious shopping more valuable to your bottom line.

Profitable products to profitable customers

The end goal is to focus on selling the most profitable products to the most profitable customers, saving money by not marketing to those who are loss-making, and expediting refunds to consistently high-value customers to keep them happy and continue their spending. This requires a transformation away from paper-based and manual returns processes, bringing visibility to your returns with a digital journey, and investing time and resource to make returns a powerful source of clarity and true profitability.

Dan Nevin is chief revenue officer, global retail at Doddle.