What follows Christmas? Returns, of course. This is especially true for on-line retailers who must generally offer more forgiving returns polices than conventional retailers. In Europe, this is a matter of law. In the US, it is often a necessary part of gaining customer trust. But how much do returns cost retailers? According to The Economist, it can be quite a bit (Return to Santa, Dec 21).
Return rates can be alarmingly high: for some online retailers up to half of everything they sell comes back. Studies find that just handling each returned item costs online sellers between $6 and $18, and that is before the losses from items that are returned in unsaleable condition. …
A new study by Christian Schulze of the Frankfurt School of Finance and Management seeks to put some hard numbers on the scale of the serial-returner problem. Mr Schulze studied 5.9m transactions in Germany, involving 166,000 customers, for a large European online retailer. He looked only at those who had bought at least five items over a five-year period, and found that 5% of them sent back more than 80% of the things they had bought; and that 1% of customers sent back at least 90% of their purchases. Without the cost of returns, the retailer’s profits would be almost 50% higher, the study found.
But is this necessarily a bad business? That is not immediately clear on two levels. First, as I noted above, it is the cost of doing business. Virtually all goods have some aspect to them that cannot be properly evaluated without handling them or seeing them in person so there are going to be returns. Now there is the legitimate question of what can be done to control the quantity of returns. For example, could a firm make it possible for customers to preview goods even if they ultimately order them on-line? That might sound goofy — why would an on-line player want to resort to bricks and mortar — but my colleague Toni Moreno and his co-authors show that opening showrooms has actually reduced returns for on-line glasses seller Warby Parker. See their paper “Inventory Showrooms and Customer Migration in Omni-Channel Retail: The Effect of Product Information.”
The showroom approach lowers the cost of getting information with the hope that information leads to better product choices upfront. An alternative approach goes in the other direction and makes it harder to send stuff back. For example, does the customer have to pay to ship the stuff back? Is that little bit of friction enough to wanton ordering and returning?
That gets to the second point. Does the firm actually want to stop lots of returns if it would mean losing high volume customers? Best Buy and other firms have gotten press for “firing” customers who abuse its return policies but it’s quite clear what would count as abuse in an on-line setting. Take a customer who returns half of what they order at an on-line shoe or apparel retailer. If that comes about because the customer always orders two sizes so she gets the proper fit, it is hard to say she is a bad customer.