The hidden cost of selling direct – the returns game
Jan 03, 2018
Welcome to the returns game…one of the major costs of selling direct to the end user/consumer. All eCommerce companies and retailers wanting to sell direct, need to keep this in mind, that the cost of dealing with returns is much higher and worse than anything that most retailers experience during the course of a business year, even when you factor in post-holiday buyer’s remorse and gift returns.
As a marketer selling direct (eCommerce), you need to start factoring returns in as a cost of doing business. They aren’t going to go away, no matter what you do. Fortunately, they can be minimized - by staying away from products and offers that tend to generate high returns.
Different products and product categories return at different rates. Apparel, for example, returns at a much higher rate than home goods. I've seen returns on apparel as high as 100%. And, different types of promotional offers will generate higher returns than others.
One example of an offer that generated higher returns is “Free Shipping.”
Free shipping will generate additional orders, but it will also increase returns. And, depending on the products being sold, it can generate enough returns that it can make selling them unprofitable.
Some returns are solely related to the product, some are related solely to the offer, and some are related to factors affecting the consumer who is buying them, or a combination of any of these. I will give an example of a consumer related factor… a customer buys a size 10 dress thinking it’s a size 10 or thinking she’s a size 10, only to find out that when the dress arrives it’s either too large or too small. As a result, she returns the dress...she's not really a size 10. There’s also a chance it is product related meaning the dress is not really a size 10, or it may be a size 10 in one manufacturer’s product line and another size in some other manufacturers, which the buyer has purchased before. Or, it might even be the fact that it’s a different batch with size or color variations, etc. This is one reason that apparel direct marketers who have been around for ages and have a following have developed their own sizing and spec charts, and make sure that everything they sell conforms to those patterns.
Apparel, especially women’s apparel, tends to be one of those categories that generates a high rate of returns and it’s not just about sizing. How a dress or blouse looks on a model may sell the product, but it may also lead to a return when the customer finds out that she doesn’t look at all like that model does with the blouse on.
Yes, the tech community is promising a solution to the size fit problem with VR. Eventually, when it’s actually developed and mature enough as a technology to matter, VR may help, but the fact is it’s not going to eliminate 100% of the problem, even when it becomes viable, because most of us have a distorted image of our body, etc. I’ll look good in that, not.
The above example focused on apparel, but no product category is immune, especially with how easy marketers have made it for buyers to make purchases. Let's face it, eCommerce direct sellers have made it easier for buyers to return goods bought on line than it is to return goods actually bought in stores.
Order 3, Keep 1, Return 2 and that's "Bracketing"
Factor in how easy you make it easy for consumers to buy and ”bracket” just so they can test a bunch of options to see which they like and want to actually buy, and you are going to artificially inflate the return rates of products. And, why not, there is no cost to the consumer. But, there is a cost to you and it may be high enough to make selling that product or products or all of your merchandise online (direct) unprofitable.
The fact is that the direct sales generates more returns than traditional retailers have ever had to deal with. As for eCommerce companies without prior mail order business experience, dealing with returns is also something relatively new to them as well.
The Return of the Liquidators...
Whatever you do, you’re not going to eliminate returns, but you can start to factor them into the cost of doing business and dealing with the cost of processing, handling, restocking and liquidating returns. Liquidation costs are opening the eyes of many eCommerce and omni-channel retailers. They’re finding out that hard way that 10 cents on the dollar may be a good return on moving out the products through liquidators. It can be a lot worse, and I've seen the recovery rate down to a point where it makes more sense just to destroy the product, or even let the consumer keep it. And, based on the amount of goods going to landfills these days, some online retailers are finding out just that.
Different Channels, Different Cost, Different Rates of Return
Here’s something that many retailers and eCommerce companies fail to accept as a fact of doing business direct, and that is that doing business in the direct channel, selling direct is not the same as selling through brick and mortar. There are different costs and different cost structures. As a former retailer and direct marketer with P&L responsibility, I have had vast experience working with the different variables and costs. And, I can say that any retailer that tries to play both sides (brick and mortar and direct) without adopting direct marketing practices in terms of offerings and pricing is going to get hurt the worst. Taking your retail product line and pricing structure and just offering it online is the quickest way to lose money.
What’s profitable in a store may not be profitable when being sold direct.
Returns are a fact of doing business in the direct channel and they are here to stay, but you can minimize their impact by developing a returns tracking program, tied to products and offers as well as using pro forma breakeven analysis tools before you promote the product to see if it will be profitable to sell direct. This has been a common practice among direct marketers long before the digital channel arrived. The mail order catalogers turned eCommerce direct marketers have a leg up on the others new to this business of selling direct, because they have the processes and systems in place to deal with returns.
The first step in reducing the impact of returns is doing the proper breakeven analysis. To do this, you need to know all of your order processing, advertising and fulfillment cost. You also need to develop a database that keeps track of the return rates of all products, so you can establish parameters for product categories and offers. Unlike retail, selling direct does not allow you to make it up in the mix of products going out the door.
Want to know what returns are potentially costing your business?
From our experience in retail and direct marketing, we have developed a range of tools to do “what-if-analysis” of pricing and costing factors to determine if you can profitably sell a product direct to the end user / consumer. Using tools like these is less painful than finding out after the fact that you are losing your shirt.
One of these tools is our Average Order / Single Product Breakeven Analysis Tool, which allows you to plug in all promotional, product and fulfillment costs to determine if the product can be profitably sold and if so how many you have to sell to cover costs and make your stated profit goals. Click here to use this tool to give you an idea of how much money you’re potentially making or losing.
This tool is constructed to address the most common applications of selling a product direct, but if you would like one of these tools built especially for your business, then feel free to contact us. If you’d like help in planning and analyzing your eCommerce programs, contact us at (651) 315-7588.
There are lots of P&L operational factors to consider when selling direct to the consumer, and some are more critical than others, but returns and how you deal with them can make or break your direct business.
For those wanting to avoid the pitfalls of selling direct and who also want to shorten the learning curve on how to profitably sell direct, you should consider this book, “Marketing Direct: Breaking Through The Clutter.”
To read more about the returns problem facing all eCommerce / Omni channel retailers, check out these articles.
Dudley Stevenson, founder and CEO of DWS Associates, has over thirty-five years’ experience in consumer marketing, business-to-business marketing, and direct marketing, including developing, planning, and implementing go-to-market strategies. He's also the author of "Marketing Direct: Breaking Through The Clutter." Working with organizations ranging from start-ups to Fortune 100 companies, he and his team have helped clients such as IBM, Sony, Neiman Marcus, Arizona Highways, Marshall Field & Co., Mrs. Field’s, UNICEF, and Patagonia implement successful direct marketing programs. A longtime member of the Direct Marketing Association and the American Marketing Association, Stevenson is also a sought-after speaker. He’s given hundreds of presentations and workshops on marketing and direct marketing. His “Marketing Planning 101” workshop alone has reached more than 100,000 marketing and sales professionals.