Winning greater loyalty with easier product returns

With up to one-third of all retail sales now resulting in returns, retailers increasingly need new strategies to keep customers happy and loyal, according to a study conducted in Canada by the Boston Consulting Group (BCG).

According to BCG's study, Canadian consumers now return a worrying Can$10 billion worth of retail purchases each year. According to George Stalk Jr., a senior vice president and director in BCG's Toronto office, who co-authored the report, "Traditionally, retailers have seen returns as the 'ugly duckling' of the retail industry. No one likes them or knows what to do with them, and for the most part they have made the process difficult and uncomfortable for customers."

But Stalk said he understands why retailers who don't really want to take back purchased goods have so often made it difficult for customers to go through the returns process.

A loyalty-building opportunity
But rather that making it hard for their customers, which only serves to frustrate those who may otherwise be very happy with the store, BCG recommends that such companies should view returns as another way to win market share and strengthen customer loyalty. Stalk warned: "Retailers need to understand they can mine a wealth of consumer insight and reap tremendous customer loyalty by embracing rather than fighting the returns."

The study found that retailers putting into place a more difficult approach to returns has not reduced the number of people wanting to bring back unwanted purchases - a particular problem after the holiday season each year. In many categories in the Canadian retail market, the number of returns is actually growing at a rate of over 50% each year, effectively meaning that up to one-third of a retailer's products could end up being returned.

Gathering preference data
Rather than making it difficult to return a product, some retailers have already found that a generous, easy and efficient returns policy can provide a genuine competitive advantage in attracting the most desirable customers. Such companies end up knowing much more about their customers (particularly their likes, dislikes, and turn-offs), and why products are being returned. They can then use that knowledge to improve the performance of their retail sales operations.

Success stories
According to Stalk, "Stores such as GapKids and BabyGap are particularly good at liberally interpreting their returns policies in favour of their customers. They recognise returns as a reality of the business and make this part of the benefit of shopping there. When we spoke with consumers about their experiences with the company, we found they fell into two categories: those who purchase virtually all of their children's clothes from Gap stores and those who soon will."

Another company that has also embraced an enhanced returns policy is Zappos.com - an online seller of shoes, handbags and accessories. Its returns policy encourages customers to buy several pairs of shoes at a time because they know they can send back the ones they don't want, at no charge. The company even gives customers up to one year to return unwanted shoes (in their original packaging and condition).

Three steps to competitive advantage
The report outlined a number of key steps a retailer can take to turn its returns process into a competitive advantage. Before developing a strategy, the retailer must assess both the scope of its own returns business and the returns policies of the best players in the consumer goods industry. Once this is done, the company can develop a differentiated strategy based on these considerations:

1. No risk with an initial purchase
   Understand the importance of the returns policy to the customer's initial purchase. Consumers tend to remember their first experience with returns when it comes to their future selection of retail outlets to shop at. The most sophisticated customers will ask about the policy before buying, while others will simply find out when the time comes. Either way, the ease of the process will impact future sales.
    
2. Driving repeat business and frequency
   Attractive return policies can influence customers to buy more products, more often. A bad experience will often stop them from coming back at all. At best a bad experience will cause a customer to stop infrequently if they have no other choice (i.e. where inertia or a lack of local competition is stopping them defecting).
    
3. Careful management of problematic returns
   The return of products with short shelf-lives or rapidly declining prices - as well as personal products - are always difficult to manage. Whether these products can be resold or not, the process needs to be done quickly and efficiently. The customer should not be expected to lose out because the retailer fears it will lose money by accepting a returned product.

Stalk concluded: "Transforming a returns policy into a competitive advantage can't be done overnight, but retailers need to understand the impact their existing policy has on their bottom-line. As they head into the most important sales season of the year - and the biggest return season of the year - some are going to strengthen their market position and some will see it erode, based on how they handle this part of the sales cycle."