UNC Kenan-Flagler Business School

Shaping Leaders, Driving Results

UNC Kenan-Flagler Business School

INSIGHTS FOR BUSINESS


How product returns can boost sales and profitability

5/25/2010

Many firms may actively discourage product returns. But this could be a costly mistake because managing product returns effectively can boost sales and profitability.

A customer’s product return behavior is a key factor in determining their value to the company, notes J. Andrew Petersen, assistant marketing professor at UNC Kenan-Flagler.

“Many firms treat customers who return products as thorns in their sides,” he notes. “These firms often offer disincentives for customers to return products and/or make the product return process more difficult for a customer to complete.”

However, Petersen has found that customers who return 10-15% of what they purchase are, on average, a company’s most valuable customers into the future. Why?

These customers feel more comfortable with the purchase process knowing that whatever they purchase can be returned without penalty. In addition, they are more likely to refer the retailer to other shoppers. So, companies with liberal return polices come out ahead, Petersen found.

But, while retailers can actively manage returns so that they become a tool to boost profits, they need to encourage certain customers to return more products while encouraging others to return less.

Every company has an optimal rate of returns. Higher returns to a point have been shown to boost higher sales in the future. But if customers go over the optimal return rate, the costs to the company to repackage and restock the items outweigh the future benefits. Thus, firms should:

  • Calculate the optimal product return rate for the company.
  • Understand what factors drive returns.
  • Adjust marketing efforts according to factors driving returns.
  • Not necessarily point to product returns as a necessary evil in all cases.
  • Take the opportunity to understand whether the product return experience can be another “touch point” with the customer to build a long-term and profitable relationship. 

Petersen studied a major apparel retailer and found that returns tended to be lower when shoppers bought discounted items. Returns were also lower when customers bought the same types of products they typically buy but purchased through a different distribution channel.

Returns tended to be higher when shoppers bought new types of products from the distribution channel they usually used.

Petersen notes that this information can be used by marketers to influence shoppers return rates. For example:

  • If a customer has been returning products too often, a manager could send the customer discounts to purchase familiar products in an unfamiliar distribution channel.
  • If a customer is only returning a small percentage of products, the company may not be maximizing profit from this customer. A manager could send this customer an incentive to buy new types of products.

Ultimately, Petersen found that for the apparel retailer, analyzing customers based on their purchase and product return behavior (rather than just purchase behavior alone), doubled the return on marketing investment and increased profit by more than 45% over six months.