Harrods

How to protect your profits with ‘on-approval’​ shopping

Whilst I was writing this article, a former Harrods colleague posted an article to LinkedIn from The Robin Report which identified the fact that the 18th century has never been more relevant for retail. I had been mulling over the fact that Victorian-era ‘on approval’ shopping seemed to be making a comeback, in various forms, as a way of winning and rewarding customer loyalty, and encouraging higher spend.

When I worked in Harrods in the 1990’s, there were still a few customers old enough to remember when ‘on approval’ was commonplace at their local ‘corner store’. Often, they were quite perturbed to find that we couldn’t dispatch their order without first taking their credit card details, charging it and then issuing a refund should they find it unsuitable. They didn’t wish to make a purchase, they just wanted to view a selection of merchandise that fitted their requirements so that they could decide at home whether anything was suitable or not.

Since that time, ordering online has dramatically changed the way we shop and customer behaviour on e-commerce sites indicates that this ‘on approval’ mentality prevails with some customer segments. Interestingly, it now seems that some retailers are not only encouraging this behaviour, but endorsing it.

Catering to their EIP customers, Extremely Important Person, (2% of the customer base but 40% of the sales) Yoox/Net-a-Porter is introducing a ‘You Try, We Wait’ service. The delivery of an order is not completed until the recipient has tried on the items and returned the unwanted goods to the awaiting delivery service. No payment is made until the customer has made their selection and, the inconvenience of returning is removed. Providing this level of customer service will of course be costly to the retailer, but, these are luxury items and the lifetime value of ‘EIPs’ should more than justify the investment. I wonder too if there is an added benefit to the retailer of handling returns more efficiently. With this service, there’s no delay in getting limited, expensive merchandise back into stock and ready to sell again.

Other examples include retailers, Threads and Enclothed. Their proposition is a ‘try before you buy’ service for men, who typically don’t like shopping. They take the hassle out of shopping, by shipping a clothing selection made by an online ‘personal stylist’, for approval at the customer’s home/work etc.  The retailer must really get to know their customer, because the business model is not sustainable unless their customer keeps the clothes they recommend. The end goal is for the retailer to get so good at predicting what their customer wants that sales are maximised and costly returns are kept to a minimum.

Amazon, meanwhile, is introducing their own ‘try before you buy’ option with their latest offer ‘Amazon Wardrobe’ for Amazon Prime customers. This encourages customers to use their home as their changing room by ordering, without making an advance payment, and returning any items that are not suitable.  To encourage more ‘keeps’ than returns, customers receive a 10% discount if more than 3 items are kept and a 20% discount if more than 5 are kept. Amazon is aspiring to make their online purchases as friction-free as possible but at the same time giving customers an incentive to be careful about their choices and ensure that each order remains profitable.

The end goal of these services is, not just to sell more, but to use personalisation and incentives to make sure that the customer ‘keeps’ what they buy. That seems obvious, but it’s interesting that Clear Returns has seen more mainstream ‘try before you buy’ methods drive up returns by encouraging impulse buying followed by buyer’s remorse. Often ‘Buy now, pay later’ payment methods, available at checkout, are not targeted and offer ‘on approval’ to all customers, even those serial returners who have no intention of keeping their purchase. As a regular online shopper, I’ve seen a steady increase of these types of payment options at checkout. This morning on a well-known, fast-fashion, retail site I was given the option of paying £1.20 to delay my payment by 20 days. Other sites use a popular payment method which allows customers to delay payment for up to 30 days, or to pay in installments. These payment options are there to increase conversion rates, but are encouraging customers to buy more than they want, because there’s no up front charge and returns are free. If you also add a free shipping threshold (e.g. shipping is free for orders over £50) then the customer has an incentive to buy more than they want and return the unwanted items later with no additional cost.

So, for retailers who want to increase sales with ‘on approval’ shopping without damaging profits – what’s the solution?

Understanding your customers sales and returns behaviour is key. Clear Returns uses niche, predictive analytics to identify retailer’s ‘keepers’, ‘explorers’ and ‘serial returners’ so that retailers can balance a competitive service with the profitability of making the sales in the first place. Clear Returns gives retailers an informed, holistic view of returns with a detailed understanding of who is returning which products, and why, and provides actionable insights that accelerate gross sales, reduce operational costs, improve stock availability and increase retained revenue.

Customer behaviour can be changed – six billion plastic bags and counting.

Think of the progress UK retailers have made in reducing single-use plastic bags since the introduction of a 5p charge in October 2015.  This policy change has reportedly taken 6 billion plastic bags out of circulation and gathered £29 million for good causes (source).  These impressive results for the environment haven’t driven customers away, and the small penalty alone cannot be the reason that so many customers now ensure they regularly use a ‘bag for life’.  So what is this change in mindset telling us?

To  cultivate the progressive image that 21st century customers demand, more and more retailers  are focusing on sustainability and their impact on the environment.  Millennials, in particular, are attracted to companies who share their values and beliefs, and they expect brands to engage with them and to be socially aware.   A report last year recorded the fact that 88% of millennials and Gen X’ers want retailers ‘to do more good, not just less bad’ (HBR) and reputations can be damaged very quickly when retailer’s tech-savvy customers spread damaging reports on social media.

In response, many large retailers now have a Head of Corporate Responsibility or a Head of Sustainability function within their organisation.  This role encompasses political and ethical areas such as modern slavery and responsible sourcing but also environmental issues of reducing waste and improving the supply chain, which will ultimately cut costs too.  In the case of Debenhams, for example, reduction of carbon emissions is one of the KPI’s measured by their board – the 2016 Annual Report records a reduction of 12% on the previous year.

They are not alone in their efforts.  Last month H&M became the first International retailer to sign up to EP100 with ambitious plans to achieve a climate positive value chain by 2040.  Others, such as Shop Direct, N Brown and Tesco are undertaking initiatives to promote greater environmental responsibility and employ environmentally friendly technologies, becoming the first retailers to sign up to the  UN Global Compact.

Clear Returns advocate a similar strategy on returns – reducing costs and the impact on the environment through the reduction of transportation, warehousing and packaging.  With today’s customer-centric retail mindset, it involves something of a shift in policy.  Clear Returns focus on modifying customer behaviour with data analytics and small policy changes which can have a big effect on the bottom line.

Clear Returns’ specialist returns technology perfectly aligns with this growing, socially- responsible, trend.  Primarily to help retailers reduce the operational cost of dealing with returns, it also lowers the impact of e-commerce on the environment.  This isn’t a case of reducing sales, but ensuring that goods are not being regularly shipped and returned by customers who have no intention of keeping them.   Returns can be the next ‘plastic bag’ but, who will lead the way?

Are returns the biggest barrier to online profitability?

When working with retailers to reduce returns and sustain profit growth, we have two initial questions:-

 

Question 1. How much are returns really costing?

So not just expressed as a % of orders, but also in unnecessary fulfilment costs, wasted warehousing capacity, reduced stock availability, inefficient use of working capital, and so on.

Question 2. Are they being actively managed and controlled, or just being accepted as an inevitable cost of selling on-line?

Concentrating effort on reducing returns at the same time as growing sales can have a huge impact on profitability.

 

Example – Retailer A

We discovered that this retailer was spending £25 million a year shipping stock to and from returners to achieve zero sales.


Example – Retailer B

We calculated that reducing returns by 11% would have a greater impact on profit for this retailer than increasing sales by 20%.

It’s a complex area, with massive volumes of data to analyse.   Establishing who the genuinely unprofitable customers are, and doing something about them, without impacting the profitable ones, is key.

 

At Clear Returns we offer detailed returns data analysis and insights through to AI modelling to create direct data feeds for dynamic, customer level intervention.

Combining a market-wide view, award-winning returns insights software and a commercial focus – because it’s not really a sale until the customer ‘keeps’ it – Clear Returns reduce returns without impacting top-line growth. Clear Returns gives retailers an informed, holistic view of returns with a detailed understanding of who is returning which products, and why, and provides actionable insights that accelerates gross sales, reduce operational costs, improve stock availability and increase retained revenue.

 

We can enable significant reductions in returns and profit growth.

You can’t manage what you don’t measure

It’s not really a sale until a customer decides to keep it. Returns add up to almost 12% of revenue lost each year, on average, with an even bigger hit to profits. But retailers don’t really know the causes of those returns, their impact on conversion and how they affect customer profitability.

Every click the customer makes before they buy is scrutinised with digital analytics tools, whereas the causes of returns are typically assessed from a few codes on a returns form. Marketing efforts may actually drive up returns and costs. And effort gets focused on tackling the symptoms – not the causes. This impacts customer experience and lifetime value.

Returns can only be managed and reduced once they are measured and understood – which is where the Clear Returns Intelligence Console fits in. We measure the keep, not simply the sale and incorporate costs and gross profit. Meaning you understand how product, marketing, suppliers and customers are really impacting your business performance.

And once fully understood, returns can then be reduced without impacting top-line growth. This means increased profits, improved marketing efficiency and increased customer loyalty.

You wouldn’t run you sales and marketing activities without data – so why ignore the more critical information of all, what your customer actually keeps

Schedule your returns intelligence demo now!

It’s not you, it’s me.

How customer behavior is the biggest influence on retail return rates

When I founded Clear Returns, I did so in the guilty knowledge that I return at least 70% of what I buy. The purchase is only the start of the process for me – my buying decision only really starts when the goods arrive. And then the bulk of my order almost inevitably goes back.

As a data analyst, I knew that if enough others shopped liked me, then the numbers on which retailers base their marketing, policy, and stock buying decisions are fundamentally flawed.

Five years on, this company’s ability to predict and prevent returns continues to astound me. The only thing I underestimated was the extent to which the problem would worsen and the impact that would come have on retail profits. Many ecommerce retailers just experienced their highest return rates ever, and for some that is jeopardizing their commercial survival.

And yet, still, when the retailer thinks about tackling returns they typically look at product, fit, images, and operations. They assume the cause lies with them and can be fixed in the supply chain.

The critical question should really be

“did my customer ever intend to keep their purchase?”

Why? Because 75% of returns come from shoppers who may never have intended to keep all their order, they were simply choosing at home – often in direct response to marketing efforts that encourage them to do exactly that.

 

Why customer intent matters

Whether a shopper intends to keep or return their order is a highly complex, but highly predictive indicator.  And the proportion of “keepers” vs “returners” in the overall base of customers determines not only the likely return rate, but also stock efficiency and overall profitability. This is a worked example, based on real patterns, for a clothing retailer making £5.2m of ecommerce sales:

 

 

 

 

 

 

A keeper may still return – usually because something went wrong with the process or product. But they spent what they could afford and intended to keep their purchase when they made their buying decision.

A returner, on the other hand is likely to spend more and buy more often than a keeper – because they do not intend to keep everything they buy. They may overspend in response to discounts or to get free shipping. They are making their purchase selections at home – a very costly behavior.

As more of this group appear in the customer base – and the overall proportion of keepers falls – return rates and returns costs rocket. BUT, total revenue grows too. So, at first glance these returners seem like great customers and marketing attention flows towards them. Returners nearly always push keepers out of ad targeting and high priority segments, because they are responsive and spend more. But they can be less profitable than their keeping counterparts once costs are factored in. This gets compounded if stock is unavailable for keepers to buy, because it is locked up with high returners.

Unless a retailer has visibility on the costs of returns and the split of “returners” vs “keepers” in their base, their efforts to grow revenue can ultimately make the business less and less profitable.

 

 

 

 

 

 

 

 

 

 

Forget fit, focus on customers

The current fixation on fit and size is not going to transform retail return rates – you’re preaching to the choir when you focus remedial efforts on those who intended to keep anyway. Especially if at the same time your marketing efforts are disproportionately aimed at returners.

75% of refunds are typically coming from customers who didn’t intend to keep their whole order. And that is not necessarily bad. These returners include your most valuable shoppers of all, but they also include customers who cost you money every time they buy.

At Clear Returns we know the customer is the most significant place a retailer should focus in order to make significant improvements in return rates. Talk to us now about optimizing your retail business for keeps.