UNLOCKING THE VALUE IN RETURN TRANSACTIONS

By Matt King, Manager

There are only so many dials that can be turned to increase sales and reduce expenses, and most have been turned at least twice already. But, what about returns? Historically, return transactions have just been “a part of doing business,” — however, they can unfortunately cause both a negative sales impact and an increase in expenses. But, what if new value could be created — previously ignored in return transactions — adding new sales? Or what if fraud and abuse could be reduced without creating stricter policies that can frustrate good customers — and still save costs by reducing return rates? What if a new dial could be turned? Think about it, if providing a higher level of customer service and generating both revenue and increased margin during the stressful return or exchange process could be possible, then an improved bottom line and a competitive advantage would have just been created.

Retailers who have recently optimized their return transactions have increased customer conversions while reducing fraud and abuse, resulting in increases of over 1–2% in net sales.

We all know that during the typical Monday morning rush, IT delivers reports, graphs, and charts showing column after column of numbers — the “stuff” you need to run your business. Management spends hours pouring over the financials, trying to squeeze one more ounce of margin or raise the size of the average ticket ever so slightly. But in the zeal for maximizing sales and trimming costs, has something been missed?

Return and exchange transactions are a dark part of the retail environment — accepted out of necessity and/or customer service pressures, yet often left unexamined. Most retailers are so accustomed to seeing the returns bucket on weekly reports that they simply gloss over it, or grumble about the negative effect returns have in transforming gross sales into net. But returns hold significant promise, and I believe that the concept of Return Optimization may be one of the keys to unlocking their extraordinary value.

A New Perspective on Returns

Traditionally, retailers have utilized policies and procedures to manage returns and try to curb fraudulent return transactions. In the past few years, Returns Management applications, focused on receipt validation and return authorization, have been introduced to help contain the losses from returns — yet returns and return fraud and abuse continue to grow.

To compound the problem, most retailers who are trying to “manage” fraudulent returns by implementing stricter policies and procedures are often alienating good customers and causing sales associates additional headaches as they try to enforce them. Retailers may have strong return procedures and policies in place and empowered store managers to apply discretion when processing returns, but still many have not examined the numbers that drive their stagnant or, worse yet, growing return rate. Shouldn’t there be a better way to minimize fraudulent returns and ensure adherence to return policies while maximizing customer service?

“The benefits from issuing a reward certificate during the return process greatly exceeded our expectations. Not only does it soften the returns process, but redemption rates have averaged above 25%, driving an increase in incremental sales over 1%.”

— Bill Turner, Director US Retail Operations, Nike, Inc.

Retailers already spend a lot of their time and marketing, operating, and training budgets trying to get shoppers into the store and then convert them to a paying customer. With a return, the shopper is already in the store, plus they have money to spend; why not encourage them to spend it in the store immediately? It is the perfect time for a conversion attempt.

In this age of advanced communications and technology, I believe that returns can now be examined and even exploited to further reduce the amount of red ink. Part of the awareness comes when considering that returners are a cross section of regular shoppers, including some of the best and worst customers. The trick is to improve customer service and convert the 99% of good customers, while still deterring return fraud and abuse. Return Optimization can provide retailers with these benefits in addition to generating new revenue.

Return Optimization is a process that tracks purchase and return histories and combines them with statistical models to discourage fraudulent and abusive return behavior, while at the same time encouraging good customers to continue their shopping experience by issuing incentives. Traditional Returns Management solutions verify the customer receipt for validity; however, Return Optimization goes above and beyond by also examining customer data, trends, purchase history, and products to discourage abuse and fraud while utilizing predictive behavior and retailer-specific business objectives to generate incentives and reward thresholds.

Opportunity to Generate New Revenue

How can retailers minimize the negative impact of a return transaction? What is needed is an improved return experience — an opportunity to win customer confidence and earn their loyalty at a critical point in the relationship. It’s also a huge sales opportunity: The shopper has cash in-hand from the recent return, so keep them in the store . . . spending!

Here’s how to convert a previously “un-convertible” return customer:

When a good customer returns a product, give them an incentive that rewards them if they stay in the store and spend money. The byproduct of this incentive is also a significant boost to customer satisfaction.

Here is what happens next:

The customer stays in the store for additional purchases, generating new sales — a 1% (or more) increase in sales!

There is no better time to retain a good customer and ensure their ongoing patronage than when they are standing inside the store. Rewarding them says, “We apologize that the product wasn’t what you wanted,” and can simultaneously defuse an awkward and potentially stressful transaction. Use the return transaction to enhance the customer relationship by offering an intelligent incentive to convert the customer and keep the money in the store. Use Return Optimization to identify the customer and point them back into the store with a specific promotion tailored to the customer’s and the store’s needs, not just a generic discount to be redeemed anytime. Offering an intelligent discount to be applied immediately will raise retailer and customer satisfaction and create that “wow” factor which retailers and customers continuously seek.

“If you have not focused on managing return dollars as a method of protecting your profits, then you may be leaving money on the table . . . it was the highest and quickest capital ROI in the company.”

— Paul Jones, Global Director of Retail Partnerships, eBay (commenting on implementing a solution while at Limited Brands)

Opportunity to Reduce Fraud, Costs, and Shrink

Fraudulent and abusive returns cost retailers approximately $10-15 billion annually, accounting for nearly 10% of the return dollars*. Most retailers wrestle with return procedures on the customer “service versus strictness” spectrum, but the decisions that get applied as store-level policies may do more harm than good — enacting stringent across the board policies impacts good shoppers as well as fraudulent shoppers.

Some retailers have chosen simple receipt verification provided that their point-of-sale system will validate that the item was in fact purchased at the store. Recent POS Benchmarking Surveys indicate that approximately 30% of the top 100 retailers actively use a centralized returns management solution. These host-based databases can verify if the receipt and the original purchase are valid, but, unfortunately they cannot intelligently advise the store as to whether or not it should accept the return. This simple receipt verification is a good starting point and certainly improves the management of returns; however, the problem with this approach is:

• It does not account for shopper return trends and behavior; there are many examples of return abuse where every receipt may be valid, but the returner is clearly exhibiting negative behavior. Receipt verification looks only at a specific transaction and is unable to detect those behavior trends.

• Depending on the application, receipt verification may be configured simply to provide the information to the store employee, but it still leaves the decision-making to the store employee whether to allow the return. This introduces subjectivity and accountability issues which may be applied or enforced very differently across an entire chain.

• Receipt verification does not address the problems associated with “non-receipted” and “no-customer-identified” return transactions.

Instead, what is needed is a statistical modeling approach that helps more accurately determine true return fraud, eliminating abusive returns while allowing legitimate returns. Using the same type of statistical algorithms that have transformed Price Management, Return Optimization is now available to identify which customers to reward for their patronage during the return process and which customers are abusing services and/or defrauding the business.

Progressive retailers who have implemented solutions such as Verify-2™ by The Retail Equation, Inc. have realized an average of 8.2% overall reduction in returns (and a corresponding impact on shrink) without negatively affecting customer service ratings. They continue to offer high customer service to their good customers, while discouraging abusive customers (through education and warnings) and preventing fraudulent returns.

Store associates appreciate Return Optimization because they are able to deliver good service to good customers but let the system choose an appropriate action for abusive or fraudulent returns. The enforcement of the corporate returns strategy is transferred to an outside provider, deflecting confrontation between the store associate and the fraudulent customer. The process has helped many retailers reduce fraudulent transactions much the same way Check Verification Systems did in the 1990s.

Returns Opportunities

Returns represent a major untapped opportunity in retail. Retailers now have a new dial to turn — one that increases conversions and revenue and also reduces fraud and abuse, without negatively impacting customer satisfaction.

What are the next steps to discover the opportunities and address the challenges in the current environment? Retailers need to ask themselves the following questions:

• How is the customer return experience at your store?
• What are your current return policies?
• Do your return policies adversely affect your best customers?
• Do you have a method for receipt validation at the point of return?
• Can you identify what actions and overrides are being performed during the return process?
• How do associates feel about the return process at your store?
• What is your current customer conversion rate?
• How are good customers being rewarded for their patronage?
• Does anyone review “good customer” returns?
• Do you incorporate the return transaction into your reward system?
• Do you have a process in place to help move an “average customer” up to be a “best customer?”
• How much impact could Return Optimization make to your bottom line?

The ability to properly manage abusive and fraudulent return behavior by identifying, tracking, educating, and then deterring unwanted customers without negatively impacting good customers can significantly increase sales. When you combine that ability with a reward system based on converting returns into purchases and creating positive interaction at a touch point that can often be frustrating for both the customer and the associate, the impact to the bottom line can be dramatic.

“Too many retailers continue to struggle with the fine line between customer service and discouraging abusive behavior. Despite best efforts, we anger our best customers and still allow fraud and abuse to damage our sales and profitability,” remarks Jim Bunn, a Partner with Clear Thinking Group. “With Return Optimization, we now have the tools to not only discourage bad behavior, but also to promote average customers to great customers, greatly increasing our bottom line.”

“While we heard relatively few complaints about the process, we did recognize we changed both customers' and store associates' expectations and behavior during the return exchange process. Our associates became better disciplined when it came to complying with our established procedures for handling the transactions and customers experienced a more consistent process when doing returns. Overall, it’s a faster and fairer experience for the customer and it takes a lot of pressure off the store and store management. Plus, we've seen about a 6.5% reduction in our return rate in one retail division and a 17% reduction in another.”

— Mike Smith, Sr. VP Loss Prevention, The Finish Line, Inc.

Retailers have a real opportunity to put more on the bottom line and increase customer satisfaction. Instead of just trying to manage returns, there is a better way to minimize fraudulent returns and customer frustration, while maximizing return transactions’ untapped value — Return Optimization.

* (Source: 2009 Customer Returns in the Retail Industry, NRF)

Originally published as a white paper by The Retail Equation, Inc., January 2008

This article was republished with the permission of The Retail Equation, Inc. Patents, pending patents, trademarks, service marks and registered trademarks referenced herein are the property of The Retail Equation Incorporated, including but not limited to The Retail Equation, Verify Return Authorization, Verify-1, Verify-2, Receipt Verification, Return Rewards, Purchase Rewards, and Patent 6,016,480 and 7,455,226.