Returns and the Ugly Side of Retailing

No retail strategy would be complete without a customer service and return policy. Retailers take very different approaches to this, and the successful ones often incorporate their policies directly into their branding. Nordstrom, for example, is famous for its extremely liberal return policy, while a big box retailer such as Best Buy may have a very restrictive policies.

More important then the policy itself is the transparency and communication of your return restrictions and service options.  As my group — Doba’s Marketplace team — manages product fulfillment and returns between suppliers and Doba-affiliated retailers, I know first-hand the process and impact that a retailer’s policy (or lack there of) has on their business and how that translates into a likelihood of success or failure.

There are many aspects you need to consider when creating and implementing a return policy. For many retailers, the best place to start is to look at your own expectations as a consumer and choose merchandise, suppliers and marketplaces that match up with your own personal philosophy. Others should take a more pragmatic approach.  The category (electronics versus clothing), the marketplace (your website versus eBay/Amazon) and your product pricing strategy all affect a return policy in different ways.

Without a doubt, Nordstrom’s liberal policy is the product of the consumer expectation of a category (i.e., clothing has high returns due to sizing, taste, seasonality, etc) and their pricing strategy. While Nordstrom has semiannual sales, they carry brands and clothing that cater to a demographic more tolerant of expensive, higher margin items. However, this strategy does not come without consequences. Nordstrom struggles with attracting a larger demographic, and since they maintain a large physical footprint and carry a larger breath of products within their category, it’s very hard for them to compete on products that are more price sensitive.  As a result, the products they do sell must carry the financial weight of all the non-sellers and returns.

For most retailers, online or otherwise, most service-related problems arise, however, in the communication of their policies.  A lot of retailers, especially those new to retailing, make the mistake of having a reactive — not a proactive—  approach in dealing with returns. What I mean is that instead of researching the policies of their competitors, pricing their items to carry the financial burden of a bad sale, understanding the particulars of the products they are selling, and carefully examining the policies of their suppliers, they instead wait until a customer is trying to return a item before they become aware of their philosophy. Coupled with that is the tendency and need for small retailers to depend on marketplaces like eBay and Amazon that give the consumer a lot of power to influence return policies through feedback mechanisms.  Simply put, a lot of new retailers have a tendency to compete on price while not clarifying with the consumer – prior to the sale – the reasons they will take a return.  As we’re always pointing out here at Doba, competing solely on price is not, in my humble opinion, the best strategy.  However, if you are going to adopt this philosophy, you must take measures to understand the goods you sell and account for the risks.

As a general rule, approximately 10% of goods are returned. This, of course, depends on the category, item, etc.  I have always found a good strategy is to set a low and high threshold that you can absorb. If you take 10% returns, it will hurt but not ruin your business. On the other hand, if you keep returns to 5%, then you can adjust your pricing, keep the extra as margin, loosen up your policy, and do whatever fits best with your particular business.  On top of internal thresholds, you should maintain ‘report cards’ on your supply base and hold them to the same standards. To help Doba retailers understand the supplier policies and performance; we show ‘report card’ data on every product to help you make these decisions.  Report card data provides a benchmark for you set your minimal expectations. Like Doba, you should hold suppliers to realistic standards and for quality aspects that are within their control.

You also need to be realistic, look for ‘red flags’ and hold consumers to reasonable purchasing behaviors, also.  For example, if you sell jeans and a customer orders the same pair in three different sequential sizes, you can be safe to assume that unless the customer was a triplet (with one slightly larger and one slightly smaller sibling and they are starting a band),they will ask for a return of at least 2 of the 3 pairs. If the suppliers ships the three pairs in a timely fashion and the jeans arrive as the supplier described them, the return acceptance or refusal is a retailer issue, not a supplier issue. As retailers get larger, they undoubtedly push and squeeze suppliers to take more of this burden.

Finally, when talking about return policies, it’s important to address issues that are more specific to you, the Doba retailer.  While drop-shipping lowers your upfront costs and reduces your risk of non-saleable inventory, it also means that you must sell items based off information provided by the supplier.  While the information the supplier provides should be the base, online drop-ship retailers do themselves a disservice if all they can communicate about an item is what’s in the brief description. If you don’t know any more of the particular details or specifications, you can always add examples and information about the brand.  Another possible direction is to just simply explain that this is all you do know about the item and the price reflects that there is a lack of information, but that your return policy guarantees against mistakes in the description.  Every situation is different and being transparent with the consumer is key.

When you consider the cost of returns, do not overlook shipping. One of the largest shortcomings of ecommerce is the cost associated with shipping.  Shipping is a fixed cost that is absorbed by the supplier, retailer, or consumer in every return. It is not margin nor lost time, but a payment to a carrier that must be paid regardless of the reason for the return (with the exception of carrier-related damage). Be mindful of the cost of the goods themselves versus the costs of shipping. In many cases, you will be better off to ask for forgiveness of the customer, let them keep the return, and give them a refund instead of eating three shipping charges on a replacement. Again, this is a retailer policy issue and only you can create the strategy that will work best for your retail operation.

In the end, your customer support and return policies should communicate clearly to the consumer what they can expect when purchasing from you. It’s important to take control and own your customer’s experience and understand that your decisions need to be acceptable to your business independent of the shortcomings of suppliers, marketplaces, and even overly demanding customers.