Merchandise return transactions are a critical part of the customer experience of the retail industry. The objective is an optimal return rate, where the retailer finds the right balance between too many returns that may lead to return fraud and abuse and too few returns that may lead to customer unhappiness. But how does one arrive at such a measure? By finding the right retail return policy.
A major retailer recently asked the same question. As a customer of The Retail Equation (TRE), the retailer asked for help in understanding the impact return policies have on business. The retailer, who was experiencing declining sales, needed to pinpoint areas where they might improve, and one of the areas to be evaluated was the return counter. TRE set forth on a benchmark study to examine the impact a particular retail return policy could have on net sales and return rate.
Stores were divided into three groups:
1. The first group, which made up approximately one fourth of the customer’s stores, was placed into a “strict return rules” test group. (“Strict” Group)
2. The second store group of similar size began testing The Retail Equation’s Verify return authorization solution, a “friendlier return experience,” at the same time as the first group underwent its strict return rules policy. (“Friendly” Group)
3. The third group – the control group – operated as usual (“Balance of Chain” Group).
The “strict return rules” test group and the “friendlier return experience” TRE test group were the most easily compared since they rolled out their new return procedures at the same time. The results speak for themselves.
Net Sales Change (Before and After)
Over the course of the test, which ran for six months, the strict group showed an 11.2 percent decrease in net sales, while the BOC stores showed a 6.4 percent decrease in net sales. And the friendly group showed only a 2.6 percent decrease in net sales—this is an 8.6 percent improvement over the “strict” group.
Taking a closer look, the customer evaluated the net sales trend by store group, comparing the time in the months leading up to the deployment date with the months following. During that time, the stores with a friendly policy showed a minimal change. The net sales decrease leading up to the deployment date was 0.1 percent, while after the deploy date it was 0.2 percent. However, the net sales decrease in the stores where a strict policy was implemented had a 0.6 percent net sales decrease leading up to the change, and a whopping 2.1 percent decrease in the months after they adopted the strict return rules policy.
TRE dug deeper to determine whether these trends differed based on region, and the decline in the “strict” stores was universal and widespread across all tested regions.
Return Rate Impact
TRE also evaluated the impact the stricter return policies and “friendly” stores had on return rate. Based on the findings, both the friendly and strict stores had better return rate reductions than the Balance of Chain control group. The friendly stores exhibit return rate reduction due to TRE’s targeted predictive modeling approach that only impacts a small portion of all returns (typically less than 2 percent). The strict stores exhibit return rate reduction using more punitive rules and policies, for example, by declining all non-receipted returns, and directly impacting the overall consumer experience of every shopper.
Conclusion: A Strict Retail Return Policy Negatively Affects Stores and Consumers
At the end of the six-month test period, the strict stores showed an 8.6 percent reduction in net sales compared to friendly sales. Stated a different way, if sales declined in the entire chain by 8.6 percent and the overall return rate was 7.2 percent, the retailer would have to reduce their total return dollars by approximately 118 percent to offset the loss in revenue, which is impossible. The total dollars of lost sales would have already exceeded the total return dollars for the retailer.
These retail statistics show a real revenue impact for the retailer and serve as a key learning point for other retailers. Additional important conclusions drawn from the study include:
- Strict retail return policies negatively impact all shoppers, even those who never make a return, because return rules are typically a consideration on every purchase.
- Stricter return rules and policies significantly harm net sales. As mentioned above, strict stores showed almost a 9 percent reduction in net sales as compared to friendly stores.
- Depending on chain size, the unintended consequence of stricter return rules can cause a revenue decline of millions or even billions of dollars.
- Stricter return rules and policies do not lead to any better return rate reductions when compared to The Retail Equation’s Verify solution.
This article was originally published in 2015 and was updated February 13, 2017.