It's Time to Rethink Your Customer Returns

Dec. 10, 2008
In difficult economic times, the more you can control both the revenue and cost implications of customer returns the better off your company will be.

The current economic climate is causing us all to rethink our business assumptions. In good economic times, it's easy to be profitable in spite of less-than efficient processes. Now that the economy is in turmoil and many companies are seeing profits decline, the time has come to redress those business practices that are eroding profitability.

One such area that firms often neglect is returns. Customers can send back product they've purchased for a variety of reasons, but this represents a reduction in your revenues and an increase in logistical and operational costs. So what do you do with all that stuff that comes back? Now that times are hard, how you handle your returns can more evidently impact your bottom line.

Returns have both revenue and cost implications for your firm. In difficult economic times, the more you can control both sides of the profit equation the better off you'll be. Let's look at six new ways of thinking about the revenue and cost implications of returns.

First, the value of keeping customers happy cannot be over-emphasized. For most firms, the cost of generating new customers far outweighs the cost of keeping existing customers. When customers return products, this signifies some level of dissatisfaction with your product or service. Each return situation should be viewed as a potential red-flag on your customer's satisfaction index. To further complicate the return situation, customers often view the return situation as a hassle. When thinking about developing and maintaining the loyalty of your customers, don't underestimate the power of poorly handled returns situations to tip the balance in creating customer dissatisfaction and eroding customer loyalty. One firm I spoke to thinks of returns as the "voice of the customer" and listens very carefully to the messages coming from the marketplace with respect to return products.

Second, recognize the long-term brand equity that can be gained by properly managing returns. Returns that are recycled or put to socially or environmentally responsible uses can enhance your firm's position in the marketplace. One industrial carpet firm I have dealt with views returns as part of what differentiates them from their competition. When selling a new carpet to businesses outfitting or remodeling their office spaces, one of the value propositions in the sales pitch is that this company will take the old carpet away, which makes it really easy for customers to decide on this carpet company as their supplier. The carpet company actually recycles the carpets that they remove. They claim to be cost-neutral on this process, but value the marketing benefit gained by encouraging returns from their clients. They build customer loyalty and long-term brand equity on two fronts -- they are very easy to do business with, and the recycling provides a positive environmental image to their customers.

Third, returned products can provide a valuable revenue stream from secondary markets that you've overlooked in the past. Evaluate to what extent the returned products you receive can be refurbished or remanufactured to a sellable condition. Although you will certainly incur costs to inspect and then refurbish products, the margin you gain in the marketplace can create a profitable revenue stream. High-tech companies have been doing this for years. Returned computers and other electronic products from household toys to industrial machinery can be refurbished and sold in markets that had not been previously tapped. For example, in the computer sector, second-time-around customers may be small businesses or consumers who wish to purchase a certain computing power, but are unwilling or unable to pay premium prices for new equipment.

Fourth, on the cost side, reclaiming products/parts that can be reutilized in the forward supply chain can dramatically reduce a firm's cost of goods sold. Even if refurbishment or remanufacturing is required, revenues can ultimately be gained from essentially "free" inputs. The firm has already paid for the raw materials once and doesn't have to re-procure or totally transform them again in order to gain additional revenue. Appliance and electronic goods manufacturers are prime examples of organizations that are taking advantage of this type of non-traditional supply.

Fifth, operating expenses can be reduced through effective and innovative returns management programs. In addition to minimizing costs relative to returns processing, customer service costs can be reduced if the return process is streamlined from a customer's perspective. Additionally, capturing information about the reasons for returns being made can be leveraged to further improve the product, thus reducing future returns. Effective returns management and processing can also reduce a firm's environmental compliance or waste disposal costs.

Sixth, recognize that return products do not usually age well. This means getting merchandise returns from dealers in a timely manner so that alternative uses can be made of the inventory before the only option is to write it off and then dispose of the product. Managing the timing of returns is especially critical for seasonal or short life-cycle products. Merchandise returned at the end of a season has little potential for alternative use. Making earlier decisions about stock disposition in the field can provide many opportunities to reuse inventory before it becomes obsolete. This means implementing channel "cleaning" policies with dealers and retailers to manage not only the quantity of returned products, but also the timing.

In sum, effective returns management can add significantly to a firm's profitability. In these tough economic times, better managing returns can add real value to your firm.

Diane Mollenkopf, Ph.D. is an associate professor in the Department of Marketing and Logistics at the University of Tennessee College of Business Administration. Before pursuing her academic career, Mollenkopf worked as a logistics and product manager for several international organizations, primarily in the cosmetics industry.

For over 50 years, University of Tennessee (UT) faculty have played a major role in the supply chain/logistics arena -- conducting innovative research, publishing leading-edge findings, writing industry-standard textbooks, and creating benchmarks for successful corporate supply chain management. 2009 U.S. News and World Report ranked the University of Tennessee College of Business Administration a Top-25 school among top-tier public universities, up 12 positions from last year. The college's supply chain management/logistics program now ranks #5 among top-tier public universities.

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