The Well-Traveled Package

Historically, retail has swept the returns process under the carpet—few in retail organizations have been eager to own up to returns, much less own the process of returns disposition. Like it or not, however, returns are a fact of life in retail, particularly for direct merchants where consumers can`t touch or try on products before they buy. But some forward-thinking retailers have recognized returns as a strategic opportunity and returns policies as a way to gain competitive edge. At the same time, they`re realizing cost savings–even extra profits–from well-executed returns processes.

There`s a growing recognition the customer experience doesn`t end when an order ships. "The customer experience is king in direct retail," says Jonathan Dampier, vice president of marketing for returns services provider Newgistics Inc. He cites "enormous effort, innovation and ingenuity online retailers put into getting consumers to buy the product. But then it`s as if the customer experience is complete at that point," he says. "For maybe seven out of 10 customers, it is. For the other three, it`s just beginning."

Getting proactive

According to estimates of The Gartner Group, anywhere from 5% to 40% of the goods ordered from direct merchants is returned. On the low end are gifts (hard goods) where the rate of return is estimated at 5-9%, and home decor with an estimated return rate of 5-10%. Shoes and casual apparel fall in the middle range with return rates estimated at 25% and 20%, respectively, while returns on fitted apparel may be anywhere from 20% to 40%.

With numbers like that, smart retailers are becoming proactive about embracing returns rather than consigning them to the status of a backroom function. Take Shoes.com. At about 15%, the returns rate at Shoes.com is lower than the category average and comparable to the return rate at a brick-and-mortar store where customers can try on the merchandise before taking it home. And it`s less than Shoes.com originally figured it would be. Keeping the return rate at that low level has been, in part, the result of a number of strategic decisions the brand has made about its returns policy.

For example, Shoes.com bumped its original 30-day window for returns up to an unusually generous 60 days, although the majority of customers who actually make returns continue to do so within two weeks. And it now features that policy more prominently on its site. "We realized it was a great selling point for people to know that, before they have even started shopping," says vice president of marketing Mondy Beller. Though Shoes.com hasn`t tied specific metrics such as customer retention or repurchase to its extended returns window, Beller says its psychological effect on customers—and sales—has been positive.

"Shoes are a little bit riskier to buy online because you want to try them on. We needed to minimize that risk and give customers peace of mind. We want to really give that customer the confidence to buy that shoe," Beller explains.

A developing standard

Shoes.com also gives free return shipping, fast becoming an industry standard in online sales of footwear. Shoes.com ships outbound using United Parcel Service because its corporate parent, Brown Shoe Co. Inc., which also owns Famous Footwear and Naturalizer stores and several additional shoe brands, gets discounted rates on its high volume. But Shoes.com`s method of return is the U.S. Postal Service.

"That is so much more convenient for the customers. It`s almost like having the shoe store come to you," Beller says. Customers get a prepaid postage return label with their order. Those with a safe location outside their home can set the package out for the mail carrier to pick up. Others can drop it at the Post Office.

Featuring the returns policy more prominently has paid additional dividends in the form of fewer inquires at the call center about what to do if the shoes don`t fit. That`s significant because Shoes.com tracks all returns by sales source, and the largest return percentage are orders that are placed by phone at the call center. "My guess is that the customer using the call center might be a little more risk averse; a little less used to shopping online," says Beller. "Or perhaps they are trying a new brand they haven`t worn before."

Profitable returns

While Shoes.com handles its own returns and leverages efficiencies of scale through parent Brown Shoe Co., other e-retailers have seen gains by outsourcing the whole process. Newgistics now has about 40 brands among its clients. Dampier says that e-retailers using its SmartLabel service have realized a number of benefits including increased customer retention, decreased call center costs and as much as $1 or more in profits on each retuned package handled by Newgistics.

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SmartLabel, a preaddressed bar-coded label that`s delivered along with the online customer`s order, allows shoppers who want to return an item to affix the label to the front of the original package, seal the package and drop it in the mail. While it affords customers the convenience of dropping the return package in the U.S. mail, the SmartLabel system offers something extra: control of the returns process and visibility into it.

The barcode solution

SmartLabel captures individual order data at the point of order. The customer-specific data are coded into the barcode that appears on the SmartLabel return label that is shipped with each outbound package. The barcode also indicates which of the USPS`s 21 bulk mail centers should receive the package, if it`s returned, based on the location of the customer and of the retailer.

Newgistics collects the bar-coded packages daily at bulk mail centers and sends them through one of its five regional "SmartReturns" centers, where it sorts and palletizes them and schedules their delivery to retailers. Throughout, it feeds information to retailers on package status so they can schedule warehouse personnel more efficiently based on their knowledge of what`s scheduled to arrive. Some retailers even have that information plugged into their call centers so agents can keep customers informed on package status.

The process can pay off on a number of fronts. For one, says Dampier, Newgistics clients have seen increases in customer retention on the order of from 1% to 3%, as determined by A/B tests against a control group. "Customers become more confident when making a purchase that returns will be smooth sailing," he says. "That has played out as increasing repurchase." Among several retailer clients, implementing SmartLabel has resulted in cost savings at the call center, with calls involving questions about the returns process reduced by about 35%.

In addition to such operational savings, Dampier says the program generates revenue for most retailer clients. Newgistics charges a set fee for every package it handles for a retailer client, and retailers typically mark that up when passing return shipping fees on to the customer.

Neiman Marcus Group Inc.`s direct-to-consumer business has trimmed a day and a half from its average time to process returns since going with returns services from Newgistics last year. "The packages come back to us very quickly," says Greg Shields, vice president of operations at Neiman Marcus Direct. "Because Newgistics extracts the packages (from regional shipping centers) and consolidates them, the average time it takes from the time a package is inducted into their system is about 3.7 days."

Of the items that are eligible for return via Newgistics` program, customers are choosing to use the service about 90% of the time, he adds. Some items can`t be shipped under the program because of size and weight restrictions. In addition to ratings from customers who`ve used the service that are 90% favorable, Neiman Marcus Direct gets extra mileage from the program by using it to get returned goods back out into the shopping stream sooner.

"Because we know a lot about the package as it`s coming back, it helps us speed returns through the system," Shields says. "If the product is in good shape, we can actually pick it off the dock and ship it back out again." Given the short and seasonal nature of the product lifecycle for gifts and apparel, that helps Neiman maximize sell-through on those items, he adds. Using SmartLabel also has let Neiman Marcus eliminate call tags, a service for preferred customers that arranged for a shipper to pick up the return package at the customer`s house. That had been costing Neiman about $5 per call, says Shields.

While Neiman Marcus currently uses Newgistics service only in its direct to consumer business, which also includes the Horchow catalog and Chef`s Kitchen brands, the company is about to test the program in its Bergdorf Goodman store in New York City, which gets many of its returns through the mail rather than in-store because many store customers are visiting from out of town. The test will include a Newgistics label on any package shipped out to a customer who purchased it in-store, as well as make Newgistics labels available in-store to customers.

Getting a firm grasp on the returns process—by internal improvements or an outsourced solution—is a win for retailers, though some have yet to see that. One of the biggest objections Newgistics encounters when talking to prospective clients is that while some will even go as far as to admit they handle the returns poorly, they continue to assign it a low priority if they don`t understand its larger impact, Dampier says.

The other major objection? Some retailers still believe that making returns easier will only increase their volume. Yet among four retailer clients who have tested that premise in A/B tests, returns by customers given the option to use SmartLabel were either the same as or less than those from the control group not offered that option.

"Sometimes, the idea is that if a retailer makes returns easier, it will have more customers returning items," says Dampier. "That doesn`t make sense, because the alternative is having a customer who doesn`t return the item, but is unhappy. Why would you want that?"