Make All Sales Final

Sales are increasing, fulfillment is running smooth, and inventory management is more accurate than ever. So, why are your profits not shooting through the roof of your e-commerce operation? Perhaps it's time to take a closer look at the merchandise returns that are piling up on your warehouse floor.

Jupiter Media Metrix recently reported that the number of online consumer returns in the United States will reach 90 million in 2005 - a grand total of $5.8 billion in returned goods. Some may consider the whole topic of returns as e-tailers' dirty little secret, but the reverse-logistics process - managing, transporting, and storing your company's returned merchandise - can significantly affect your bottom line. Jupiter's research suggests that if e-tailers concentrate on improving the reverse-logistics process only after the products are back in their possession, then they are missing out on significant cost-saving opportunities prior to the sale.

Reduce Returns By Changing Customer Behavior
While there are advantages to online shopping such as convenience and selection, the medium prevents consumers from touching and feeling the products. Customers are limited to a low-resolution image of those leather strapped sandals and a 15-word marketing ploy before they add something to their shopping carts, and that isn't always enough. Unfortunately for retailers, part of the convenience of online shopping for consumers is the ability to return merchandise that is not wanted or doesn't fit based on a "no questions asked" policy. I have a 6-foot-tall friend who has difficulty finding longer length pants and size 10½ shoes in retail stores. She chooses to shop through the Internet and catalogs for better inventory options. Since she cannot try them on first, she ends up returning the majority of her delivered purchases. She sees nothing wrong with this practice; in fact, she simply considers it a part of retail customer service. It is the shopping behavior of my friend (and millions like her) that e-tailers should analyze. You need to figure out how to better serve her before she buys.

Analyze Data To Head Off Returns
No matter what the reason for a return - damaged/unwanted merchandise or a mistaken shipment - e-tailers can realize significant cost savings if they add detailed data collection to their reverse-logistics systems. If e-tailers learn why customers return goods, they will reduce the frequency, better identify trends, and quickly redistribute the goods. Jupiter analysts reported that e-tailers must consistently collect well-structured data regarding the reasons for returns and the condition of the products. This will allow companies to analyze trends for particular product categories and consumer segments, which could eventually result in the elimination of certain types of returns. To identify these trends, e-tailers need to incorporate effective reporting and analysis tools into their reverse-logistics systems.

Since some percentage of returns is inevitable in the retail business today, e-tailers have more options than ever to get the most value out of their returns. According to Gartner analysts, the cost of processing returns for Web merchandise was twice the value of the merchandise itself last year. Instead of managing returns themselves, e-tailers have the option to work with companies like Return.com, The Return Exchange, or ReturnBuy.com, that channel the returned merchandise into their own distribution centers on behalf of the e-tailer. From there the items are routed to the appropriate place depending on the quality, damage, or reason for return. The products can be sold though a variety of high-traffic auction channels gaining the e-tailers a higher value for their returned merchandise. There are also companies like Return Central and Return Path that are ASPs (application service providers) for reverse-logistics operations, saving e-tailers the cost of purchasing the solutions themselves.

If you still think merchandise returns are just another necessary cost of doing business, then you are only limiting your bottom line, not to mention wasting precious warehouse space.

(Watch for a further discussion about reverse logistics and managing returns in next month's E-Tailing Forum.)