Sam Sturgeon, Head of Marketing Sciences at Hall & Partners, explains how to accurately predict the impact of raising prices to cover the cost of returns.
While consumer goods brands were buoyed by their annual increase in sales during holiday period, they are likely still counting the cost of returned goods – gifts that weren’t right or liked, fashionistas who bought multiple sizes so that they could return what didn’t fit and sale shoppers who got a better deal elsewhere.
The impact that returned consumer goods has on the retail sector is significant. As inflation continues its upwards trajectory across much of the world, consumers, who have a right to return goods bought online, reconsider whether they really need what seemed like a good idea earlier in the week when they clicked ‘place order’. The cost is predicted to continue to put pressure on many direct-to-consumer brands and retailers in the coming year. America’s National Retail Federation suggests in its report that returns will exceed $816bn this year. An average of 16.5% of all online sales now returned in the US.
Consumers have become so used to buying and returning that many retailers and brands are probably still drowning in an operational tsunami as thousands of multiple, single inbound deliveries arrive for processing after peak buying events. Rising shipping costs and the labor involved in managing returns means that increasingly retailers are deciding that they can no longer cover the cost of this free service. Free returns are likely to become a thing of the past. Stores from Abercrombie & Fitch and BooHoo to Zara are now charging shoppers to return goods.
No such thing as a free return
Continous returns by consumers, many of which can be fraudulent, has created a tipping point that will impact the cost of online ordering for everyone. It won’t be the first time that the bad behaviour of some has resulted in increased costs for everyone. In the travel sector for example, travellers had got into the habit of reserving multiple rooms for holidays until they made their final choice, cancelling the rest at the last minute and subsequently leaving some hotels with empty rooms. Now everyone is charged a premium for the convenience.
Such examples are proof that people don’t always evaluate all their actions as contributory factors to such sector ‘resets’. And further that the impact of their purchases on the planet are often more complex than they look at first glance. Take my Generation Z daughter as an example. She is outwardly critical of the damaging impact that fast fashion has on the planet, as are many of her generation. When I pointed out that her ‘life hack’ for the formal high school dance – ordering a number of dresses and sending back the ones she liked the least – was also having an impact on the environment, she was surprised and upset. The convenience of multiple deliveries may be free but ultimately the planet pays.
To charge or not to charge, that is the question
Retailers want to recoup costs wherever they can and they also want to reduce their own impact on the environment. Arguably, charging for returns may result in increased consideration about the order. Getting this balance right and then deciding how much to charge can be challenging when consumers still place high value on convenience.
Thankfully AI and research algorithms can help us determine the price consumers put on having access to free returns as well as the price threshold where the additional cost means that they decide not to purchase the brand at all or switch to a competitor. We don’t need to guess what the impact might be of charging restocking fees.
Marketers who are feeling the pressure to raise prices will be conscious about the impact this has on their brand perception too as well as the overall shopping experience. It will take a while for consumers to adapt to the fact there is no such thing as free returns and that someone must pay the costs somewhere in the value chain.
Consumer research will help them to understand the trade offs. Are convenience and cost more important than acting sustainably? The approach will be different across brands and categories and depend on how consumers value the brand.
Communication will need to be carefully crafted to decrease any annoyance experienced by the consumer about either paying extra or being made aware that their purchase is having an impact on climate change. Emphasizing that charging for returns is the responsible thing to do or directing consumers to a “is this size right for you” add-on to the website with messaging around “how a moment spent checking your size may help the planet” or “we are in this together” can go a long way to building a sense of empathy and trust.
Understanding the price elasticity of individual brands in a high inflation environment and how associated price messaging is executed will determine whether brands are able to increase perceived empathy or whether they will erode brand trust and loyalty, ultimately whether they will maintain or lose market share.