It is currently a common trend for many manufacturers of consumer products to negotiate a Return Allowance with Retail partners to avoid the cost and effort of handling their own product returns and Reverse Logistics. Using a Return Allowance means that the retailer will keep your returns and manage the disposition of your items in exchange for a negotiated Return Allowance Fee deducted from each invoice. While for some products, with a lower selling price and higher transportation costs, this may be a great idea, if your products have a higher selling price, you may want to re-think your Return Allowance strategy.
There are two key considerations that may make you re-think your Return Allowance, the first is Brand Protection and the second is an opportunity to make additional, often easy, profit from your returned products.
Retailers are great at selling new product. However, many of the goods that get returned are open box, not working or in some state or condition that is not suitable to put back on the retail shelves for immediate resale. If you have negotiated a return allowance with the retailer, these returned items now belong to the retailer, so the retailer is going to try to minimize the cost of handling the returned items, minimize the time they are holding the returned items and maximize the price they can re-capture for the returned items. Most retailers are not in the business of handling, inspecting, testing and refurbishing returned goods. As a result they typically sell the goods as-is or turn them over to a 3rd Party Reverse Logistics partner for disposal or resale. This is where the Brand conflict may begin to arise in four key areas:
No Control of the Secondary Market
- You have very little or no control over what happens to your product now. You have worked hard to create a brand image and establish brand pricing. However, now your product may end up in secondary markets or landfill locations where you would prefer your product not to be seen or found.
No Control of Secondary Market Pricing
- your products may be re-sold in visible markets or on-line websites for prices well below the branded pricing you have worked hard to establish.
- your consumers may be confused and believe the product they have purchased is in new condition and has full warranty, when in fact it was initially returned by the original customer because it had an issue and should not have been sold again. Now you have second upset customer as a result of one defective unit.
Double Warranty Costs
- in the situation above, where you have a confused customer, you will often end up absorbing the cost to provide a warranty repair or replacement on the defective unit a second time to please the upset customer who unknowingly bought the secondary market product. That item should not have been sold a second time because it was identified as defective at retail the first time and you have already reimbursed the retailer for this warranty item through your return allowance.
Regardless of the condition of your product, your team has the best information to make the best decisions to get the highest selling price for your products, new, refurbished or as-is. Reverse Logistics knowledge and expertise has made a lot of progress over the last several years. As a result, the process of getting your goods back from retail, assessed, refurbished and resold is much easier. Most importantly, handling your own returns may be an excellent opportunity to generate significant profit for your company. These six considerations might help you understand why:
Zero cost inventory
- whether you issue an allowance or whether you issue a credit to the Retailer when you receive the returned goods, essentially your inventory cost is zero. Your task is to now spend some money on those returned items to achieve a return that exceeds your new input costs of transportation, labor and handling.
Higher Selling Prices
- there is significant demand from customers in the secondary market to purchase most refurbished products. Often the selling price for factory refurbished products can achieve up to 85% of full retail selling price.
No Trouble Found
- the nature of retail returns results in a high percentage of open box, no trouble found items. Many consumer products have No Trouble Found rates of 50-85%. These are very easy to clean up and resell for high recovery values.
Returns Processing Management
- there are now great tools and partners that make managing Returns processing very easy. Software tools are available that can help your team rapidly process returned items, credits and create special work flows to rapidly assess, and stream a returned item through process steps for rapid and high value recovery. There are also a number of great 3PSP Third Party Service Providers and 3PLs Third Party Logistics partners who specialize in Reverse Logistics processing who can help you process and manage your returns for high value recapture.
- there is significant consumer demand for refurbished goods. You can easily experiment with numerous resale channels, from on-line, to B2B auctions, to secondary and to primary retailers.
Better Data and Understanding
- handling your own returns provides you the opportunity to have faster and better data to understand your returns, not just for better processing and disposition, but to quickly provide feedback to reduce manufacturing issues or to better understand why customers are returning products. Better data will help you achieve your most important goal of reducing returns at retail.
Revisit your Return Allowance Decision
Protect your Brand and capture profits from your products are two excellent reasons to rethink your returns allowance. Once you have a better understanding of opportunities in these areas, your next task is to create a business case to review with your CFO and CEO. Assembling preliminary numbers for a business case is not too difficult a task. The Reverse Logistics Association (RLA.org) Consumer Products Committee assembled an excellent article called Finance is from Mars and Reverse Logistics is from Venus - “How we can talk to each other” that expands on the data and information above. (RLA.org login required, it just takes a minute). The article also has an easy to use spreadsheet called the Returns Savings Calculator to assist you to assemble your case.
Go ahead, take a closer look. Your CEO and CFO will thank you.
aul Rupnow - Director, Reverse Logistics Systems, Andlor Logistics Systems Inc.
Editor - Reverse Logistics Professional Report Business Insights and Strategies for Managing Product Returns