It’s a dilemma that has faced all retailers: How do we create a return policy that deters dishonest people while providing a service to our best – and most loyal – customers? After today’s return fraud session, I was even more acutely aware that this question has no easy answer and is one of those pervasive predicaments that keep executives up at night. Bruce Pyke, DVP of Loss Prevention and Security at Bon-Ton Stores and Ray Cotton, Director of Security Operations at Orchard Supply Hardware, spoke this afternoon about how their respective companies took the plunge into a return policy change – and how it impacted customers in the process.
Here’s the problem: Nearly all customers are honest, and nearly all customers will need to make a return at one time or another. But that doesn’t necessarily mean retailers should embrace all returns with open arms. Because while most customers are very good – as in the words of a famous nursery rhyme – when they are bad they are horrid. (One example: A single person in Florida traveled up the East Coast as far north as Maine returning electric razors at Bon-Ton stores. The grand total? $12,000 in returns – to the same guy – in 10 days. Prior to its change in policy, Pyke said, “you could take the same receipt and return something 100 times. We were the easiest target in town.”)
Cotton said Orchard Supply Hardware was having similar issues. Four years ago, he said, “we had no return strategy. You could dig up your neighbor’s plant and bring it in and we’d probably refund you. We took back anything and gave cash back – if they told us what it was, we’d believe them.” Cotton said it wasn’t unusual for customers to return “never-used” weed whackers and lawnmowers – with gas still in the tank.
It was clear to each LP professional that the company was hemorrhaging money through return fraud. But figuring out the problem was the easy part. Both executives acknowledged that selling a return policy change to senior management was a gigantic hurdle. Understandably, senior management was concerned about sending away honest customers. They also didn’t have a grasp of how damaging – and costly – the return fraud problem was.
But if executives understand one thing, it’s numbers – and, in this case, the numbers didn’t lie. “I’ve seen one person who has made 170 returns,” Pyke said. “When I started showing this to our vice-chairman, he couldn’t believe it.”
Still, convincing company executives at many different levels was a process, Cotton said. He first found it was beneficial to speak to the business owners in a language and metrics they understand: “Let them know the impact on company and bottom line.” He also suggested using a pilot to generate and validate financial assumptions, including the current return rate versus the expected rate as well as associated dollar savings. A bit of advice, he said, “Don’t rush the pilot. You’re going to be under a lot of pressure to make a quick decision. Don’t rush it. Go through the 60 or 90 days and most importantly, have your own accountants check it.”
When all else fails, Pyke said, start small. After a six-year process, the company rolled out its first return policy change last October, requiring customers to present identification when making a return. To date, Pyke said, “that’s 12,000 returns that didn’t even get started because they didn’t have an ID. “
For each company, the pay-off has been huge. Its new policies have saved Bon-Ton between $400,000 and $800,000 a month since implementation and employee return fraud has also declined sharply. Orchard Supply Hardware has also benefited – the company has experienced over a six percent reduction in net returns and managed to improve the speed of a return transaction by 18 seconds (certainly something that those post-Christmas shoppers can appreciate!).
As for customer complaints? Pyke said Bon-Ton had a phone number on the back of receipts in case aggravated customers wanted to complain about a bad experience or find a higher-up to plead their case. After 500,000 returns since the new process was implemented, the phone rang once: It was a store employee just checking to see if the number worked. “It is right to be conservative, and we are,” Pyke said. “You don’t want to turn off good customers, but here’s the secret: customers are used to a return authorization process.”
Sound too good to be true? There’s one caveat. Both retailers, along with an executive from the Retail Equation, cautioned that this is not as simple as merely making a change to the return policy. Taking a look at metrics, evaluating the “good vs. bad” returns, and implementing a pilot program are all important measures before making any company-wide decisions. Because inevitably, if your change in policy is simply turning off your best customers without isolating your worst, all the savings in the world may not make up for the losses.