Return Rates - Should They Be High Or Low?

First, let me just wish all readers of this post a very Happy New Year.  I hope 2006 brings you all the happiness and prosperity you could wish for.

This is the first post of 2006 and I must apologize for not posting more often over the last month or so.  I’ve been traveling in Australia and back to Alberta, Canada where I grew up. 

I’m not complaining.  Alberta was actually reasonably warm for this time of year.  It’s usually 10 or 20 degrees below freezing! It was good to see family and friends and I got to watch 3 of my nephews play in a hockey tournament.  (Boy, I know I’m getting slower when I watch their games and compare them to my own :-)

And, Australia was absolutely beautiful. I can definitely see why people live there or want to move there.  And speaking of Australia, I’d like to thank Wayne George for clearing up the mystery surrounding the batcave from my last post. 

Here is what Wayne wrote in a comment to my last post:

“With reference to Batman and Melbourne (my birth city)- Melbourne was originally discovered by a guy named John Batman and, set in the pavement of one of the main streets there, you will find a plaque stating that this was the spot John Batman stood when he announced "This will be the place for a village" - some village huh?. His name is pronounced Batmn with all the emphasis on the first syllable.”

So I guess the real location of the batcave remains a secret.  If you know the location please comment on this blog.  Thanks.

Ok, now on to some marketing insights I got from reading Joe Sugarman’s “Marketing Secrets of a Mail Order Maverick”.

This one was a surprise to me.  See what you think.

In the book, Joe tells a story about a seminar where he was showing ads he had written for a particular product.  The president of the company whose product was featured in the ads was attending the seminar.

Joe asked the president how the product did.

The president said that they had sold thousands of the product and had a very low return rate of 3%.

A return rate is just the percentage of people who purchase an item, receive it and then decide to return it (for whatever reason).

Return rates of 20% usually mean that the product has either a defect or that the customers expectations are not met because the product wasn’t described properly.

So Joe asked the seminar attendees if they thought that a return rate of 3% was good and if so, why?

Most of the attendees responded that 3% was quite good. Obviously the quality of the product was high and customers were pleased with their purchase.

Joe on the other hand said that he thought that the 3% return rate was totally unacceptable!

And his reason?

Joe felt that the 3% return rate indicated that the product was not being sold hard enough. 

And he pointed out how many more items of the product might have been sold if the return rate was 10–12% which is more typical.

Joe also pointed out that you can’t please everybody all of the time.  You will get both positive and negative feedback on your products and services.

Looked at another way … even if you have a 10% return rate that still means that you are satisfying 90% of your customers and selling a lot more product.

I don’t know about you but when I read this story my first inclination was that the return rate should be as close to zero as possible.

But based on what Joe pointed out, this is not the case.

I’m not arguing for a higher return rate due to quality issues with a product.  You must always have high quality.

But this insight has big implications for using return rate as a feedback mechanism for how much harder you should be selling.

And for Big Ticket items the ramifications are much larger.

Look at this example:

Say you sell an e-book for $47.00.  In a month you sell 15 or about 1 every other day.  Total for the month is $47.00 * 15 = $705.00. If your return rate is 3% that’s about 1 book so you refund $47.00 and have sales for the month of $658.00.

Now let’s say you push the sales process a bit. Point out more benefits and really increase the conversion.  Say sales double for the month and the return rate moves up to 12%.

So now you have sales of $47.00 * 30 = $1410.00. With a return rate of 12%, that’s about 4 books.  So you refund $47.00 * 4 = $188.00.  Sales for the month end up at $1410.00 – $188.00 = $1222.00.

So even with a higher return rate you still ended up with almost double the profit because you sold harder and converted more.

Now let’s look at a Big Ticket example:

Say you sell an DVD/CD home study system including a manual for $547.  In a month you sell 10.  Total for the month is $547.00 * 10 = $5470.00. At a return rate of 3% you that’s about 1 home study system so you refund $547.00 and have sales for the month of $4923.00.

Ok, say you push sales hard again.  Conversion doubles to 20 home study systems per month.  Now sales are $547.00 * 20 = $10940.00. At a return rate of 12% you would have 3 home study systems returned for a refund of $547.00 *3 = $1641.00. So total sales for the month less refunds is $10940.00 – 1641.00 = $9299.00.

Again, profit for the month are nearly double, even with the higher return rate.

And yes, I know there are probably a few more costs associated with shipping a home study system instead of a digitally downloaded e-book.

My point is simply to show that in both cases we should be pushing sales hard even if the return rate ends up going up a bit.

But look at the dramatic difference in profits of a Big Ticket vs. a Small Ticket item!  Except for the creation of the product, the marketing steps to sell both are very similar and cost almost the same. I love it!

That’s why everyone should have one or more big ticket items in their product mix. 

That’s it for this week.  I hope you found this as interesting as I did. 

Best in Big Ticket Success,

-Chuck