We get a lot of questions about why retailers offer price adjustments. Many wonder, “will stores stop offering price adjustments if people actually use them?” Some think this policy is too good to be true and are skeptical that the policy will last.
We think this view should change. While using Paribus is one way to have peace of mind that shoppers always get the best price on a purchase, the frequent usage of the price adjustment policies that make Paribus possible are actually critical to both consumer peace of mind and retailer top and bottom lines.
Returns are Expensive
Imagine if every time the price dropped on an item you bought, you re-ordered that same item while returning the original. Under Walmart.com’s 90-day free return policy that would fall squarely within your rights.
Returns are expensive for everyone involved. For a customer, it costs your time to research a store’s return policy, print the label, find the original packaging, take the item to UPS/USPS and wait 2-4 weeks for the money to get returned to your bank account.
Think about the following situation: You buy a shirt on Nike.com because you need something that wicks better for yoga class. Then you see a lower price for the same shirt at Target! If it were easy to send back at no cost to you, you’d probably send it back. While studies show that many people don’t return their shipments today because returning stuff stinks, those return numbers are beginning to hit an inflection point and are on the rise. According to Kurt Salmon, returns at brick and mortar stores average about 5% of annual gross sales whereas nearly ⅓ of all online purchases are returned. Before the 2015 shopping season really kicked into gear, returns were up over 10% year-over-year (before Black Friday), with the bulk of the increase coming for online retailers.
We all know that person who online shops by ordering the entire store to try on, and then sends back 95% of the merchandise. Highly favorable return policies are enabling this behavior even though some stores have reportedly banned customers for returning too much merchandise. Paribus data are showing this behavior happening more frequently for stores we don’t yet support. Interestingly enough, for stores that Paribus does support, return rates are way below industry average because consumers know they are getting the best price. On items with Paribus-driven price adjustments, return rates are more than 90% below industry average.
Returns are “Bad News Bears” for Online Retailers
For an e-commerce retailer, returns are very costly. Best Buy lost almost 10% of their annual revenue in 2014 on returns. Amazon has been known to tell people with items under $10 to not even return the item. If you want to return a mattress to Leesa, an online retailer with a hundred day money back guarantee on all mattresses, Leesa will just give it away or send it to the dump instead of repackaging and shipping it back to be refurbished. In 2013, The Wall Street Journal Reported that up to ⅓ of all internet purchases would be returned.
Almost every major retailer, from L.L.Bean to Amazon (depending on the item) to Nike provide free shipping and free returns on all orders or at least on orders over a certain size. L.L.Bean even has a mind boggling lifetime guarantee on all items.
Those policies are not only ripe for abuse but also economically unsustainable. To add injury to insult for the retailers, certain return policies are actually mandated by law in some states.
But the real elephant in the room is the not-so-hidden logistical, supply chain and shipping costs associated with returns. Supply chain issues, especially related to re-stocking, over-stocking and returns cost retailers almost $2 trillion in 2015, $600 billion of which were directly related to returns. Once big box retailers like Macy’s, Target, and Walmart go deeper on their transition to ecommerce, they’ll be spending additional billions each year on supply chain logistics and returns.
But why are returns so expensive? Besides the shipping costs, which depending on the item, can be hundreds of dollars, retailers have to re-package, re-route, re-stock, and re-sell returns. Furthermore, there is a high likelihood of damage in transit or “non-re-sellability” of an item which means the retailer would have been better off if consumer’s just kept that item or threw it away.We’ve all gone back to the store two days later when a price dropped to get a refund which doesn’t cost the store all that much beyond the adjustment itself, and at least they got you to come back to the store to potentially buy something else. However, imagine 62 days after buying a $200 TV and a $300 refrigerator, returning those items to Target.com (which provides free returns on all orders up to 90 days). The shipping cost on the return alone could be hundreds of dollars.
Last quarter, Amazon’s shipping costs as a percentage of revenue were up 14.7%. As it stands today, Walmart and Target are investing billions into their e-commerce businesses which only represent about 3% of their total sales volume. If they succeed in their respective goals of transitioning to double digit percentage of sales coming from online and mobile channels, their return policies will cost them billions each year on shipping alone. Yet to become competitive in e-commerce, they will need policies across the board that are better than Amazon’s.
Enter Price Adjustment Policies
As e-commerce continues to grow at 15% or more per year, traditional retailers need a way to minimize shipping and supply chain costs, while satisfying their shoppers wants and needs. Price adjustment policies have statistically shown to dramatically reduce returns by up to 90% as well as positively impact other critical retailer metrics. Retailers don’t just need price adjustment policies, they should expand them. They can’t afford not too.
In parts II and III, I’ll talk about about how price adjustment policies increase brand loyalty and CLV (customer lifetime value). To start saving on your online purchases automatically, visit paribus.co.