A Word of Caution to the Holiday Deal-Makers

Repeat customers—with higher return rates and real bargain-hunting prowess—can have negative effects on a company’s net earnings.
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(Photo: pagedooley/Flickr)

(Photo: pagedooley/Flickr)

The average American spends hundreds of dollars on Christmas presents; for retailers, presents equal money and, perhaps more importantly, brand loyalty. That's always a good thing.

But not in every respect. According to a recent study in the Journal of Marketing Research, many repeat customers—with higher return rates and real bargain-hunting prowess—can have negative effects on a company’s net earnings.

“Retailers are typically interested in cultivating customer relationships over time. They engage in marketing practices such as price mark-downs, promotions, loyalty programs, liberal return policies, and so on,” says lead author Denish Shah, a Georgia State University business professor. “However, as customers repeatedly transact with the firm, can these repetitive transactions develop into a habitual behavior?”

Customers in the study fell into certain routines, like using the same checkout counter and shopping at the same time of day. Some also developed more financially impactful tendencies, returning items and seeking out the best deals.

Shah and his associates identify four shopping habits that they believe suggest brand loyalty: purchase habits (which they believe is indicative of brand loyalty), promotion habits, low-margin habits, and product return habits. Looking at a data set of one Fortune 500 retailer’s 1.3 million customers over a four-year period, they found that indeed sale-obsessed shoppers really do impact a company’s profit margins. Often for the worse.

“Repeat purchase and promotion purchase habits positively affect the firm’s bottom line by $53.5 million and $3.9 million, respectively,” the authors write, “whereas product return and low-margin purchase habits negatively affect the firm’s bottom line by $58.9 million and $61 million.”

In other words, customers who return a lot of their purchases, and have a knack for bargain-hunting, can cost a store serious money.

Customers in the study fell into certain routines, like using the same checkout counter and shopping at the same time of day. Some also developed more financially impactful tendencies, like returning items and seeking out the best deals. The problem for stores, Shah explains, is that repeat customers often become repeat customers precisely because they want the lowest prices. More specifically, they want the clearance items and the markdowns, as opposed to the advertised sales. (It's common knowledge by now that the marketed sales very often aren't really all that great.) Practically put, who's going to shop at a clothing store twice a week without looking for the cheapest stuff?

These two sides of value hunting have been theorized before; a 1990 study distinguishes between the “deal prone,” who tend to seek out the marketed sale, and the value-conscious customers, who simply want to pay the lowest price.

As to exactly how much stuff people actually return, Associated Press reporter Jennifer Kerr’s 2013 report shows that about nine percent of all sales—that’s $264 billion—are returned.

Knowing this, Shah argues, retailers need to develop marketing strategies that better benefit their companies, while still acknowledging people’s love of “the deal.”

“Retailers need to seriously think about consumers’ shopping habits," Shah says.

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