Busting the Myth About Profit-Diminishing Returns

Will your profits take a hit if you give consumers the option to pay later, allowing them to shop with no strings attached? After all, there will be more returns, and returns diminish profits, right? Well… as it turns out, profits go up – not down.

Giving consumers the option to pay later is one of the biggest trends in the e-commerce world right now.

“We can see that commitment-free shopping is not just what consumers want, but also what is expected from savvy online shoppers, looking for flexible and personalised experiences,” says Victoria Watmough, Commercial Director at Klarna.

One of the fastest-growing online retailers in the UK, the fitness apparel and accessories brand Gymshark, sees payments as a key factor in their focus on customer acquisition and retention.

The payment deal they offer their customers – order today, get the goods, try them on, and pay only for what you keep after 30 days – has skyrocketed sales and boosted average basket size by 33 percent since it was launched using Klarna in the summer of 2018.

But how about the cost of the returns?

“One of the areas that I was really keen to keep an eye on was on the impact on returns. Were people just spending for the sake of it and then returning their items? But we have not seen any real hit there,” says Niran Chana, trading director at Gymshark.

You can watch him talking about his experience here:

Other retailers have had a similar experience to Gymshark. Paul Masters, COO of In The Style:

“Any concerns we had about the rise in returns this would create have been offset by increases in purchase frequency, basket values and customer loyalty. Our customers are buying more, trying more and loving even more. And as a result we’ve seen a 31 percent increase in average order value when shoppers use Pay later and a massive 47 percent increase in order frequency compared to other payment methods. In a competitive market it’s not only helping us drive sales from our existing client base, it’s become a powerful acquisition tool for converting new shoppers.”

Victoria Watmough at Klarna explains why Pay later has become such a powerful customer acquisition tool:

“After this positive shopping experience, consumers become more loyal not only to the brand, but also to the payment method. We have noticed that many of our 1.5 million active Pay later users in the UK now seek out retailers that provide that payment option.”

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Rethinking customer experience, returns and profitability

There are some interesting facts you should be aware of regarding alternative payments, returns and customer experience. These were revealed in March this year (2019) when Klarna presented new research based on data from 2,000 UK consumers:

  • Pay later insight: 31 percent of shoppers said they were more likely to buy something online if they had the opportunity to pay for it after trying it at home.
  • Easy returns insight: 75 percent said easy returns were an essential factor in their choice of retailer
  • Customer experience insight: 84 percent said they wouldn’t come back to a brand if they had a poor returns experience.

The volume of online items being returned has climbed 14 percent since Klarna conducted similar research two years ago. However, that rise in returns is down to problems with the items rather than flexible payments:

  • Faulty items: Consumers returning faulty items have doubled (from 12 percent in 2017 to 24 percent in 2019).
  • Quality issues: Have nearly quadrupled (from 6 percent in 2017 to 22 percent in 2019).
  • False expectations: Complaints that the product looks different online than in reality have more than doubled (from 8 percent in 2017 to 19 percent in 2019).

So instead of ignoring the pay later trend based on of the false assumption that it will have profit-diminishing effects on your business, you might need to flip your reasoning around. Pay later leads to increased profit, and the issue of returns can’t just be swept under the rug.

Or as Doddle CEO Tim Robinson chose to put it in our report Rethinking Returns:

“Returns are a huge headache for retailers but they’re not going away. For many online shoppers, they’re a right and a necessity – the online equivalent of the pile of clothes you used to hand back to the changing room assistant in a store. As a retailer, once you take this as the context, the focus changes. Returns become just another cost in the online supply chain – like packaging or shipping costs – and rather than being a problem that needs to be solved, the focus turns to optimisation and efficiency.”

For more insights about returns, read our article Why customer returns are great for your business.

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