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Reducing Returns

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In “Controlling Returns to
Preserve Profits” (PMA
Independent
, June), I showed that a 30 percent return rate with
damaged books was a money-losing proposition for my book <span
class=95StoneSerifIt>Bicycle Vacation Guide
,
and that return rates of 10 percent with damaged books or 15 percent with books
in good condition mean a profit margin so slim that my business is better off
without the sales.

 

As a small publisher selling
through a distributor, my only option when faced with a sale that is likely to
produce high returns is to turn it down. But that’s the publishing equivalent
of refusing to serve a customer at a restaurant, and it would be better for
both of us to arrange for more productive behavior patterns.

 

To do that, it’s necessary to
clear up two book-industry myths.

 

Myth
#1.
Without returns privileges, bookstores couldn’t afford to take chances on new
books.

 

Let me introduce you to Ben
Miller. Ben works in the cube next to me when I’m at my part-time job in the
bicycle industry. He’s a full-time buyer responsible for several thousand SKUs,
and buying bicycle books is a small part of his job. His items have lead times
that range from one day (for books he orders from me) to three months.

 

Ben is responsible for keeping
small replacement parts in stock for new components and for components that
were introduced a decade ago or longer. He’s the go-to guy for technical
questions on products. For Ben, terms like <span
style=’font-size:11.0pt’>A-list items
, <span
class=95StoneSerifIt>economic purchase
quantities
, ROI, turns, and <span
style=’font-size:11.0pt’>margins
are not just business jargon,
they are the things he is judged on during his annual review.

 

Ben has never returned an item to
its manufacturer, because he can’t.

 

When a new book comes to his
attention, Ben studies it, sends it around to other cyclists in the building,
and solicits feedback. By the time he places an order, he has a pretty good
idea what will sell and how fast, because he knows the product and the market.
If he’s unsure, he places a small order to test.

 

Compare that behavior to the
pattern displayed by the Borders book buyer who ordered 300 copies of <span
class=95StoneSerifIt>Bicycle Vacation Guide

in 2004 and returned 163 over the course of the bicycle season in 2005. Had the
Borders buyer used Ben Miller’s approach, he would have ordered a case (40
books) in the spring of 2004, another case around midsummer, and a third case
in spring 2005. He wouldn’t have warehoused and eventually returned cases of
books that he couldn’t sell. I wouldn’t have lost money on the deal, and we
would both be happy to do business with each other.

 

Returns privileges weren’t helping
the Borders buyer take a chance on a new product. They allowed him to make bad
purchasing decisions. That is what returns do. When Ben Miller, of the bicycle
industry, tried the same new product without the returns crutch, he didn’t
purchase twice as many books as he could sell. Since he can’t return unsold
copies, he has to be a smart buyer or he will be replaced. It’s as simple as
that.

 

Now, because I can’t take a chance
on another purchasing blunder by the Borders buyer, he can no longer take a
chance on any of my products, new or old. I will gladly sell anything I publish
to Ben Miller.

 

Myth
#2.
Booksellers will never give up returns privileges because they benefit from the
economics of returns.

 

In fact, the direct and indirect costs of
returns are a burden on both retailers and wholesalers as well as on
publishers.
Handling the inventory
is a direct cost. It takes more time to handle 100 books than 30 books. It
costs money to warehouse or shelve books that will eventually be sent back to
their publishers, and it takes staff time to remove a book from the shelves,
box it, and send it back. Freight charges can add even more costs.

 

The indirect costs are higher, but
there is room here for negotiation.

 

When booksellers complain about
low margins, they have a point. In the bicycle industry, for example, dealers
expect keystone pricing—i.e., a 50 percent discount—on any item in
the price range of a trade book. The book industry settles for discounts of 45
percent, plus or minus a few points. Why the difference? Blame it on returns
and 90-day terms instead of the 30-day terms other businesses use. The extra
two-month delay in payment alone adds up to 2 percent to the cost of doing
business. But returns are the bigger problem. Because of returns, publishers
have to price their books extraordinarily high or shave points from the retail
margin.

 

A Smarter System

 

What if you could use those
percentage points as incentives for more intelligent buying? An offer might
look like this:

 

MyCompany will give you a refund at the end of this year just for doing
business in a smarter way. It’s simple. You don’t have to sign up for the
refund. All you have to do is comply with one of the following to get a check.
You could earn up to 5 percent more on each book you order from MyCompany just
by paying within 30 days and limiting your returns.

Pay all invoices within 30 days. Limit returns to less than 4 percent
of purchases. All returns must be in resaleable condition. Your refund: 2
percent of total purchases for the year.

Pay all invoices within 30 days. Limit returns to less than 2 percent
of sales. All returns must be in resaleable condition. Your refund: 4 percent
of total purchases for the year.

Pay all invoices within 30 days. No returns. Your refund: 5 percent of
total purchases for the year.

 

An offer like this is bound to
create some interesting discussions. Be prepared with handouts, and make sure
all of your staff is conversant with the following talking points:

 

·      “Free” returns cost booksellers
money for time, labor, and storing or shelving books that don’t sell. They also
cost publishers money. If booksellers limit returns, publishers can afford to
send them refunds.

·      Booksellers can limit returns by
ordering only as many books as they expect to sell before their next purchase
date and adding 10 percent to cover unexpected sales spikes. (POS—point
of sale—systems with purchasing software can help track sales trends.)

·      Booksellers buy better when they
assess titles they might purchase in the context of sales figures for books in
the same genre and order conservatively until a new title’s sales potential
becomes clear.

·      Training bookseller staff to
unpack and display books with proper care reduces the number of damaged copies.

·      Selling small quantities of
overstock at a discount can save staff time and shipping costs as well as
entitle a bookseller to a refund from publishers who adopt a refund program.

·      This program is voluntary.
Booksellers who want to forgo the refund can return unsold books they purchased
within the past six months. A restock fee of 15 percent will be charged for
damaged books and for returns exceeding 10 percent of the original purchase.

·      In certain cases, returns are
acceptable and don’t count against the refund, as, for example, when a
bookseller reports damage during shipping within three days of receiving a
shipment and returns damaged copies within 10 days.

 

Toward a New Definition of
Normal

 

As a practical matter, I suggest
running a year from June 1 to June 1, thus reducing the possibility that a
store will hold back on its Christmas returns until after it gets a check.

 

The beauty of a year-end refund is
that it doesn’t require buy-in and it doesn’t require an industry-wide
revolution. It simply rewards those who do business in a smarter way and helps
your bottom line in the process.

 

Consider other incentives that
might limit returns, but be careful about offering something you might have to
take back later. The main goal of any offer you make should be moving the
relationship between you and a bookseller closer to business practices
considered normal in most other industries—payment within 30 days, and
returns totaling less than 1 percent of purchases. In exchange, you will have
to offer terms that match those of other industries.

 

The tradeoff is worthwhile. If you
take an honest look at the cost of handling returns, you will quickly realize
that the refund program I’m suggesting is a win-win-lose proposition. Who
loses? UPS, FedEx, and USPS. They won’t get to charge you for hauling all those
books out and back around the country.

 

I realize that any offer not in
line with standard practice in the book industry will meet with resistance, and
that nearly everyone who is deeply invested in the book industry doubts that
change is possible. The next installment in this series will address those
issues by showing how one person could change the entire book-industry policy
on returns.

 

Doug Shidell, who runs
Little Transport Press, is a past president of MIPA (Midwest Independent
Publishers Association). He has been a publisher for more than 20 years and the
author of books and columns on bicycling for more than 30. If you’d like to
determine your own costs for accepting returns, email him at <a
href=”mailto:info@littletransport.com”>info@littletransport.com
and ask for the spreadsheet with cost variables.

 

 

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