L.L. Bean: Service vs. Profit
Analysis of L.L. Bean's century-old return policy and the profitability problem it created. Includes a SWOT and a three-part recommendation.
A company adored by millions.
L.L. Bean was founded in 1914. The company started off selling outdoor equipment. The company boomed in success and by 1980, sales had risen over $120 million. They were known to be caring to customers, and especially friendly when a customer had an issue with a product. According to Exhibit 4 of the case, 99% of customers believe L.L. Bean has high quality services and is extremely friendly to customers.
The issue with L.L. Bean was that the prices to maintain were too high. The company was spending too much, while not making enough. Their return policy greatly favoured the customer. An example in the case is given that a customer had 30-year-old boots and the boots were processed for repair. This is absurd for a company of that size. When a customer purchases a product, the company is supposed to supply that product to the customer. The problem is that the customer is purchasing a product, the company is providing it, then a third of a century later the customer wants a new shoe. The cost of providing this level of service is extremely expensive. Customers are essentially getting two products for the price of one.
Another issue was that L.L. Bean paid their employees substantially higher than the average wage. This may be considered good and bad: employees may have higher morale, but the company has a higher return cost.
Strengths, weaknesses, opportunities, threats.
Strengths
- Founder culture. Leon Leonwood Bean treated every customer like a friend, even inviting customers on fishing trips when something went wrong. Treating a customer as a friend is extremely rare today.
- Marketing team. From 1975 to 1980, sales quadrupled. This is unprecedented for a niche outdoor products company. Sales increased in every market, including weaker ones like women's apparel and the under-35 segment.
- Mail delivery. In the 1970s and 1980s, mail delivery was not common. As customers started using credit cards to buy through catalogues, L.L. Bean was ahead of the curve with 50% of total mail-order sales.
Weaknesses
- Very niche products. The prices are not cheap.
- The full refund policy means a customer can return a product years after buying it. The disadvantage of being so customer-friendly is that it is unable to provide a service with high levels of profit. The cost of building that business-to-customer relationship is extremely expensive.
Opportunities
- The public perceives L.L. Bean highly. Customer service is great but profit is low due to full refunds and free shipping. L.L. Bean could continue with customer satisfaction, but for mail orders they could charge $2 to $5 for shipping to increase profit without changing customer service.
- Rather than refunding the full cost of products, L.L. Bean could give replacements. The customer is happy with a new pair, while the company gives a new product rather than a full refund.
Threats
- The ongoing threat is that profit levels are low. That makes it difficult to reach desired goals. Growth becomes stunted due to ongoing issues.
What I see as the solutions.
Option 1, Warranty policy
A warranty policy lets the company allow returns, but the returns must be within a specific window. The person who got 30-year-old shoes repaired will likely not have that option. The return/repair window would be 3 to 5 years, and once the window is over, returns will not be allowed.
This option is good for mail orders because if a product is damaged in shipping it can easily be returned, but customers cannot use it for years and then return it for being faulty. Amazon had a similar issue where people would order a product, use it once, and return it. Amazon recently changed the policy so the customer has to pay around $5 for a return and refund.
Option 2, Charge $2 to $5 for shipping
Charging $2 to $5 for shipping is good for the large percentage of mail orders. Customers who take advantage of mail orders will pay a little extra. This allows the company to have slight leeway and reduce the cost of goods sold. Most customers would not mind paying $2 more, as everybody should know about shipping fees.
This is incredibly reasonable for a company to do. Most companies who offer free shipping only do it after a certain price is reached. Some companies offer free shipping on orders over $50 or $100. L.L. Bean should do the same, where if a customer spends over $100 the shipping is free.
Option 3, Replace some workers with machines
This option is the least likely to happen and the least effective. The only reasoning is the fact that employees are being paid well over average wages. A machine may be able to do their job for them, while costing less in the long run. This is strictly from a business POV. The company would likely not be able to cut wages to their employees.
The best option is Option 1 and 2 combined. Warranty and shipping costs allow customers to return their products if they need to, but the company doesn't lose as much money. It allows L.L. Bean to save money while also providing the customer service they are known for. They keep the positive image and continue selling products everybody loves.