Costco Adds Service to Reduce Returns
One of the most appreciated aspects of shopping at Costco is the company’s no hassle return policy. Bring it (whatever that is) back and the retailer will make good.
While club members are very happy with Costco’s willingness to accept returns, there is a negative side for the retailer. The company has seen a number of product returns on more expensive consumer electronics, such as large-screen plasma televisions, because club members were having trouble with installation.
The result of all the returns has been lost sales and margin pressure as the company eats the costs associated with taking products back.
To address the situation, Costco has begun looking at an installation service for members purchasing consumer electronics.
“We are testing a concierge service which includes installation and so far it is working out well,” said Costco’s Chief Financial Officer Richard Galanti on a conference call with analysts.
“They (customers) want somebody to come in, wire it and hang it up and make sure it is working.”
Costco getting into home installations may put added pressure on major consumer electronics chains such as Best Buy and Circuit City. In-home installations, reports Reuters, have been a source of profits for those chains.
Mr. Galanti did not say if the installation service would be rolled out nationwide but he did say, “As you might expect, the last thing we want to do is just change our return policy without trying everything else first, and that may be a little painful short-term, but that’s where we’re going to go.”
Discussion Questions: What will an in-home installation service do for Costco’s consumer electronics business? What will it mean for competitors in the
same space?
Amidst the applause above, let me sound a cautionary note about this. When Costco takes on installation services it makes its business more complex to operate. An in-house tech support squad represents an overhead cost and fixed expense. A third-party arrangement must be monitored carefully, as it puts the Costco brand reputation in the hands of outsiders.
Costco has traditionally been cash and carry. Whether it’s a home theatre system, a huge gas grille, a pool table, or a ten pound tray of peaches, it’s been up to the customer to haul it home, set it up and use it as he/she sees fit. Set-up services for big-ticket items represent a change in the business model that may have unintended consequences.
I expect Costco has investigated this carefully, as it should. Clearly some customers require help with these items, and a service orientation is generally a good thing. The company should watch its cost structure carefully as this rolls out and also monitor how it is perceived by consumers.
Part of the Costco allure is buying items in bulk, more than your need, because you think you need it. This may be OK for a tub of peanut butter or a year’s supply of Mac and Cheese, but if you buy an expensive electronics item and you don’t understand how it works or how to set it up, it is a negative to customers as to Costco not supplying information at the store or at least someone to say, “You really don’t need this or wouldn’t understand how to work it.”
Costco’s version of the “geek squad” is a great idea, even though it crosses a line of service the retailer hasn’t offered in the past. It makes the Costco hunt an even better experience — kind of like a safari guide.
Being a national low-cost retail chain, in-home installation is a completely different business. Setting up a national installation service — while laudable from a customer service standpoint — might be a significant tactical error. The risk exposure is extraordinary as there is no way to ensure nation-wide coverage of consistently-acceptable service in customers’ homes. If this service is contracted to an existing national chain — what is the end price to the customer?
Offering only installation services misses another critical issue. In order to really get the true HD “experience” with the new TV, you’ll also need to upgrade or purchase other associated equipment and services, which you may not have considered when you purchased the TV. My guess is that many of the TVs being returned are not for problems with installation – the added costs of additional equipment/services and not being willing to incur them is what may be responsible.
I’m having trouble understanding our collective decreasing ability to DIY. Despite improved tools, services, online information, and retail outlets featuring DIY, we seem to become more wimpy. How to hook up a TV? How to hang something on the wall? If you just don’t get it, why not ask a neighbor or friend instead of going through the effort of returning the product? After all, didn’t you want the product when you bought it? Or, is this just a convenient cover for buyer’s remorse?
However, I love Costco’s trump card — in-home installation. It calls customers’ bluffs with service. And in a world where most installation guides and manuals for electronic products are initially written by Asians and then interpreted badly, help is apparently on the way.
Installation is a must for any electronics. I need help figuring out my new camera, car stereo, and absolutely my home entertainment system. The installation piece will be an extension of Costco, so they need to be right on who does it for them. The total cost for electronics and installation as a total price will be important. In the past, a warranty provided incremental profit, but in today’s world if you spend on the best electronics, you want the best performance out of the electronics. Most people need help.
Does Costco understand the extent to which consumer electronics drives traffic to their stores? Do people come to the big store with no promise of customer service to buy a big screen TV and then leave? Probably not. They are probably also using Costco to buy their household staples and groceries.
That means there is much at stake when a customer can’t, or won’t, get a consumer electronics purchase installed properly. When an item is returned, the customer relationship is at risk. It is a chance for the retailer to shine or to self destruct. With installation options, Costco equips itself with an essential play in their customer service playbook, and a chance to distinguish themselves in the customer eyes. Without customer service, they run a high risk of self destruction.
What is the impact of botched return? First, Costco loses the margin from the big ticket sale. Then they must restock and potentially remedy with the supplier. They increase their risk of customer flight and all those dollars from household supplies and groceries. With customer flight, Costco increases the risk that the former customer will tell their friends and family about their bad experience. It’s bad news all round.
I wonder if Costco has looked at their lost customers to discover the rate of return on customer electronics items.
We’re all of the same opinion here – this is a great move by Costco. It’s a logical extension of the “good customer experience” mantra embodied by their no hassle returns. Think about it. Nobody buys a high end TV or stereo planning to return it. They want a good experience with it. If Costco can take the hassle out of system set up and installation, then a potentially negative experience becomes a positive one, and both Costco and the consumer wins.
Smart move by Costco. Since they already appeal to a higher income consumer it only makes sense for them to offer in-home assistance. This is similar to Best Buy and their Geek Squad and yes it will push other retailers to do the same. If Costco is able to pull this off — and of course others in the past have tried to do the same without success due to the inability to monitor closely enough the in-home labor — then Costco will have taken another reason away from a consumer to shop at a locally owned retailer based on the service they can provide.
It’s a no-brainer! If they’re seeing these products come back in quantities large enough to cause concern, of course they need to add a service component. Who knows, if it’s effective enough it might even grow their business in a whole new direction.
Home installation and related in-home services can be great margin generators. They’re increasingly important as the population ages. Furthermore, it’s a growth lever because technology-driven manufacturers, with few exceptions, believe (1) they cannot afford to provide service and (2) mistakenly think “more features means more value.” In many cases, new technology destroys much of its value by featuring complicated design. Costco can increase sales and margins by offering in-home service.
Consumers are more confused every day as new and more complex products come to market, and these services are a HUGE boost to the bottom line of retailers. Look at the rise of the Geek Squad and online services such as Plum Choice; the success of this service and installation segment is because consumers REQUIRE the service, not because it is convenient. Costco is in the perfect position to compete with Circuit City and Best Buy in this market and they will be successful.
Low price AND good customer service. Congratulations Costco, instead of making it harder for your customers to buy, you went to the trouble of finding out how to fix the problem and satisfying your customers even more.