Have you calculated the true cost of returns to your business?
On a macro-level, over 200 billion dollars worth of merchandise was returned in 2021. That equates to approximately 20% of total online sales. Additionally, another study showed that around 25% of customers believe they return between 5-15% of their purchases. A few people even said that they return more than half of what they buy online. Those numbers grow during holiday seasons when people have been known to return 2 out of 3 gifts they’re given. This is especially true of product lines like apparel, electronics, and jewelry.
So What Does that Mean for Your Business?
Those numbers may not be exactly encouraging, but you might be wondering how that applies to your own company. In actuality, returns cost businesses 66% of the original price. Even when the item is returned in good condition, the whole returns process is still costly due to the necessary labor, transport, and inspection. That doesn’t even get into the intangible costs associated with a dissatisfied customer who may not shop as much with your business – or may even share poor reviews or post about their experience online.
It’s important to note that returns likely cost you more than you realize. This makes sense with the growth of ecommerce. As people shop for goods that they aren’t seeing and feeling, it’s more likely that something won’t work and a consumer will want to return items. You might view returns as a normal cost of doing business, but it’s worth trying to mitigate these costs when you can.
This is especially true for smaller businesses. Big brands and established ecommerce companies can handle these return costs. However, it’s not the same scenario for smaller companies or those just starting out. Aside from just refunds, smaller ecommerce sites suffer both immediate and long-term losses that can hurt their reputation and their bottom line over time. Here are a few of the ways that returns negatively impact online businesses.
- Loss of customers – Every return is an opportunity to lose customer loyalty. Many customers have great return experiences, but those that don’t are not likely to come back. They may have bought more goods from you in the coming months, but are unlikely to if they are dealing with a current return.
- Damaged reputation or brand – Long-term customers are more likely to provide helpful feedback or try new products. For many reasons, it’s good to count on longer-term customers. They already trust your brand and are more likely to share those opinions. Furthermore, you can lose future customers because of bad reviews. A single poor review could be enough to dissuade a potential new customer. If they share such opinions on social media, it can be even worse news. Truly bad experiences can do long-lasting damage to your reputation that can be difficult to recover from.
- A higher cost to acquire customers – You’ve probably heard that it costs a lot more to acquire a customer than to keep one, and that’s true. Repeat customers help with acquisition costs and also typically result in larger average order values. Say you spend money on online ads to acquire a customer. If the customer returns the product then you’ve lost that investment as well. If you operate with a low profit margin normally then it’s easy to start taking net losses. For instance, if you normally profit $20 for an item, and you spent $10 in ads to obtain the purchase, plus have to account for shipping, handling, and other costs related to returns, you can see how it doesn’t end up worth it.
- Lower customer lifetime value – Customer lifetime value (CLV) shows you how much each customer brings to your business over time. A higher CLV means customers are loyal and likely to make repeat purchases. They’re also more likely to buy high-value goods which offer higher margins. On the other hand, a low CLV means the opposite. Chances are those customers have only purchased a few times. CLV affects your overall revenue and you need to adjust your acquisition costs to make up for it. Online retailers should aim for a CLV that helps them to remain profitable and grow. If a customer ends up making returns, it is likely to impact how much they buy in the future and how their CLV shapes up over time.
Tips for Mitigating Returns
You can see the point we’re making here: returns are costly, likely even more than you thought previously. It’s crucial to try to reduce returns and not simply absorb these costs as a normal part of doing business. Here are a few of our expert tips for lowering returns:
- Include clear sizing charts. An item not fitting is the main reason for normal returns, and sizing is variable across brands. Make sure you have an accurate sizing chart that is easy to read.
- Add photos of the product in use. It’s helpful for people to see how the item actually looks or behaves in real life. Include clear images and have various models wear the item (if clothing).
- Make sure the representation is clear. Photograph the item from all sides and angles. Your goal is to give customers as much perspective as possible of how the item looks in reality.
- Write clear and helpful product descriptions. This is one area that consumers pay close attention to before pulling the trigger on a purchase. Do everything you can to help them make a truly informed decision.
- Encourage customers to leave a review. Research shows that a lack of reviews is a big problem. Up to 90% of shoppers will hesitate to buy a product with no reviews present. Do everything you can to entice positive reviews and then make sure they are displayed properly.
These are just a few tactics that should be part of a comprehensive return reduction strategy. Leveraging the right technology can ensure you’re making the right moves. We can help you to develop a robust plan for limiting returns using real business analytics and business intelligence.