eCommerce

The real cost of returns and how to reduce it

Mariluz Sampalo

Mariluz Sampalo

Dec 27, 2022

return costs can end up reducing the profits of an online store

Inside this article

  • iconWhat are return costs?
  • iconHow to reduce return costs
  • iconConclusions
  • Managing returns and overcoming their costs may be one of the biggest challenges of running an online store. With the opportunities that come with the eCommerce industry, so do higher return rates compared to physical stores.

    Although returns can be costly, the damage that refunds can have on a company by far surpass that of exchanges and other return options.

    That’s the truth of the matter: returns don’t need to become a refund or a lost client. They can be used to build customer loyalty and lower the return costs considerably. Find out what the hidden costs of returns are and how to reduce them to ensure profitability in the long run.

    What are return costs?

    Refunds have an immense cost for online stores: not only do you lose the money invested in the sale — from fulfillment to shipping and restocking — but also the opportunity to sell to that customer again. Refunds can be seen as the end of the relationship with your customer.

    When an exchange or store credit wasn’t an option, it means that the customer was truly unhappy with the quality of the service and products.

    Customer acquisition cost (CAC)

    Contrary to what used to be thought, the costs of online retailing aren’t much lower than traditional brick-and-mortar stores. With the lack of rent, electricity, and staff, come other hidden costs such as return costs or advertising costs.

    CACs due to marketing activities can even exceed the rent price for a physical retail presence when not done properly. However, if your CAC isn’t compromising the stability of your business, what should catch your attention is how many of these clients are actually staying in the loop and purchasing from you. What does your repurchase rate look like?

    When your CAC isn’t high but customers decide to opt for refunds instead of an exchange or a new product, the customer LTV (lifetime value) is shortened, and the cost per transaction increases without bringing any real benefits to your business.

    Order management cost

    Behind every order, there are employees and systems that are involved in the order management process - which adds costs to the company. In the end, the picking and packing process is not only time-consuming but also resource-intensive. All of these costs only can make sense when the sale is guaranteed and the customer is satisfied with the service or products.

    Shipping cost

    Shipping costs can be yet another expense to be added to the total cost of a sale. If, as a retailer, you offer free shipping for some or all of your shipments, you may be losing money if your returns rate is high and most of your returns end up in refunds rather than exchanges or in-store credit.

    Return shipping fee

    As more and more retailers realise the high cost of returns for their business, a shift in the way customers return products is taking place.

    Zara was one of the first companies to stop offering free returns and, what seemed like a decision that could make them lose clients, has ultimately proven to help maintain the profitability of their business. One of the ways to reduce the costs of returns is by not supporting all the returns costs yourself, but sharing them with the customer in order to prevent return frauds.

    Restocking fees

    Even when the customer decides to exchange a product over getting a refund, there’s an extra cost to be added to the overall cost of returns that is attached to the management of the returned product and its return to inventory.

    Typically, the warehouse operator will open and inspect the parcel to ensure the item is as stated, and that the description of the problem matches the reality. Then, depending on the nature of the product, it will be placed for sale or discarded. This is an extra task that adds an additional expense for retailers.

    Although not an expense, we can agree that losing a client is not only expensive because of the costs attached to it, but also because of the possible profits that they could have brought.

    How to reduce return costs

    The first step to making sure you don’t lose money because of an inefficient returns management process is knowing why returns have an impact on your profitability. However, this isn’t enough if you want to reduce return costs in order to maximize each customer. Below are some starting points to begin to reduce return-related costs.

    1. Perfect product pages

    One of the most fundamental changes to implement if you want to make sure that the returns you receive are truly essential is to perfect your product pages.

    Collect information on the reasons why certain products are returned to find out if a product runs big or small, if the instructions aren’t clear, or if there’s anything wrong with the way you promote your products.

    apple product page design is thought with the customer in mind

    Although the number of returns an online store receives will always be higher than that of a brick-and-mortar store, reducing the reasons why customers may feel obliged to return an item as much as possible should be one of your top priorities.

    2. Automate processes

    As automation continues to develop and become more available and affordable, automating processes is a decision that will not only save time, but also allow your operations to become more efficient and less resource intensive.

    One of the ways to take this automation into consideration regarding the returns process, is to offer a self-service returns portal where customers can manage their own return or exchange without having to contact your customer support team.

    returns can be easily automated through a self-service returns portal

    Many companies choose to outsource the management of their returns. However, we encourage online stores to do this in-house as it gives them a complete overview of their operations and more control over customer satisfaction.

    With Outvio, you can create a fully branded returns and exchanges portal where customers can manage their orders in an autonomous manner. Save time, reduce returns costs, and deliver the best experience to your customers.

    3. Use return rules

    As part of your automation, but not necessarily included in all eCommerce tools, is the possibility to create return rules to adapt to every possible scenario without putting your business or your customers’ satisfaction at risk.

    Return rules work following the logic “if X, then Y”. For instance, if the product is perishable, then don’t allow the return. Or, if the item is of low value, simply refund the client, but don’t create a shipping label for the return.

    These return rules considerably reduce the customer support workload. For the customer, it means speedier processes and a better purchasing experience. With higher customer satisfaction comes an increased repurchase rate.

    happy customers tend to purchase from your online store again

    When returns not only bring more sales, but are also automated, the cost related to returns significantly drops.

    Outvio helps you create return rules to automate the process of exchanging and returning items, and gives you a self-service returns portal to enable customers to manage their orders on their own.

    4. Allow in-store returns

    As important as it is to reduce the cost of online returns, there are other ways to provide a  returns process that is good for customers and healthy for your business. For instance, you can try to minimize the number of shipments associated with returned items by enabling returns in-store.

    This will minimize the number of returns you receive, and increase the possibility that these customers purchase more items instead of simply exchanging the item for another one of similar value.

    Plus, in-person interactions with a brand are very valuable in terms of building customer loyalty and retention, and strengthening customer relations with a brand.

    Conclusions

    Return costs are one of the biggest headaches for eCommerce managers. However, reducing the number of returns an online store needs to process is very hard.

    With the many benefits that come with online shopping, there also come some disadvantages that can’t always be salvaged with the technology we have: size problems, inaccurate descriptions or pictures, or simply a change of mind.

    These are all common return reasons that can end up costing a lot for the retailer, from shipping costs to restocking fees and the possible damage of the customer relationship.

    Return costs should be kept to the minimum. Thanks to our tips, we hope that your returns will not only be profitable, but even good for your business thanks to the power of automation and the use of software that transforms returns into an important marketing opportunity.