Ecommerce Returns: Reducing the Profit Hit

Study after study of direct to consumer shopping habits show a high percentage (over 70% in some cases) feel ease of ecommerce returns impact their purchasing decisions. “Free” returns shipping makes shopping even more attractive. Who wants to buy a product that can’t be returned or carries onerous conditions?

Return rates for products will vary widely by product category. Apparel and shoes could be 15% to 30%, higher for fashion items. Home furnishings may be 5% to 10%, and consumer electronics run 15% or higher. It’s impossible to eliminate all returns; the objective is to control and reduce the rate where you can.

Here are 7 ways to lessen the profit impact of ecommerce returns in your fulfillment center:

Form a Process Improvement Team

To study the profit and customer impact of returns, make this a strategic initiative involving the managers in fulfillment, marketing, merchandising and accounting. They all have input and should have accountability for controlling ecommerce returns.

Understand Return Rates by Product Category

You may not be able to control “customer choice”, however, what reasons can you affect? Examples: content, photography, carrier damage problems; picking errors; vendor supplier QA problems, etc. Merchants need to have a reason for returns analysis by vendor, item, percent of order lines returned and customer reasons. Review it at least weekly.

Determine the Cost of Processing Returns

In most fulfillment centers, returns cost more than orders to process. This prior post gets into more detail about calculating the cost of returns.

Factors to consider:

  • Is it a return or an exchange? Returns come with a loss of gross margin
  • Inbound: cost of receiving, merchandise disposition and put away
  • Outbound: cost to pick and pack, supplies and shipping of the replacement item
  • Refurbishing: cost to refurbish item for resale
  • Product and shipping damage: cost of any damaged product by carriers or insufficient packing
  • Free return shipping costs
  • Customer service costs: return and exchange correspondence, emails, chats, etc. with reps

All these costs make returns more costly than orders. The biggest cost of all is the damage to LTV if the customer stops buying.

Fulfillment Center Considerations

It is critical to consider the space, flow of goods and people needed to process ecommerce returns during peak volumes. Here are six practices you can implement:

  • Receiving and staging space: Many fulfillment centers are not planned with sufficient space to receive returns (opening, inspection, processing, etc.). In a high return business such as footwear or apparel, 15% to 30% return rate require considerable additional space.
  • Space Planning: How will your space need to be configured? This includes movement of packages from receiving to returns; how to work returns on a FIFO basis; shelving requirements; the number of workstations and supplies needed for average and peak weeks; disposition of merchandise and flow out, etc.
  • Dealing with Waste: Returns generate tremendous trash and recyclables. How will they be efficiently removed?
  • Refurbishment: Often, these functions do not need to be done within the same footprint as processing returns. Does your facility have unused space that is more conducive to these tasks, such as a mezzanine or another low clear height area?
  • Using Returns to fill back orders: Cross-dock returns whenever possible. If the returned item is on backorder, send it directly to a pack station. This eliminates steps in handling, touches and delays, including restocking and replenishing and processing the new order.
  • Streamline returns processing: This includes credit refunds or exchanges; updates to the customer file, disposition and the interface to the WMS. Ideally an associate should be able to process a return with one or two screens. Utilize barcodes on shipping and return labels. Receiving can separate out a return, and returns processing can pull up the order quickly with the barcoded label.

Consider Reverse Logistics Services

Third-party logistics and specialized reverse logistics companies provide automated processing and tracking. This can come in handy and be cost effective for high-return categories. Notification of returns in transit will help you plan labor.

Factor Returns into Future Purchases

Returns can lead to overstocks. If your ecommerce company offers high return categories like shoes, apparel, electronics, the expected return rate needs to be planned into the future purchase order to avoid overstocks.

Other Issues

Here are a few issues other ecommerce companies deal with:

  • Can you save the sale? Before you get the return back, can you “save the sale”? If you have gadgets or electronics that are hard to setup or use, can you get the customer to contact you first for input? Crutchfield Corp. learned this 35 years ago and saved its business by publishing installations for every product sold and vehicle. If products like footwear and apparel have size problems, can you improve your content that notifies customers?
  • Multichannel business returns: It may make sense to have a policy that allows customers to return items to stores. But do you list the item as available in store or online? Are you willing to absorb the cost of transferring the item back to the fulfillment center?
  • Keep the product: For low price and low margin items, many companies find it’s cheaper to tell the customer to just keep the product. This eliminates their time, frustration and shipping cost as well as your center’s return processing expenses.

Ecommerce returns are expensive. Make them as hassle free as you can and you’ll earn more profit.

Brian Barry is President of F. Curtis Barry & Company