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When eCommerce Return Management Costs Go Down, Profit Goes Up

By Ruthie Bowles | Tags: eCommerce

Online shopping is thriving, and it’s a market that continues to grow year over year. In an April 2017 survey shared by Statista, 40% of consumers stated they purchase items online at least several times per month. As many as 20% admitted to shopping online on a weekly basis.

In 2014, total worldwide eCommerce sales equated to $1.3 trillion. Cumulative data presented within The Enterprise Guide to Global Ecommerce shows worldwide eCommerce sales reached $2.3 trillion in 2017 and are forecasting $4.5 trillion by 2021.

Unfortunately, with the increase in sales comes the problem of customer returns.

BONUS: Before you read further, download our Inventory Management Software Whitepaper to see how Logiwa uses real-time tracking to help customers get up to 100% inventory accuracy and manage their returns.

A Look at U.S. Product Return Costs

In 2017, U.S. return delivery costs amounted to $381 billion and is expected to reach $550 billion by 2020. Seeing return rates hover at around 20% has become the norm for many eCommerce retailers, with returns spiking to 30% or more during holidays.

With the rising costs, it’s critical for retailers to evaluate how they manage eCommerce returns. You want to protect profit margins without damaging customer satisfaction and customer lifetime value.

In this post, you’ll see the main drivers for customer returns, how to reduce the cost of returns and recommendations for improving eCommerce returns management.

Why Do Your Customers Return Products?

You’ve likely seen a variety of reasons for customer returns. It ranges from an item that didn’t fit to a damaged product or a gift purchase that was returned. Your customers return products for many reasons, and every return is a direct hit to your bottom line.

It’s a significant hit when you consider just how many customers return products. 89% of customers have returned an online purchase.

The leading causes for product returns for online purchases include:

  • 20% of consumers returned products due to damage

  • 22% initiated returns due to products that didn’t match the product's image online

  • 23% returned products because they were shipped the wrong item by the retailer

But in some cases, there’s no real problem with a product, or even with the retailer. 41% of customers purchase products with the intent of returning the product.

This growing trend in online shopping isn’t intentionally malicious. In fact, it’s a trend that’s developed specifically because of the industry itself. The introduction of try-before-you-buy with eCommerce is likely a major contributor.

Try Before You Buy May Increase Your Returns

Online marketplaces and retailers like Amazon, Sephora, and Warby Parker are popularizing a new business model allowing customers to try on products with absolutely no upfront cost. Instead, the customer returns unwanted products and they’re only charged for what they choose to keep.

Experts struggle to attribute rising returns to the try-before-you-buy model. However, a 2018 study found that since the emergence of the try-before-you-buy model, 40% of US and UK retailers have experienced a spike in returns.

Research has consistently shown us that customers prefer anything that’s free. Free shipping has shown to improve conversion rates and 79% of consumers want free return shipping.

Your customers are just returning products as part of the normal shopping experience.

And they’re definitely your customers. They’re not necessarily random first-time-shoppers you’ll never see again. In fact, 77% of returns come from repeat customers.

And that product return doesn’t mean they’ll never shop with you again.

As long as you make the process easy and continue focusing on customer satisfaction, they’re far more likely to continue shopping with you. As many as 92% of consumers will buy something again if returns are easy.


Return fraud does happen, and you can read about that in our blog post on creating a great return policy.

What Does Poor eCommerce Return Management Cost You?

If you’re a small retailer you can handle returns easier when the volume of sales matches the scale of the business. In this setting, your returns management system is often manual. You might have one or two return people from the point of the contact requesting a return to the item being restocked and replaced or refunded.

But that approach isn’t scalable and as your sales volume increases so do your returns management costs.

To manage returns, eCommerce businesses typically add workers, increase or designate warehouse space for returns, and even establish separate departments just to handle returned products.

For larger incumbent brands, the return cost as a percentage of revenue is just 2%. For smaller entry-level brands and growing SMBs, that return cost as a percentage of revenue is 48%.

Aside from refunding the revenue from the sale of the item, there are various other costs at play that impact profit margins:

  • Conditioning items for resale

  • Obsolescence of returned items

  • Lost warehouse efficiency

  • Cost of shipping (return shipping and reshipping)

For the average business, managing the return and repair process can account for around 10% of total supply chain costs. However, if your eCommerce return management process is poorly planned and inefficient, it can compound the cost and reduce profit by 30% (or more).

A cumbersome eCommerce return management process is also guaranteed to frustrate your customers. You’ll lose a significant chunk of revenue due to the loss of repeat business.

A study from Forbes Insights found that among the top reasons customers don’t return, 21% of retailers attributed customer loss to poor experiences/customer service.

How to Reduce the Cost of Returns

Customer returns are a part of retail, whether online or in a physical store. While you can’t eliminate returns completely (and refusing to allow returns will only hurt your business), you can do a lot to reduce customer returns in a cost-effective manner.

Streamline the return process

The first step is to review your logistics for handling returns. Every business should have a plan for reverse logistics or the process of products returning to inventory from customers.

Benchmark your current return process from the point of customer contact through to resolution. Audit this process and treat every bottleneck as an opportunity to improve the process.

Take into account:

  • How easy it is for the customer to make contact

  • How are returns tracked

  • How are returns handled on arrival and returned to inventory

  • Accounting for returns (reconciling inventory, sale, and taxes)

Don't Let Your Inventory Become a Liability: Learn how Logiwa integrates with the technology in your warehouse and automatically updates your inventory across all of your channels so that you can easily automate your returns process.

Automate the return process

For a smaller eCommerce retailer, it may be easy to designate just a few people (or one person) for handling returns with your existing cloud software. For larger and growing operations, you may find it necessary to automate some or all of the return process.

Unfortunately, automation can be difficult. Even with modern eCommerce platforms, easy integration isn’t always available between the platform and the ERP you’re using. That can result in time-consuming manual work for requesting and entering information.

It’s an inefficient workflow that’s prone to errors. You may lose records and experience delays in return processing.

Automating the ecommerce return management process is likely the most ideal choice because:

  • The customer can instantly initiate a return whether you setup blind returns or require authorization.

  • Data moves automatically between systems eliminating internal data entry errors.

  • Reconciliation can be done automatically.

  • Returns are automatically tracked, and customers automatically updated on the status.

  • The return process is shortened with automated return labels.

  • You’ll need fewer hands managing and monitoring the return process.

Adjust your return policy

The simple act of having a return policy can impact your sales and influence whether a customer chooses to shop at your store. According to UPS study, 88% of shoppers review return policies while shopping online, with 67% checking the return policy before completing a purchase.

Unfortunately, 15% of shoppers will completely abandon the purchase if the return policy is unclear or unfavorable.

Make sure your return policy is easy to find and the language is clear. Likewise, consider updating your return policy so it’s more customer-centric. Points to consider:

  • Increasing the window in which returns are accepted

  • Allowing for free returns (whether conditional or not)

  • Simplify the language of your policy so it’s clear and can be understood in less than a minute

One study published in the Journal of Marketing found that free returns could boost consumer spending by 158%–457% when stacked against pre-return spending. Another study from the University of Texas-Dallas found that a lenient return policy with a longer return window can result in more returns but correlated with an increase in purchase volume.

Review Your Product Packaging

  • A whopping 20% of consumers returning products due to damage. When customers return damaged products you should look closely at your packaging:

  • Is the packaging you’re using sufficient to protect the products being shipped (right size, correct thickness, right material?)

  • Are the included packing materials to pad the products protecting the contents within?

  • Is your team packaging products correctly to ensure they’re protected during shipping?

  • Is damage happening with a specific carrier?

Audit Your Warehouse

Even if you have a documented and automated return process in place, take the time to regularly audit your warehouse team in charge of outbound shipments and handling product returns. Look for deviations or bottlenecks that increase the cost of handling returns like mishandled or misplaced products coming back into stock, packaging delays, interruptive workflows, etc.

Monitoring your picking and packing workflows is the best way to discover issues that can cause improper products from being shipped. Drs Foster and Smith reduced returns by 74.7% when it introduced paperless scanners from its pick-and-pack process.

Improve Your Product Images

A good portion of returns happen because the product received doesn’t match what the customer ordered. You can dramatically reduce this by improving the quality of product images on your website.

  • Avoid using close close-matching images or manufacture images if you can

  • Take your own professional, high-quality images

  • Post multiple images of a product from various angles

  • Use user-generated content – include images of your customers using or wearing your products

Another way to reduce returns is to add product videos on your product page. Ice.com saw a 3% reduction in returns when shoppers viewed a product video.

Leverage product reviews

The social proof is in the product review. As many as 92% of consumers turn to reviews before making a purchase. But they’re good for more than just getting prospective customers to make a purchase.

When comparing customer purchase and return behaviors, PETCO found there were 20.4% fewer returns on products that contained product reviews.

Most eCommerce platforms include basic review functionality for products. To ensure your reviews are working in your favor, consider a 3rd party app like Yotpo that gives you more review and testimonial functionality with reviews that stand out in your online store.

Solicit Customer Feedback (and Follow It)

Customers want to know it’s easy to return a product and 85% won’t return for another purchase if the return process is complicated or inconvenient. Involve your customer an ensure a hassle-free return policy.

Reach out to every customer after a return is complete to get their feedback on the return process. If there is any friction during the return, your customers will likely be all-too-willing to let you know.

A smaller retailer can probably send a follow-up email manually, which has the benefit of a more personable shopping experience. A scalable solution would be to trigger an automated survey sent to customers once a return is complete.

Whatever approach you take, make sure you’re reviewing and listening to your customers. They’ll let you know exactly where the return process is breaking down and costing you repeat business.

Your eCommerce Returns Management Can Cost Money or Make Money

You’ll always have customer returns – that’s the nature of retail. For eCommerce retailers, those return rates will always be higher than brick-and-mortar. However, with the recommendations above you can reduce how those returns impact your profit margins. Remember, any change you make should be routinely investigated and analyzed for additional opportunities to optimize your policies, processes, and reverse logistics.

Ruthie Bowles

Written by Ruthie Bowles

Ruthie is a content marketing consultant for Logiwa. Her specialties include small business development and inventory management.