Last mile delivery

Reverse Logistics: When eCommerce Return Costs Go Down, Profits Go Up

Reverse Logistics: When eCommerce Return Costs Go Down, Profits Go Up

We’ll let you in on a little secret: When eCommerce return costs go down, profits go up!

So in this post, we take another look at reverse logistics. But this time around, you’ll see the effects it has on online returns.

More specifically, on the cost of managing and putting your return policy into action. You’ll see:

  • What drives online returns in the first place;
  • The current eCommerce returns best practices;
  • And how to cut the cost of returns with reverse logistics.

At the same time, you’ll get an in-depth look at what reverse logistics process steps you need to take to make it better and work for you.

Let’s start.

Why do your customers return products?

There is no one answer to this question. Technically, customers return products for a number of reasons.

Some customers return products because they arrive damaged. Others don’t fit or don’t match expectations. While others still are gifts that people want to return.

Whatever the case, there are a lot of people looking to return their purchases. In fact, 89% of consumers have returned an item that they have bought online in the last three years. While 42% have returned a purchased item in the last six months. Here are the leading causes for product returns:

The top reasons for returns in eCommerce:

  • The received item not as described: 23%
  • The description doesn’t match the item: 22%
  • The item was damaged or defective: 20%
  • Other reasons or not mentioned: 35%

But consumer-preference is a big factor, as well. When it comes to clothing and fashion, the reasons behind returns are different.

A survey by Return Magic of 1,000 businesses and over 800,000 Shopify customers revealed how consumer-preference is the reason behind 72% of all returns. Here, defective and not as described products (non-preference reasons) accounted for only 10% of returns.

The top reasons for returns (fashion and clothing):

  • The size was too small: 30%
  • The size was too large: 22%
  • Changed my mind: 12%
  • The style was wrong: 8%
  • Not as described: 5%
  • Damaged/defective: 5%
  • Other or not mentioned: 18%

But at the same time, some customers return products for no apparent reason. At least 41% of customers say they actually purchase a product only to return it.

Habitual returners like these fall into two categories:

  • People who buy a product only to wear it or use it once and then return it with no intention of keeping it. They either don’t have enough money to buy the item or exploit lax return policies.
  • People who recreate the brick-and-mortar store shopping experience at home by buying the same items in multiple different sizes, versions, or colours. Once the items arrive, they try out all of them, pick the best one, and return the rest.

The growing trend of sampling products before buying them is the direct result of eCommerce.

To accommodate the demand, retailers and brands have introduced the try-before-you-buy option in recent years. And it just one of eCommerce returns best practices to consider.

What are the best eCommerce return policies?

Returns are a key part of the online shopping experience. That’s why it’s critical to transparently illustrate the return policy to your customers just as you would label a feature on a product.

According to UPS, 88% of consumers check the return policy when shopping online. While 67% of them review the return policy before completing the purchase.

If the return policy is not transparent, unclear, or inadequate, 15% of potential customers will abandon their shopping cart.

So a return policy also has to be generous in the eyes of your customers. In fact, 96% of online shoppers say that good return policies influence their decisions to do business again with an e-retailer.

And because of that, consumer-friendly return policies can drive sales and profit. Here are some examples of best practices and solid eCommerce returns solutions you can use when it comes to your return policy:

Free returns

Offering a free return with every purchase is by far the most generous policy you can have. In fact, free returns or exchanges are the number two reason that would make consumers “more likely to shop online.

And according to Dotcom Distribution, 90% of consumers “highly value” free returns, while 62% of them “would buy again” from a brand offering free returns or exchanges on their products.

Zappos (an Amazon company) is the best eCommerce returns example of this practice. The company offers free shipping and returns on all their shoes, to all of their customers, all year round.

Talking to Fast Company, Zappos’ Vice President of service and operations, Craig Adkins said:

Our best customers have the highest return rates, but they are also the ones that spend the most money with us and are our most profitable customers.

But without the acquisition of Amazon, the company would struggle to afford such a policy. This, however, hasn’t stopped others to promote the same business model.

The danger in offering free returns is that you ignore how returns relate to profit, especially for small-to-medium businesses.

When you take a look at large brands, the cost of returns is just 2% as a percentage of revenue. For SMBs, the cost of returns is closer to 48%.

In other words, if you want to offer free returns, you have to accept the cost of doing business (managing reverse logistics) and take a more bottom-line driven approach to reduce costs and maintain a profit. (More on that later)

But if you can manage that efficiently, research suggests that free returns could raise spending by 158%-457% when compared to pre-return spending.

While another study from the University of Texas at Dallas revealed that “a lenient return policy with a longer return window can result in more returns but correlate with an increase in purchase volume.

Try-before-you-buy

Customers love convenience. A survey by PwC shows how it’s one of the key factors that drive customers to choose a brand in the first place.

Similar principles apply to same-day delivery. Only here, customers want the convenience of shopping online with the experience of going to a physical store.

In other words: Your customers want to get a chance to try something out before they buy.

And as mentioned, this is the direct result of eCommerce and habitual returners.

In 2018, The Wall Street Journal reported that Amazon had started banning customers who “made too many returns”.

This prompted Amazon to reveal Prime Wardrobe. Prime members in the US can order 3-8 items with a 7-day window to return them before paying for the order.

Others use returns-management apps. As Kaleigh Moore from Glossy explains, companies use these apps to allow “shoppers to buy again using a credit before shipping an item back.

Now, it’s a common practice. Online retailers like Walmart, Aldo, Sephora, Home Depot, Warby Parker, and other stores offer free online returns, which enables customers to try on products at no cost upfront.

A frictionless return policy

Consumers are returning products now more than ever. So much in fact, that most eCommerce retailers see return rates hold out at around 20% throughout the year, and spike to 30% during the holiday season. And the trend will only continue.

Thanks to free online returns and try-before-you-buy policies, retailers in the US and UK have experienced a 40% rise in returns.

The good news is that 77% of all those returns come from repeat customers. And that’s a real opportunity for you to increase sales, as long as you make the process as simple as possible.

To do that, you need to create a frictionless return policy.

Frictionless returns elevate the customer experience and increase satisfaction. And with 67% of millennials abandoning shopping carts if they feel the return process is complicated, the return policy can make or break a sale.

So, how do you make returns painless for customers? You listen to your customers.

One thing that’s true for all of your customers is that they are all different. And they all want a choice when deciding how to return a purchase. So, you need to provide as many distinct return options available to them.

For example, while most customers prefer home pick-up as a method of returning an online purchase, there are at least 16% of online shoppers who returned an item by dropping it off at the store.

People like Lisa Fields from New Jersey (USA). After facing an “online returns only” policy, Lisa abandoned her purchase and said in an interview: “My kids are finicky. If I can’t return clothing to a store, I won’t buy it.

How people want to return an online purchase:

  • Post office
  • Carrier
  • Collection point
  • Locker
  • Home pick-up
  • Retail Store

At the same time, it’s worth giving customers different refund options to choose from, and offer cashback, product exchange, or in-store credit.

But whatever return options you end up including in your policy has to be easy for customers to return an item, and for you to enforce it. Otherwise, you risk losing customers or piling up costs due to ineffective returns management.

How much does poor returns management cost your company?

The simple answer is A LOT!

In fact, the cost of return deliveries worldwide will reach $642 billion this year. And, for example, the cost of running Amazon’s reverse logistics is $16.2 billion alone.

Of course, the cost of your returns won’t reach those levels. But you still lose money because:

  • You have to refund the customer for their purchase (cashback, product exchange, or in-store credit)
  • You have to cover the cost of the initial delivery, the pick of the return, and the delivery of the replacement product
  • You have to recondition the returned product for resale (repackage the item or send it back to the supplier for a replacement)
  • You have to invest additional resources on sorting out returns, finding a replacement, and reshipping the return

Each return comes as a cost to your company. And every cost is a hit to your bottom line.

Technically, the return process can amount to 10% of the total supply chain costs for an average business. But if the return process is poorly managed and inefficient, expenditure can skyrocket and cut profit by 30% (or more).

On top of that, an inaptly enforced eCommerce return policy harms the customers’ experience and discourages them from doing repeat business. That can eat away at your revenue much more than the cost of your returns.

To deal with this, you must look at ways to decrease the cost of your returns.

How to reduce the cost of eCommerce returns?

Returns are the natural part of the shopping experience. Whether it’s a brick-and-mortar store or eCommerce retail, getting rid of them is out of the question. Instead, you must strive to make the process as painless as possible for your organization.

What you have to understand is that returns are a trade-off between reducing the impact on your bottom line and encouraging customers to buy from you.

We have already touched on how free returns, try-before-you-buy, and a frictionless return policy can entice customers to convert to buyers. But the very least you should do is to offer a 30-day window for free returns.

A (now standard) 30-day free return policy ensures you don’t drive away customers at checkout in the first place.

The next thing you need to do is to take a bottom-line driven approach to how you manage returns. And to do that, you will need to follow these three steps:

Step #1 Review and benchmark the current return process.

Make sure that the instructions for your return policy are easy to follow and identical across all of your communication channels (website, social media, product pages, labels, etc.).

Then, audit your returns. Identify any gaps or bottlenecks in the process. You can do this by taking a look at recurring queries from customers. Common questions about returns include:

  • Where is my refund?
  • Where is my replacement item?
  • When is my exchange item due?
  • How long does it take to replace an item?
  • How much does it cost to return an item?
  • Who covers the cost of the return?

View these questions as opportunities to improve the way you manage returns. At the same time, you have to take into account:

  • How easy (or difficult) it is for customers to contact you about returns
  • How do you approve returns (customer verification and return forms)
  • How do you track returns once they have been approved and picked up
  • How do you handle returns once they arrive or return to inventory
  • How do you keep books in order and adjust inventory, sales, and taxes

A more holistic and transparent view of the entire return process will help you fix big challenges in eCommerce such as reverse logistics and how you enforce the return policy later on.

Step #2 Collect and use data to organize the return rates.

A product return rate analysis looks at return rates in relationship with net sales. It lets you design customer return profiles from the least to the most profitable buyer.

For example, customers that have a high return rate aren’t necessarily unprofitable because they might buy a lot of products as a result of their returns. On the other hand, it helps you to weed out habitual returners.

The data is also more accurate than the industry average. It is easier to pinpoint opportunities to generate more profit based on information originating from inside your organization.

And your efforts to optimize the return process are more in-line with your capabilities. That can help you set up more realistic price limits (thresholds per order value) or return windows for your customers, as well.

Step #3 Examine the price, value and return rate of your products.

Returns work differently from other operations. If you can increase the perceived value of a product, you can lower the return rate. The only question is: how do you increase the value of your products?

One way is to play around with the price of a product. For example, if you reduce the price tag on a product, customers will perceive the difference in price as value. They will think that the money they save is more valuable than the hassle to return the product.

The same applies when you increase the price. A customer may associate a higher price with a higher quality of the product, and therefore perceive it as more valuable.

And whenever customers put a value on a product (or service), it’s much more difficult to detach themselves from the item and return it. When that happens, profit goes up because return rates drop considerably.

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But these three steps are just the start. To truly lift your bottom line, you need the right backend that can give you the edge to deal with the cost of eCommerce returns.

How to handle online returns with reverse logistics?

On the one hand, we’ve mentioned how important it is to keep customers happy with your return policy. On the other, it’s just as important to dedicate enough attention to satisfy your corporate needs.

In eCommerce, reverse logistics have to satisfy both sides of your business: the customer and the company. Often, when businesses consider reverse logistics for the first time, they overlook one in favour of the other.

Usually, companies put the needs of customers ahead of their company. But what many fail to realize is that there are suitable opportunities to raise profit margins by optimizing the reverse logistics process.

In doing so, you reduce the cost of operations, and the impact returns have on your bottom line. At the same time, you improve performance and efficiency, which raises customer satisfaction.

Before you start optimizing, it’s vital to know what is reverse logistics and what is it used for. Not to mention, the key components that make up eCommerce reverse logistics.

In simple terms reverse logistics is:

…the process that controls the return movement of orders from their final destination… [which] covers a company’s return policy.

(Find out more about reverse logistics and how it turns failure into opportunity in this GUIDE)

In the diagram below, you can see the key components of eCommerce reverse logistics. It is necessary to improve the efficiency of each process if you want to successfully keep up with online returns.

e-commerce-reverse-logistics

Source: Cerasis.com

But a majority of eCommerce retailers aren’t equipped to effectively deal with online returns, most notably when demand exceeds capacity. Still, many more also lack the experience to keep up with that growing demand.

Research suggests that 44% of retailers complain about how handling and packaging returns had hurt their margins.

And this is a huge problem for online business owners. If your supply chain is unable to handle the influx of return goods, the products will be stored indefinitely and raise waste, as well as cost.

A different UPS report explains that without a robust reverse logistics process, a business could lose over 50% of returned inventory value if you fail to sell the products in secondary markets.

Again, that’s why you need to make return logistics as painless as possible. The first step is to develop a standard practice for handling the eCommerce returns management process.

For small-to-medium eCommerce stores, this may seem easy. Sometimes all you need is one team (or even one person) to focus on returns, and take care of logistics.

But the problem comes to light when you start growing, and you have to scale your operations quickly. In these situations, it’s necessary to begin adopting strategies to optimize your reverse logistics, as well as proven delivery tactics to grow your operations.

And one of the main strategies that make returns easier to handle is automation.

Start automating the return process

Automating any process is a daunting task. It requires the right approach to integration and tools with a low learning curve, especially if you are still planning manually. And even then it takes some time to get used to it.

But in the modern eCommerce arena, digital transformation is a necessity if you want to unravel the maze of inbound and outbound logistics. The good news is that businesses are already taking that leap forward.

A Gartner survey shows that 70% of supply chain leaders plan to invest in the circular economy until 2022. However, only 12% have connected that strategy with their digital transformation.

Nevertheless, companies are using technology. Many of them in vital areas of their process, including:

Delivery: 46%

Customer engagement: 45%

Manufacturing: 43%

Planning: 43%

At the moment, a third of surveyed companies (27%) are using technology to improve reverse logistics, as well. And another 39% of respondents are planning to integrate a reverse logistics solution by 2022.

So, the time is right to start looking at eCommerce returns software. But what apps and tools should you look for?

Technically, there are two options available for you to explore. (When you don’t want to turn the reverse logistics process over to a 3PL company)

Returns Management Systems

The first option includes apps that specialize primarily in reverse logistics. These apps include solutions like:

The benefits of returns-management systems are that you take a narrow-front approach to reverse logistics. One tool for one task.

All of these apps specialize in returns efficiency. And all of them can integrate with any:

  • Inventory management system (IMS);
  • Order-management system (OMS), or;
  • Warehouse management systems (WMS) (for international operations).

But providers like Happy Returns, take reverse logistics a step further. This company offers both a physical service to go along with its SaaS solution. Happy Returns provides its customers with over 700 physical locations (in the US) where online shoppers can return products in person.

The downside of returns-management systems is that they focus on one area of the ecosystem.

Not taking an omnichannel approach is fine when you only have to deal with inbound logistics. But if you want a platform that can tackle forward as well as reverse logistics for the entire fulfilment process, you need to take a different approach.

And that brings us to the second option.

Delivery management platforms

Delivery management software takes a holistic approach to managing all aspects of delivery logistics and in every environment. Companies as varied as beverage distributors and pharmacy deliveries use it for everything from route optimisation and ePOD to reverse logistics.

Solutions like eLogii, also use smart APIs to integrate with all other tools you use. You can connect this platform to any OMS, IMS or WMS, or any other system, including your website or Shopify account.

What this brings to the table is complete visibility and total control over your entire operations across your entire supply chain.

It enables you to track and monitor every piece moving on your logistical chessboard, as well as to collect, evaluate and act on data in real-time. That makes delivery management platforms ideal when you want to offer free returns inside a 30-day window to customers.

For example, when a customer contacts you about a return, the dashboard allows your teams to scan the map for a suitable driver. They can then treat the returns just as a delivery order, and add a pick-up task to the driver’s delivery schedule, as well as a drop-off task at the depot site.

Because the software takes a cloud-first approach to delivery logistics, all of the information you have just uploaded is automatically visible to everyone involved: the driver, customer support, depot or inventory teams, and returns managers.

What’s more, you can increase customer satisfaction by offering to exchange products as soon as a return request arrives.

Since the system connects to an IMS, you can scan multiple depot locations to find the replacement, notify the inventory manager, and send the nearest driver to pick it up.

At the other end, a different driver (closer to the customer) can pick up the return, and bring it in for repackaging or send it back to the supplier.

Using delivery management software to build an agile delivery operation like this will increase the performance and efficiency of both reverse and forward logistics. And that means:

  • Less waste;
  • Lower costs;
  • A stable bottom line;
  • More value to your customers, and;
  • An efficient return policy.

Ready to start solving the puzzle of eCommerce returns?

At the end of the day, customers will want the choice to return products. That doesn’t mean they want to turn their backs on your business. All they want is service. It’s up to you to provide it!

How you manage returns is a whole other question…

Overlook customer expectations, and they slash conversion rates before checkout. Mess up the process following a purchase, and they eat away at margins. And jeopardize the existence of your business.

But returns are a normal part of the shopping experience. With a first-rate policy, returns can be a wellspring of profit and loyalty for your company. All you need is the right tool that can take you there…

Try it out for FREE

eLogii is an end-to-end delivery management platform that operates on the cloud. Our powerful solution can overcome all the challenges of modern eCommerce delivery including how you manage returns with reverse logistics.

That’s why we offer you to START A FREE TRIAL right now by clicking on the link, no questions asked except one:

What’s stopping you from taking that first step in the next step of the evolution of your delivery?