The secret to success with any e-commerce business is to keep your customers happy. Rapid order fulfillment, free shipping, and excellent customer service are some of the best ways to do that. When determining an e-commerce business plan, many fail to factor in (or underestimate) product returns.
Returns are a necessary evil for any e-commerce business, and if you don’t handle them properly, they could swiftly break you. Frequent returns can not only negatively impact your profit margins but also destroy your conversion rates, bring down customer satisfaction/loyalty, and threaten the survival of your business as a whole. Developing and enforcing a strong returns policy is a must if you want your business to be successful.
In this article, we’ll cover the ways in which your return policy impacts sales and how change your policy to benefit your business. We’ll also cover some of the best e-commerce return practices to make sure that returns don’t ruin your business.
The State of E-Commerce Returns
In 2017, there were over 1.6 billion digital buyers around the globe – that’s more than 20% of the world’s population. What’s more is that number is projected to increase to over 2.1 billion by 2021. Though the e-commerce market presents nearly limitless possibilities for retail businesses, it does come with its challenges. Reaching your target audience can be tricky when you have billions of potential customers, and you must compete with dozens or even hundreds of businesses like yours. In the wide world of e-commerce, it’s the little things that make your business stand out – things like your return policies.
According to Star Business Journal, returns at brick-and-mortar stores hover around 8% to 10% while returns for online stores are nearly double at 20%. Furthermore, returns can be extremely expensive for a business – particularly during the holidays. Here are some eye-opening statistics:
- Over 40% of online shoppers will buy multiple sizes or variations with the intent of returning the unwanted items.
- 77% of online returns come from repeat customers.
- 95% of online shoppers say a positive return experience affects brand loyalty.
- On average, it takes 28% of businesses two weeks to add a returned item back into inventory.
To account for the logistics of returns, many businesses take steps such as increasing their workforce, adding more warehouse space, and creating separate departments to handle returns. All of these factor into an ever-dwindling profit margin.
Before getting into the details of how you can keep returns from potentially ruining your business, let’s take a closer look at some of the ways returns affect your overall profitability.
How Do Returns Affect Your Profitability?
To a certain degree, keeping your customers happy is about transparency. Your customers want to know that the products they are purchasing are of the highest quality and that they are getting the best value for their money. They want to know that their order will be processed quickly and efficiently and that they will be able to contact customer service with questions or concerns, which will be resolved in a timely manner. They also want to know what your return policy is upfront, before clicking “buy”.
Your e-commerce return policy affects your business more than you may realize. According to recent research, about 67% of online shoppers will check a company’s return policy before buying. What do customers like and dislike about return policies? Let’s take a look…
- About 80% of consumers surveyed expect free returns.
- Only 25% of online merchants offer free returns.
- Over 83% of consumers read a company’s return policy before buying.
- About 71% of customers decide not to purchase when restocking fees are charged for returns.
As an e-commerce business owner, you need to account for all variable when it comes to profitability. While it might cost your company money to offer free returns, doing so could, in turn, boost your sales. In fact, customers are twice as likely to make large purchase (over $1,000) online if free returns are offered.
To give you an example of what a good return policy can do for your business, consider the Zappos model. They were the first e-commerce retailer to offer a 365-day, free two-way shipping, and returns policy. What’s more is that the policy allowed customers to return their shoes for any reason. This was absolutely unheard of in 1999.
According to Zappos’ VP of Services and Operations, the company’s best customers have the highest return rates (up to 50% of everything they purchase) but they also spend the most money which makes them the company’s most profitable customers. At first glance, it may sound like their return policy is hurting business but, over time, those loyal customers end up spending more, which offsets their returns. Simply put, a lenient return policy (when properly executed) can make a huge difference for your business and for your profit margins by creating a more loyal customer base.
What Really Drives Returns?
In order to improve your returns policy, you first need to gain a better understanding of who is returning your goods and why. Here are some of the most common reasons for returns:
- Damaged Goods – Items arrive at the customer’s door having been damaged prior to or during the shipping process.
- Mis-Delivered or Undelivered Goods – Items fail to arrive at the desired destination.
- Malfunctioning Goods – Items arrive at the desired location but do not work properly.
- Exchanges – Items are exchanged for another item.
- Inaccurate Description – Items received are not as described, either in terms of size or style.
- Changed Mind – The customer simply changed their mind about the product.
In addition to identifying why certain items are being returned, it is also helpful to develop customer profiles to determine who is making the most returns and how to prevent it from damaging your business. For example, some customers intentionally take advantage of lenient returns policies by purchasing items to wear once and have no intention of keeping them after. There are also others who order multiple sizes and options for the sole purpose of trying them on at home.
Having developed a better understanding of your customer base and the most common reasons for returns, you can now work on developing a stronger return policy.
Tips for Developing a Strong Return Policy
Now that you understand that the majority of customers will check a company’s return policy before making a purchase. It is also important to note that nearly 50% of customers will continue buying from a company if they have a hassle-free return policy. So, how do you create a return policy that improves your profit margins while also retaining your customers?
Here are some simple tips to help you develop a strong return policy that wins over customers while keeping return rates low:
- Offer free returns and a specific return window/trial period. Your customers want to know that if they aren’t satisfied, they’ll be able to return the item easily.
- Keep your return policy clear and concise, so there is no confusion about how the policy works, on your end or the customer’s.
- Make your policy easy to find – your customer shouldn’t have to search for it. A strong return policy should show that you stand behind your product to instill confidence in your business to build trust with the consumer.
- Never copy a return policy from another company. You should personalize your return policy to your business and products.
- Try to keep the language light – avoid phrases like “you must” and “you are required to.” You want your returns process to be easy, not scary.
- Be clear about what the customer can expect during the process. Make it clear whether you offer an exchange for returned products or if you provide store credit or a full refund.
- Give specific instructions about the procedure for returns and exchanges. Tell the customer whether they need to use the original packaging or if they can use their own. Tell them if they need to include the order slip and if they can print a return label online.
- Educate your staff so they understand the return policy and can communicate it to your customers quickly and efficiently.
No company is perfect but having a strong returns policy will prevent returns from destroying your business. Even with a strong policy, however, you should be prepared to take a hit now and again. If you make a mistake with shipping or packaging, you may be forced to eat the cost yourself for the sake of keeping your customer happy. Always keep the customer and your long-term bottom line in mind.
What About Reverse Logistics?
The term reverse logistics is sometimes used interchangeably with returns, but they are not quite the same. Technically speaking, reverse logistics refers to monitoring the life-cycle of a product after it arrives at the customer’s door. This includes the ways the product can be reused, how it should be disposed of, and other ways to create value with an expired product – it also involves the return of products from the end consumer back to the manufacturer.
In order to develop a reverse logistics procedure, you need to first think about the different stages a product goes through during a return. First, you’ll need to consider the physical shipping of the returned product – how you will get it from the customer back to the warehouse. Next, you may need to test the returned item to identify existing flaws and document any problems. Then, you’ll need to repair, recycle, or restock the item.
To help you get a better understanding of the reverse logistics portion of your company’s supply chain, there are four key analytics to consider:
- Volume – Take a look at which products are being returned most often – if it’s a large volume of the same products, you may need to consider a recall or make changes to your production.
- Percent of Sales – What percent of your total sales is lost to returns and how many of the returned items can be reincorporated back into your inventory?
- Product Condition – See if you can identify a pattern of failure or malfunction to determine what is going wrong with the product and what condition it is in when it is returned.
- Financial Value – Are the returned products able to be recycled or resold? Think about ways to use returned items to minimize the blow to your profit margins.
Once you’ve gathered this information, you can gain a deeper understanding of your company’s reverse logistics and use that information to optimize your workflow. Improving the efficiency of your reverse logistics system provides numerous benefits, including the following:
- Reduction in related costs. When you plan ahead for returns and implement a system to ensure that orders are fulfilled correctly, you can minimize related costs for administration, shipping, quality assurance, tech support, etc.
- Faster processing. By implementing a reverse logistics system, you can increase the speed with which orders and returns are processed which keeps your customers happy.
- Improved customer retention. A poor return policy can prevent a customer from coming back, but a strong policy instills confidence in the brand and makes customers more likely to purchase again, even after you’ve made a mistake.
- Recoup your losses. By using a reverse logistics system to gather data on returns, you can decide how best to use returned products to reduce losses. You could fix and restock the product, scrap it for parts, or repurpose it in another market.
Handling returns in a quick and efficient manner is the key to keeping your customers happy. With a strong returns policy, you can minimize the damage caused by shipping errors, manufacturing defects, and other issues that necessitate a customer return. When your customers feel like they can trust your company to correct errors in a timely manner, they will be more likely to become repeat customers.