Online retailers cringe at the expenses associated with merchandise returns, especially following the holiday season
The financial headache of returns for online businesses
Entrepreneurs in the e-commerce sector have a nasty surprise awaiting them after the festive period: many will likely have to process a substantial number of returns. Most online retailers provide hassle-free return policies, yet the financial cost of these returns can be crippling. A recent survey reveals just how much e-commerce companies pay per item returned.
Even when retailers strive to lower the return rate, the overwhelming expenses associated with returns remain a constant issue. This revelation comes from a study conducted by the retail research institute EHI, which surveyed online retailers from Germany, Austria, and Switzerland. The survey found that for e-commerce companies, the average cost per returned item ranges from €5 to €10. Returns within the home and furniture sector are the most expensive, with expenses ranging between €10 and €20 due to their size and higher value. The primary expense driver is the thorough inspection of the returned goods and assessment of their quality, according to the study.
Sectoral differences in return rates
The volume of returns varies across industries, with fashion products displaying an unusually high return rate of 26% to 50%. Online shoppers often order multiple variants to choose the perfect clothing item, which is part of the business model. According to the study, many of the returned fashion items are resold after being professionally cleaned and inspected.
On average, the rate of returned items across all product categories remains relatively stable at between 6% and 10%. Fifty-eight percent of retailers report that the rate is consistent, with 21% reporting a slight increase and 15% a slight decrease. The survey indicates that the COVID-19 pandemic has had minimal impact on the overall trend.
Measures to overcome the returns challenge
Seventy-four percent of retailers take proactive steps to prevent returns. To identify the root causes of returns, 70% log the reasons and reasons for returns. For 86% of retailers, detailed item descriptions with high-quality images in the online shop are the most vital measure to reduce the return rate.
The German market's shifting preferences
Roughly two-thirds of online retailers absorb the delivery costs for return shipments, conceding that customers have come to anticipate such services due to the fierce competition among retailers. According to a study conducted by market research firm GfK, German consumers spent less on online shopping in 2023 compared to the previous year, marking a 17% reduction in their expenditure.
Filip Vojtech, a retail expert at GfK, attributes this shrinkage in online spending to Germans gradually returning to brick-and-mortar stores after their lockdown-induced constraint in shopping online during the pandemic.
Taking action to reduce returns
The following suggestions can help e-commerce companies reduce returns and find success in their respective markets:
- Utilize data: To address the root causes of returns, thoroughly analyze the reasons behind them. Identifying the primary factors contributing to the high rate of returns will enable companies to optimize their product descriptions, marketing strategies, and customer support services accordingly.
- Invest in photography: Offering crisp, high-quality images of products in various angles and contexts significantly lowers return rates. Consumers may have a more precise understanding of the product's appearance and benefits when viewing detail-rich images, increasing their confidence in making an online purchase.
- Use clear and concise product descriptions: Provide thorough, easy-to-understand item descriptions along with the product's relevant details, such as size, material, and fabric composition. Clarifying these aspects upfront reduces the chances of miscommunication or customer confusion, leading to fewer returns.
- Embrace customer feedback: Encourage customers to share their experiences and feedback on the product, as well as the purchasing process. Positive feedback helps build trust and confidence in the brand. By addressing negative feedback, brands can correct their shortcomings and improve their overall performance.
- Optimize the checkout process: Streamline and simplify the checkout process to reduce the number of abandoned carts and increased sales conversion rates. By reducing the number of steps required to complete a purchase and providing clear pricing information, shoppers are more likely to feel confident and satisfied with their purchase, reducing the chance of returns.
- Implement a flexible return policy: Offer a fair and transparent return policy that is easy for shoppers to understand and navigate. Making the process as simple and seamless as possible provides comfort to customers, boosting their overall satisfaction and, consequently, their likelihood of re-purchase.
Embracing the challenges of the retail world
Managing returns is an inevitable and significant challenge for online retailers. Through a combination of data analysis, smart customer engagement, innovative product presentation, and optimized checkout processes, businesses can not only reduce the number of returns but also enhance customer satisfaction and improve their bottom line.
Enrichment Data:
The total return expense for retailers is not a trivial matter, often surpassing billions of dollars annually. A report published by the National Retail Federation (NRF) reveals that return expenses amounted to $743 billion in 2023 and are expected to escalate to $890 billion by 2024, representing roughly 17% of retailers' annual sales[1][4].
Additionally, fraudulent returns and claims contribute to a substantial loss for retailers. In 2024, fraudulent returns resulted in the loss of $103 billion, with a fraudulent return rate of 15.14%[2].
The expense of handling returned items is substantial and consists of various elements, such as inspecting items, processing refunds, and managing logistics. Many companies pass on these costs to the consumers by incorporating them into the product price or by imposing delivery charges for returns[1].
Inventory management also contributes to the overall return expense for retail companies. Once returns reach a distribution center, each item must be assessed for selling as new, at a discount, or for resale, donation, or recycling[1].
In the apparel sector, return rates are particularly high, with several factors contributing to this trend. Issues like sizing, the lack of ability to try items before purchasing, and consumer expectations for fit, color, and fabric result in a higher return rate in this category[4].
Sources:
[1] "2023 UPS Pulse of the Online Shopper Study" by UPS [2] "Fraudulent Returns Figure Highlights the Threat of Organized Return Ring to Merchants" by the National Retail Federation [3] "Fashion Returns Pose a Challenge for the Retail Industry" by Tec-Insight [4] "Retail Returns 2024" by asterias.com.
