Returns Cost You Money!
Do you know how much returns cost your company each year?
Businesses face the challenge of managing customer returns, which significantly impact profits. But what exactly drives these returns and how can you minimise them to enhance your business financially?
Understanding the Cost of Returns
A study by Optoro, a logistics provider, suggests that handling a return can cost a business up to 59% of the item’s original sale price (Optoro, 2020).
Returns arise for numerous reasons but typically include the following:
- A defective or damaged product.
- A product doesn’t match the description.
- An incorrect product shipped.
- Delivery issues (such as delays, damaged packaging or items left at the wrong location).
- Customers simply changing their minds.
While some factors, like a customer’s change of mind, are beyond your control, many aspects can be managed through implementing the right inventory management software and processes.
Reducing Returns Through Effective Inventory Management
An order management and warehouse management system, incorporating product information management, can reduce the number of returns by automating the process and moving away from paper base or spreadsheet systems. Implementing this inventory tracking system ensures the correct items are picked, packed & dispatched (using barcode scanning), reducing the likelihood of customer returns due to receiving incorrect items from human error.
Accurate product information management ensures detailed product descriptions, high-quality images and accurate sizing & fit information, which facilitates better buying decisions and reduces returns.
According to a report by the National Retail Federation, in 2021, the rate of returns for online purchases was nearly triple that of brick-and-mortar stores, accounting for an average of 20.8% of total merchandise sold. Alarmingly, this equates to a staggering £102 billion of returned goods annually (Retail Dive, 2021).
While returns are an inevitable part of retail, their financial impact goes beyond just lost sales.
Handling returns involves costs – processing the return request, inspecting and restocking goods (if they are still saleable) and the additional customer support required throughout the process.
Research in 2023 by Shopify indicated that handling and restocking returned items can cost retailers 20% to 65% of an item’s original selling price, depending on the product and return condition.
Returns are as demanding as outgoing shipments. They require substantial space for sorting, assessing, repairing, repackaging or recycling. An inventory control system is necessary to track and adjust inventory in real time, prevent stock inconsistencies and avoiding potential losses in sales.
Data from a 2022 IBM study suggest that inefficient return processes add an average of 15% additional costs to warehouse operations due to the need for extra labour and space.
The environmental impact of returns cannot be ignored. The additional shipping required for returned items increases carbon emissions.
According to a 2021 study by the Carbon Trust, reverse logistics can result in up to 15% increased carbon emissions for retailers, as the extra trips required to handle returns add to the overall carbon footprint.
An increase in returns is also being attributed to consumer behaviour. This behaviour leads to inflated demand forecasts and further complicates stock management as detailed in the statistic below:
A Barclaycard study revealed that nearly 30% of shoppers deliberately over-purchase with the intention of returning the excess, encouraged by lenient return policies (Barclaycard, 2021).
In addition, other costs are not immediately apparent, such as the opportunity cost of inventory being unavailable for sale during the return process and the decreased product value due to opened packaging or minor use.
Strategic Management of Inventory to Reduce Returns
Investing in an order management and warehouse management system is essential for businesses looking to reduce the costs and processes associated with customer returns. These systems improve order accuracy, manage your inventory in real-time and provide detailed product information – all of which decrease return rates and enhance customer satisfaction. Implementing such technology is a must if you are looking to reduce the cost of returns and increase your bottom line.
A 2023 case study by Adobe found that retailers who implemented integrated order and product information management systems saw a decrease in return rates by up to 30% due to improved accuracy in product descriptions and customer expectations.
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Author: Iain Coplans CEO Stok.ly