Sales for many e-commerce companies last summer were, well, a bit of a challenge. Almost every company I spoke with recently saw a 20-30% drop in sales compared to the previous year, especially during July and August. Things have been looking brighter since late September, but it has caused a mindset change in the scene. It's as if everyone has woken up and is now thinking about what the future holds. That's a healthy shift, if you ask me.
For years eCom entrepreneurs were caught up with growing (and bragging about) their gross revenue or GMV at pretty much all costs. Net revenue and margins were of lesser importance until very recently. But the number one conversation topic in eCom boardrooms across North Western Europe is: how to get (more) profitable.
In this piece, I share my thoughts on a piece of the puzzle that is often overlooked: the refund rate. Believe it or not, this is where you, as an e-commerce entrepreneur, can really make your mark on the road to profitability and even beat your direct competitors.
Understanding why the refund rate matters is crucial. It's about knowing what it means to reduce your contra revenue. What's contra revenue, you ask? It's all the deductions you make before your GMV turns into net revenue. The larger its slice of your GMV pie, the more work you've got cut out for you. Here's a breakdown of typical contra revenue percentages:
- Payment gateway fees: typically around 2.5%
- Cancellations: also about 2.5%
- Return costs: about 5%
- Shipping costs: usually around 10%
- Marketing & discounts: often about 20%
- Refunds: usually around 60%
This contra revenue as a percentage of GMV? It's a pretty nifty metric to assess how well an eCommerce business is doing in terms of operational excellence and customer acquisition efficiency. It does not paint the entire picture, but when assessing whether a business is run in a professional way this would be the first place an investor starts looking.
Now, to my initial point. If you're looking to make a real difference in your bottom line, you've got to confront your issues head-on. Lowering the total value of refunds is a pretty smart place to start. So, how do we do that?
Actually, it's not that complicated. Once you've decided to focus on the refund rate, it's time to dive a bit deeper. Refunds are typically caused by two main issues: returns and not being able to offer your customers a replacement or exchange product.
So we can split the work into two categories. First, reducing your return rate - essentially making sure people buy the right product the first time. Second, doing everything possible to avoid a refund by offering exchanges, replacement products or store credit to keep sales on board.
Lowering your return rate
Much has been written about reducing return rates, but these are the most effective ways, in my opinion:
Offer free exchanges but paid returns
Clear communication in your sales funnel about offering free exchanges and paid returns will immediately affect your return rate. It's a way of saying, "Hey, we're here to help, but let's not make a habit of returning things."
Get insight into your worst performing products as soon as possible
Asin many parts of business, a few elements can disproportionately affect the metric you are trying to influence - in this case, the return rate. Addressing your worst-performing products can dramatically reduce your return rate. You may need to dive into your sales and returns metrics or use a returns management platform for continuous insight into your product performance. Adjusting your product descriptions, sizing tables and pricing, or even removing a product from sale entirely, may be necessary steps for the greater good of your business and customer satisfaction. There is also an article on the return impact index that is worth reading.
Understand which group of "loyal" customers are actually loyal for the wrong reasons
This might be a touchy subject in some eCommerce circles, but understanding which customers are not benefiting your business is crucial. Identifying and addressing this small group can significantly reduce return-related costs. Recently I helped one of our customers to address this issue with serious impact. We ended up blocking 0.8% of the customer base which almost overnight led to a dramatic drop of 16% in return related costs. In this particular case that amounted to more than one million euro in prevented return costs per year.
Not bad for a returns management platform. Read more here.
Charge a fee per returned item
Arecent development in eCom land is charging a fee per returned item. The most friendly way to do this is to charge a fee per returned item above a predefined threshold of let's say 3 items. It addresses the problem of consumers thoughtlessly ordering your goods without actually intending to buy them. It also covers part of the cost of buy-now-pay-later payment methods that usually lead to a higher order value but at the same time inflate your return rate. A decrease in your return rate is almost guaranteed with this solution. If you are interested in understanding the return rate by payment method or want to charge a fee per return, you can link Returnista with your store. Book a demo here.
Reduce the number of refunds
Now that we've discussed some basic strategies to lower your return rate, it's time to get into what you can do to lower the total refund value after your customer has decided to return one or more items.
Something that has become pretty much trivial in 2023 is offering exchanges. It is truly self-sabotage if you do not offer your customer the chance to get the right product in their hands at the moment that it is relevant. Let me ask you this: have you ever as an online shopper returned an item and then bought the different colour of size in the same store right after? My guess is the answer is: no. It such a hassle to do so that nearly all your customers will leave it at that. Think about the value destruction for a second. Marketing costs, payment fees, shipping costs, re-stocking the item and the lost opportunity of selling that item to the right customer in stead. Its insane. Luckily there are pretty tools nowadays that can offer your customer the right product right at the moment that is relevant to them: while returning the item.
Offering store credit is a pretty powerful tool too to use next to exchanges to keep as much money onboard as well as to make your customer as happy as they can be after making a return at your store. In essence you offer your customers a small incentive, lets say 5 euros, to get a giftcard in stead of a refund.
So, what is the result?
Companies that actively work to become more profitable than their competitors have a better chance of surviving and reaching the top of their industry. Check out this McKinsey report for more on this. At Returnista, we've seen brands manage to reduce their return rate by 45% and drop overall refund value by as much as 80%. That's what we do it for! And remember, many of these strategies can be implemented without any tools. If you're curious about what a returns management platform can offer, we're here for you!