What’s the return rate your e-commerce store can afford?

Returns are one of the worst enemies of any e-commerce website. They cost you money and much effort to be managed. And, depending on what you sell on your e-commerce store, you may experience different return rates.

Fashion is one of the industries with the highest return rate. It happens for many reasons, one of them is because of the difficulty in getting the right size the first time, especially for brands you do not know already.
Returns can’t be avoided, the only thing you can do as entrepreneur or e-commerce manager is to cover the topic at best, both from the customer perspective and from the company one.

To cover the topic at best from the company perspective, you should be aware of your actual return rate, calculate its impact on the business and set yourself the target to achieve.

The question is; how is the return rate impact on the business calculated? I will now go through all the steps to calculate the return cost and finally, I will show you the different return rated impact the business in completely different ways.

How to compute the cost of a single return

To compute the cost of a single return, you should take into account all the costs arising when an item returns to your warehouse.

First, you have direct costs, hence the costs to replace the item and all the logistics costs to have it back to the warehouse and send it again to the customer in case it is replaced (rather than refunded).

I imagine your return policy consisting in a full coverage of all the logistics costs to have the product back to the warehouse and back again to the customer doorstep.

This is not the standard, since many e-commerce stores charge the customer some of the costs above, but I believe it is going to become more and more the common practice.

The item has then to be replaced. Not always, it may also be refunded, but I consider the case of a replaced item since it represents the worst case in terms of economics.It represents the worst case not because any product cost raises, but because logistics costs to send the new product to the customer raise.

This may happen for many reason. One is that you allow free size exchange. Second, the product was defective and you have to send to the customer a new one while having it yourself refunded by the producer.

The return direct costs are therefore equivalent to two shipping, plus the packaging for the delivery back to the customer.

Then, you should take into account the indirect costs. Indirect costs are all the costs related to the return, but not directly accountable to it.
For example, as indirect cost you can consider the cost of the people in the organization who will take care of the issue. Or, if you’re the only person involved in the operations, the cost of your time.

Such cost is actually made of the average cost of an hour of your work in the organization times the average time needed to manage the return.

Now that is clear how to calculate the cost of a single return, the key question about the impact it has on the business is still open. So, I’m going to address it.

How to calculate the return rate impact on the business

Now that you have calculated the cost of the single return, I will drive you through understanding how the return rate impacts your business. To do it, you first needed the single return cost. And now you have it.

The cost of the single return, once multiplied by the expected return rate, provides you with a measure of the business impact.
Such number represents, in fact, a fictitious cost which erodes, on average, the sales margin.

For example, if the cost of the single return at your store is €20,00 and the return rate is 10%, you have an average return cost of €2,00 per sale.
Given the example above, it should be clear that the greater the return rate and the greater the impact on your business.

Which impact can your business afford? Your business can afford the return average cost which is sustainable by the sales margin. But this is not enough. It should retain the business conditions of sustainability at the operating margin level.

To simplify at maximum the concept, when you compute the Customer Lifetime Value minus the Full Customer Cost , you may add the average return cost to the latter understand whether the customer P&L is sustainable.

Whatever the result, your goal should always be to keep such value the lowest possible. To do it, you can follow the tips from Econsultancy and Elkfox.

Adam Hansen

Adam is a part time journalist, entrepreneur, investor and father.