Rate of Return in Ecommerce: Formula & Calculation (2023)
Jul 31, 2023 | 13 min read | Leave a comment
Investors are likely familiar with Rate of return, which refers to the net profit or loss on investments during a specific period.
However, in eCommerce, the rate of return signifies the number of returned items compared to the number of items sold.
Returns in the eCommerce industry can have detrimental effects on profit margins, conversion rates, and the overall viability of a business. According to estimates from the National Retail Federation, the cost of managing returns amounted to $101 billion.
How a company deals with eCommerce store returns before and after the purchase can set them apart from competitors, create a competitive advantage, and potentially increase profitability.
That’s why we’ll share a multifaceted walkthrough of relevant aspects; hence you can have better insights and develop more optimized solutions. Let’s dive in!
What Is Rate of Return (RoR)?
The e-commerce rate of return of your online store indicates how frequently customers return items. It is calculated as a percentage of the total number of products sold within a specific period.
The rate of return in the e-commerce industry varies significantly among retailers, primarily influenced by two factors:
- Types of product categories they offer
- The generosity of their returns policy.
Therefore, it is crucial to avoid solely relying on the return rates in e-commerce without considering additional factors.
To accurately assess the impact of returns, examine your return rate within the broader context of consumer behavior and your returns management strategy.
By understanding the underlying reasons for returns, e-commerce businesses can optimize their return processes without resorting to drastic or desperate measures.
How Much Does Rate of Return Actually Cost You?
The notion of “free returns” is a misconception, just like “free shipping.” In reality, it’s typically the merchant who bears the cost of reverse logistics.
According to an article from CNBC, it can take up to 66% of the item’s original price to process and deal with returns.
Unfortunately, the cost of returns is increasing over time. This is mainly because regarding the returns process, customer expectations have reached new heights.
Here are some detrimental statistics to illustrate this:
- 72% of customers expect a refund within five days of returning an item.
- 69% don’t want to pay for return shipping or packaging.
- 49% check the returns policy of an e-commerce store before making a purchase.
- 52% have abandoned an online purchase out of fear of a complicated return process.
Returns are a costly challenge for retailers, especially during the COVID-19 pandemic. As more customers shop online, many retailers offer free return shipping and more lenient return policies to attract them.
However, this also increases the return processing costs for retailers, as they have to pay higher fees to major carriers.
Moreover, these returned items can reduce the profit margins. Only around 48% of returned merchandise can be resold at full price, further compounding the expenses associated with returns.
Not to mention the negative online reviews that come after, which can lead to the loss of hundreds of potential sales.
|💡In summary, return costs consist of much more than simply preparing items for return to store shelves. Merchants will have to bear the cost of lost sales and customer loyalty.|
How to Calculate Rate of Return in E-commerce?
1. Rate of Return
The Rate of Return (RoR) Formula in the E-commerce Industry:
|Rate of Return = (The amount of returned units / The total amount of sold units) x 100|
For example, You sold 20,000 pieces of merchandise within six months. There were 5000 returned units.
The return rate would be 5000 / 20000 x 100 = 25%.
The rate alone does not provide insight into the reasons or methods behind the returns occurring. It presents the performance of your eCommerce business.
|💡Your overall e-commerce return rate doesn’t reveal the number of returns that could have been avoided with appropriate intervention or the number of returns that were converted into exchanges.|
It is essential to analyze your e-commerce return rate by breaking it down into two important metrics: refund rate and exchange rate.
These metrics can help you understand how satisfied your customers are with your products and services, and how effective your returns policy is in retaining them.
2. Refund Rate
Refund rate is the percentage of returned items that are refunded to the customer.
A high refund rate may indicate that your products are not meeting customer expectations, or that your returns process is too complicated or costly.
|Refund Rate = (Number of refunded items / Total number of sold items) x 100|
3. Exchange Rate
Exchange rate is the percentage of returned items that are exchanged for another product.
A high exchange rate may indicate that your customers are loyal and willing to try another product, or that your products have sizing or quality issues.
|Exchange Rate = (Number of exchanged items / Total number of sold items) x 100|
What Is The Average E-commerce Rate of Return?
Before we go into the details, let’s investigate what situations influence how much businesses get returns.
For instance, online retailers often utilize free shipping thresholds to encourage customers to spend more while shopping online. However, customers can just add additional items to their cart to return them later.
Another popular strategy is “bracketing” or “try before you buy,” where consumers purchase multiple versions of the same item and return the ones that don’t meet their requirements.
63% of surveyed consumers admitted to bracketing for at least some of their online purchases, based on Narvar’s 2022 State of Returns study.
Seasonal peaks, such as the holiday season, can also influence return rates, which typically witness a significant surge in return activity.
1. Average return rate across selling channels
The figures below, provided by National Retail Federation, highlight the significance of measuring returns within specific timeframes.
- E-commerce return rate: 16.5%
- Holiday season return rate: 17.9%
One notable example is the holiday season typically experiencing a higher volume of returns compared to the rest of the year due to online shoppers returning gifts. You should segment the holiday season and other major sales events from the overall return activities of the year.
However, looking at the overall return rate doesn’t provide insights into how returns differ across various product categories.
When e-commerce return rates are examined by breaking them down into different product categories, the situation does not appear as dire or catastrophic.
2. E-commerce return rates by product category
When we analyze return rates based on the type of products, it reveals more intriguing insights. Statista surveyed consumers to determine the products they returned throughout 2022.
The chart indicates that certain e-commerce businesses will need to implement more advanced returns management strategies than others.
E-commerce Rate of Returns: Causes and Solutions
1. Why Do Customers Return Their Purchases?
By examining the returns data from Narvar for the year 2022, we can observe how the reasons behind returning merchandise have varying impacts on different product categories.
For instance, reasons like “Wrong size, color, fit” will significantly impact apparel and footwear brands, but have a lesser impact on categories like electronics.
Some reasons for e-commerce returns, such as “He/she did not like it” or “He/she changed his/her mind,” are difficult for online retailers to address.
However, reasons like damaged items, inaccurate depictions, and late delivery are well within the control of your brand and can be addressed effectively.
2. How to Reduce the Rate of Return in E-commerce?
1. Find out why customers return your products
When a buyer decides to return a product, it is beneficial to engage them in a conversation.
First thing first, ask them about the reason for the return and offer any assistance or support you can provide. Once the reasons are pointed out, you can easily work towards more effective solutions.
2. Describe your products in detail
If a customer cannot comprehend a product, it indicates that improvements are needed in your product copy. Unsurprisingly, 9 out of 10 online shoppers consider product content, such as descriptions, to be extremely or very important when making purchasing decisions. If a customer decides to buy without fully grasping your product, it increases the likelihood of potential disappointment.
Instead of delving into every detail about your product, consider focusing on the three most crucial aspects. Research has shown that overwhelming customers with excessive information can confuse them and deter them from purchasing. In your product description, emphasize:
- Key features and benefits
- Explanation of the returns process
- Any other relevant information
By providing a comprehensive explanation of the most valuable aspects of your product, you enable your customers to understand whether or not they should make a purchase fully. This approach ultimately helps to reduce return rates.
3. Offer brick-and-mortar returns
The landscape of omnichannel returns has experienced significant changes due to the pandemic, as consumers are increasingly inclined to return items to physical stores.
|💡 According to Narvar, 50% of consumers mentioned that increased convenience and location were their primary reasons for preferring in-store returns.
42% of consumers also expressed their desire to browse and shop for other items while returning in-store.
Implementing the Buy Online, Return In-Store (BORIS) approach offers significant benefits for e-commerce stores. It significantly reduces return shipping costs by enabling bulk shipment of items for returns processing.
Simultaneously, it ensures immediate refunds for customers. Moreover, brick-and-mortar returns present a valuable opportunity to retain revenue by guiding customers toward replacement products.
4. Offer an alternative product
Customers love to find a suitable substitute for their original purchase and initiate the returns process. You can offer them something novel and of equivalent value as an exchange.
For example, suppose a customer no longer needs a pair of running shoes they ordered and begins the returns process. In that case, you can exchange the product for a different color or style, or showcase related products that would interest a runner.
By providing alternatives, you give them a reason to consider the exchange or explore additional purchases, instead of simply returning the item. Ultimately, it can help lower your return rate.
Alternatively, you can offer store credit directly to allow customers to make their own choices. This approach transforms the return into a transaction and helps mitigate losses.
Such processes can be easily implemented using tools like Richpanel, where customers can choose store credit as their preferred method of return without extensive conversations with customer support.
Another approach is to qualify your customers by showcasing more of your product range. This may involve displaying related products on your product pages or incorporating them into the checkout flow.
While this customer-centric design choice may slightly affect initial conversion rates, it enhances customer satisfaction (CSAT) and demonstrates your commitment to assisting them in their purchase decisions.
5. Make your return policies obvious
Does your business effectively communicate the process for customers to make returns?
While it is common for a good business to have a web page dedicated to its return policy, it is important to ensure that the instructions for processing returns are well-communicated.
Firstly, it’s crucial to clearly highlight your returns policy. Ensure that it is easily accessible, such as including it in the footer of your website and providing links to it from product pages.
Secondly, establish trust with your customers by allowing easy returns and providing a reasonable timeframe for processing refunds. Clearly state the duration within which customers can return items, specify which items can be returned, and outline any exceptions or limitations.
Lastly, consider incorporating a self-service returns system to implement these practices for your brand. It empowers buyers to initiate the returns process easily without spending excessive time on the phone or engaging in lengthy email exchanges.
By carrying out such a system, you can streamline the process and avoid needing your team to search through customer databases or CRM systems to gather customer details!
6. Simplify your return process
Simplifying the returns process for your customers is a must. Besides clear communication, it is also crucial to avoid creating a cumbersome return process that can discourage buyers.
Strive to make the return process as seamless and hassle-free as possible to prevent any negative impact on your brand’s reputation.
|💡According to Narvar, 96% of consumers would be inclined to purchase from a retailer that offers an effortless return experience.|
You can transform what is typically seen as a negative situation into an opportunity for growth and customer loyalty. Your order value can get higher thanks to your optimized return process.
Can There Be a ‘Good’ Product Rate of Return?
It is a common mistake to equate low return rates with customer satisfaction. Simply having a lower return rate than average does not necessarily mean that your customers are having a positive experience.
If you implement complex returns policies in an attempt to discourage returns, your return rate may indeed decrease. Similarly, policies that force customers to accept store credit instead of a refund may boost your exchange rate.
However, if you are not actively empowering shoppers to choose these options willingly, these metrics become artificial. Why would online shoppers support a business that doesn’t support them? Once customers redeem their store credit (often reluctantly), they are unlikely to shop with you again.
Contrary to popular belief, hassle-free e-commerce returns are crucial for customer retention. When returns are viewed as a tool for growth, they can become a powerful driver of revenue retention and customer loyalty. Surprisingly, serial returners can be beneficial for your business.
|💡 David Sobie, CEO and co-founder of Happy Returns, shares that retailers’ most profitable customers are those who make returns more frequently than average. They make substantial purchases and also return items regularly, but most importantly, they remain loyal to the brand.|
Consumers want to support brands that make their lives easier, not harder. If customers have confidence in your returns process, they will be more inclined to make repeat purchases. A staggering 92% of shoppers say they would buy again from a retailer if the returns process were easy.
You should never take your return rate at face value. As mentioned earlier, a high combined return and exchange rate indicates a positive return experience. It demonstrates that you maximize revenue opportunities and, more importantly, create satisfied customers.
Rate of return might sound bad as customers return your products, yet trying every single way to reduce it is not a good idea. Instead, you should accept it as common sense and maintain an optimal rate for higher customer satisfaction and loyalty.
Understanding why your customers send products back plays a critical role in the process. Besides, clarifying your product specifications, such as sizes, key features, etc., might help you prevent returns.
Due to the nature of online shopping, returning products is inevitable. Thus, you should establish a simple return process and communicate it well with your customers.
We hope the return rate definition, analysis, and suggestions can help you handle your product return rate better. Stay in the know and tune in TrueProfit Blog for our upcoming content!
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