eCommerce’s Problem of Returns

A worrying economic problem for eCommerce is that the variable costs of an online retail business can be considerably greater than the mostly fixed costs of a bricks-and-mortar store. And one of the chief culprits contributing to higher online costs is product returns. In fact, ease of returns, or lack of it, is a major contributor to consumers choosing to ultimately shop at a bricks-and-mortar store instead of online, especially when the product is coming from overseas. 

The common perception that online retail is more profitable than bricks-and-mortar retail is being increasingly undermined as more and more eCommerce companies face the unexpected reality of variable costs. In short, the high rate of returns adds considerably to high supply chain costs. So why is that and what can be done to reduce return costs? 

Return rates between 25 percent and 40 percent are common for such non-commodity items as clothing and home furnishings. In addition, the standard start-up business practice of seeking fast growth has only compounded the problem. 

As a result, building additional, localized distribution centers, or acquiring a company with an already installed base such as Amazon’s acquisition of Whole Foods, is seen as one way to reduce shipping and return costs. Also, from an omni-channel perspective, physical bricks-and-mortar stores can also be utilized as a way to reduce online supply chain and return costs. 

However, the high cost of land in and around cities has meant distribution facilities with a return component are not being built as quickly as many companies need. Return centers are being looked at as an alternative as they can be smaller than distribution centers and more specialized.

That said, being proactive to prevent returns in the first place is something all companies can implement immediately. Such a strategy can be far more cost-effective than being reactive once the product needs to be returned. Paying greater attention to a company’s online operational and supply chain details can make a significant contribution to reducing product returns.

For example, one of the biggest reasons for returns is sizing issues. As every consumer knows, when it comes to clothing, a designated Small sizing is not uniform across all manufacturers and brands. Detailed product information is often the key in reducing clothing returns. An expedited, convenient exchange policy, rather than a returns policy, and the option to return the product to a physical bricks-and-mortar store for omni-channel retailers, or a partner store, can also reduce return costs. 

Detailed product information, rather than generic company-issued descriptions, can also alleviate another popular reason for returns; the delivered product being different from what is described on the Web site or in a catalog. A side-issue, although on that is just as important, is that online retailers want consumers to trust the company, and incorrect or inadequate product information is going to do the complete opposite. 

While online retailers can hardly be held responsible for products being damaged in the shipping process once they leave the company’s facilities, other than making sure they are using extra packaging, sending the wrong product is very much a correctable supply chain and logistics problem. Additionally, ensuring that the product is sent out on time negates the company’s responsibility if it arrives late. 

The bottom line is that the “returns problem” for online retailers, leading to diminished profitability as a result, is not going away any time soon. Until a company-specific operational strategy is devised that would somehow reduce such return costs, eCommerce businesses could do worse than to implement measures to proactively reduce the number of returns, rather than simply accept that a 40 percent returns number is “normal.”  

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