Finance and Accounting

Returns management: what are the six hidden costs of returns

The global e-commerce market is growing aided by rapid urbanisation, increasing internet penetration and digital device usage, and an increasing preference for online shopping aided by the pandemic. According to a report by IMARC Group, the global e-commerce market size reached USD 16.6 trillion in 2022. It is expected to reach USD 70.9 trillion at a CAGR of 27.43% by 2028.

One of the appealing factors driving e-commerce is the ease of returns. Statistics indicate at least 30% of all products bought online get returned. 92% of the shoppers will buy again if the returns are easy. Free return shipping is preferred by 79% of shoppers. Perhaps, that’s why almost 49% of retailers offer it, as they cannot afford to lose customers to their competitors. However, it has become a Damocles sword for retailers. Neither can they withdraw it, nor ignore the costs incurred in managing it. Customers order impulsively and return because it is easy and free. The question remains, would customers be more cautious about ordering if the returns policy weren’t as easy and was chargeable? 

Understandably, retailers are not dwelling on this question. However, they acknowledge the need to understand and optimise the costs associated with returns management. Here are six hidden costs that e-commerce returns generate. Analysing these might help retailers find the balance to sustain the business and strengthen the e-commerce ecosystem.

  1. Logistics cost
  2. When an item gets returned, it must be picked up and transported to the warehouse. The associated cost is simple if the transport is to a local warehouse. For national or international transportation with multiple carrier management, it increases accordingly. For faulty items, further costs include transport to vendors, repair centre, recycling centre, etc. Reliable logistics management services can help optimise these costs to some extent.

  3. Customer service cost
  4. The customer service for the return process involves:

    1. Customer interaction to process the return
    2. Customer service coordination with the logistics team
    3. Customer interaction to track the status till the refund happens

    It appears simple enough. However, multiple stakeholders handle various parts of this process, which, at times, may be out of the retailer’s control. Customer service may not always have real-time updates of the return item status leading to more interaction.

    E-commerce retailers offer customer care services through multiple channels, such as calls, chats, email, social media, etc. A call centre cost per hour in India lies between USD 6 to USD 10, and USD 20 to USD 30 in the US. Live chat pricing can range from USD 25 to USD 65 monthly, depending on the transaction volume. Email and social media channels require dedicated personnel, which comes at a cost. With more returns and customer service contacts, retailers incur higher costs.

  5. Operations cost
  6. Customers expect retailers to provide return labelling. These add to the cost and wastage, especially when not used. The returned item must be checked, registered, and placed in the warehouse for further processing. The warehouse must have enough space for the returned items, which translates to cost. Coordination between various departments to repair or resell the items involves opening, verifying, repacking, and relabelling. Faulty items should be repaired, returned to the vendors, replaced, or recycled. The customer refund processing must follow. Besides, the operations team can never accurately forecast the influx of returned items. This inability results in the excess allocation of resources for returns management or a lack of it, adding to operations costs.

  7. Depreciated item cost
  8. Every item returned depreciates because of the time and cost involved in its return and resale, if at all. It is estimated that a USD 50 product return costs approximately USD 33. The retailer has to either absorb the cost or hike the product price to make a profit. Hiking prices in a highly competitive landscape is not a good strategy. So, retailers mull other cost-cutting options, which may affect the product or service quality. At times, the returned items even get discarded.

  9. Environmental cost
  10. When returned items get discarded, there is an environmental impact also. Return shipping in the US causes more than 33 billion pounds of carbon dioxide emissions annually. The damaged goods ending up in landfills are estimated to be more than 5 billion pounds. Many of these non-biodegradable materials may take years to break down, resulting in a significant environmental cost.

  11. Branding cost
  12. Damaged goods make up 20% of the returned goods, while 23% of customers return because they received the wrong item. Shipping wrong items, bad returns management, etc., will impact the brand negatively. If the returns processing takes time, that also irritates the customers. Smaller retailers without adequate resources to absorb the cost of the return may provide lower quality products, leading to loss of business. Even large retailers find returns management challenging when the influx is too high. Easy returns may cost your brand more than anticipated in rebuilding your branding.

    Each of these costs impacts profitability and branding. Customers may not accept stricter return policies, especially when they have options. One way to reduce these costs is to use technology to improve customer experiences. Providing better quality product images and in-depth videos help. Use live chats and technologies like virtual reality (VR) to help customers get a more realistic look and feel of the product. Such techniques can reduce return rates. Retailers can improve visibility in reverse logistics through supply chain management solutions that provide access to real-time information. The e-commerce market may be growing. However, it is crucial to pay attention to returns management to ensure maximum gains and sustainability.

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