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Winning Tactics to Reduce Returns: E-Commerce’s Silent Killer
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Nearly $25M worth of items are returned on Amazon every year.
Lost sales on Amazon alone have an annual valuation of about $500M. For online marketplace operations, returns can compromise profit margins if not handled properly and can have a massive impact on overall profitability. Known as e-commerce’s “silent killer,” returns can cause businesses to lose money and can rapidly spiral out of control if you are reactive instead of proactive when handling them.
In our latest webinar, former Amazonian and industry expert Andrea Riposati drills into an innovative approach to optimizing your returns process. In order to maintain healthy performance metrics, Amazon recommends that you keep your return rate below 10%. To illustrate this, if you are averaging $10M in annual sales, 10% of that is $1M, meaning that your lost sales that year is $1M. Those lost sales, referred to as “opportunity cost,” is revenue that your business won’t see due to returns.
An average item on Amazon sells for $25. For third-party sellers, several variables come into play in any one return: shipping costs, any pick/pack fees, refurbishing fees, advertising costs, customer support, and more. In many cases, the total losses of these fees combined together is more than 50% of the price of the item, which is guaranteed to kill your profit on the item.
An Untraditional Approach to Returns
Traditionally, the approach to managing returns has been the following:
1. Managing communication and shipping. The seller provides the customer with a shipping label to return the item.
2. Managing the related product review. it is likely that the customer who wants to return the item submits a review, so you should try to make sure he can return the item right away and convince them to remove the one-star review.
3. Refurbish the item and put it back on sale.
Alongside these steps, many sellers utilize return-specific software to help them manage the process. The software auto-generates labels, emails, and refunds, allows customers to return multiple products in a single request, sends prepaid shipping labels to customers, and lets customers print their own labels if they so choose.
However, per Andrea, these businesses make money when you lose money through returns. They don’t help you eliminate the returns or reduce the costs of the returns moving forward. Their business models are based on your stores losing money.
At Amazon, the focus is not on providing the customer with a label to return the item as soon as possible. The focus is on making sure that the return at hand is the last return for that ASIN and taking a proactive approach to returns.
According to Amazon expert Andrea Riposati, Amazon does not manage returns. Instead, they go through total quality management, a practice that was popularized by Toyota, to remove returns from the equation altogether. As an example, if there is a defect on one part of the car, Toyota does not just remove the defect on that car. They find the root case of the defect for the entire model at every location and eliminate the problem in that manner.
Finding Key Root Causes of Returns
It’s important to be able to identify the cause of the return in order to prevent it from happening again in the future. There are four main issues that coincide with returns:
1. Vendors: The return can be isolated to products from a specific vendor.
2. Warehouses: If you are fulfilling from your own warehouse via FBM or SFP or from a manufacturer’s warehouse before sending to an Amazon fulfillment center for FBA, returns may be generated more for items that came from one specific warehouse. It is also possible that the warehouse shipped the item incorrectly to cause the product issue.
3. Managers: If you have multiple managers overseeing your product line, one manager may have higher returns than the other due to a hiccup in some area of their shipping process.
4. Channel: If you received a batch of products from a specific channel at a very cheap price, you may discover later that the products have defects after the customers have been the first ones to make this realization.
In conclusion, the best way to deal with returns is not to hyper-manage them or wait idly for the issue to come across your desk. It’s crucial to be extremely proactive to make sure that in the future you have less and less returns. Once you identify the offenders, you can find the cause of each return and take appropriate action, keeping the customer front of mind and moving swiftly to ensure that the returns don’t eat into your store’s profitability.