8 Ways To Lessen The Profit Impact of Customer Returns


Studies of major direct to consumer companies show a high percent of customers (80% in one study) say ease of returning product is important to their purchasing decision. Studies also show a high percentage of customers are more likely to shop with an online merchant if the merchant offers “free returns”.

Who wants to buy a product that can't be returned or carries onerous conditions? It’s impossible to eliminate all returns, as some studies show that more than half of all returns are things the business shipping the product is responsible for. This becomes very costly as returns cost more than orders to process.

Here are 8 ways to lessen the profit impact of processing returns in your operations:

1. Understand Your Products’ Return Rate

When measured as a percent of gross demand, return rates for products will vary widely by category. You cannot eliminate all returns. Some problem areas where returns can be reduced include creative, photography, and inaccurate content; carrier damage problems; picking errors; vendor supplier QA problems, etc. Some studies have shown that often the majority of returns are the merchants’ responsibility.

Our article shows some typical return rates for categories and how to develop a “reason for return report ” you can use to identify returns of products.

Read The Return Rate Report Here

2. Determine What it Costs to Process Returns

Returns cost more than orders to process, be sure to include these costs in your assessment. Begin by identifying the operational and customer service costs:

  • Inbound Processing – Include the cost to receiving in the return; performing a merchandise disposition, and then finally performing the putaway process. processes for returns and exchanges; customer service for refunds and exchanges; merchandise put away for future picking.
  • Outbound Processing – Include the cost to process the pick, pack, and ship of the replacement item – including shipping costs for shipments not related to a customer exchange etc.
  • Refurbishing – Products, like apparel, often require refurbishment work to prepare for resale. Other items require re-bagging or boxing. Be sure to include the labor and material costs for refurbishment, etc.
  • Merchandise Expense – Some percentage of products being returned will have to be written off as damaged – the costs of this inventory will need to be included.
  • Lost Gross Margin On a Sale – If not an exchange there will a loss of gross margin dollars that should be evaluated.
  • Customer Confidence – Potential loss of customer and lifetime value caused by poor return handling, damaged or poor product quality.
  • Free Return Shipping – Many consumer retail companies allow for “free return shipping”, and other retailers have been pressured to offer the same. But we all know there is no such thing as “free return shipping”. Surveys have shown positive impact from customers in businesses providing “free return shipping”. However, each company needs to determine as mentioned above how these costs affect profitability and LTV.
  • “Keep the Product” Returns - For low retail price point, low margin merchandise, and many food/perishable product companies - many companies find it is cheaper or feasible to tell the customer to keep the product than to take the product back as a return. Also, consider the customer’s time, frustration and shipping cost as well as your center’s return processing expenses.
  • Multichannel Business Returns - It may make sense to have a policy that allows customers to return items to stores. But the issues are whether you have the item both in the store and ecommerce selection; if not are you willing to absorb the cost of transferring the item back to the fulfillment center.
  • Customer Service Costs - Additional knowledge about item returns can come from return correspondence, emails, chat messages and the contact center reps – this would include any costs associated with RMAs.

3. Identify Accountability for Returns Costs

To keep controllable returns in check, it’s important for the business leaders to be proactive. This should be a strategic initiative that the managers in marketing, merchandising, accounting have accountability for. This will reduce returns and lessen the impact on future customer purchases.

4. Facility and Operational Planning

It is critical to consider the space, flow of goods and people needed to process customer returns during peak volumes - here are five practices you can implement:

  • Receiving and staging space - Many warehouses are not planned with sufficient space to receive returns, open, process and inspect returned product. In a high return business such as footwear or apparel, 15% to 30% return rate requires considerable additional space near the dock - especially during peak.
  • Space Planning - What are the space requirements and how will the space need to be configured? This includes movement of packages from receiving to returns; how to work returns in FIFO basis and identify date of receipt; the number of workstations (including PC's, label printers and supplies) average and peak weeks; disposition of merchandise and flow out; refurb of product and repackaging elsewhere in center, etc.
  • Dealing with Waste - Returns generate tremendous trash and recyclables. Is there sufficient space to store unopened packages (i.e. floor space, racking or carts)? How will trash and recycling be efficiently removed to a compactor or dumpster?
  • Refurbishment - What activities should not be done in the same returns footprint? Consider what activities need to occur while refurbing returned product to make an item saleable. This includes re-bagging and reconditioning items and the equipment and supplies needed.  Often times, these functions do not need to be done within the same footprint.  Does your facility have unused space that is more conducive to these tasks, such as a mezzanine or other low clear height area of your facility.
  • Using Returns to Fill Back Orders - Cross-dock returns whenever possible. If the returned item is on backorder, you can ship it to the waiting customer rather than restocking it, replenishing forward pick and then pick, pack and ship the new customer order. 

5. Apply Technology Where Applicable

Technology should be adopted to make the returns process more efficient.  Streamline the return process in your OMS/ERP and warehouse management system systems to process returns more efficiently. These processes include credit refunds or exchanges; update to the customer file and determine the product disposition.  The systems should ideally allow a worker to process a return within one or two screens with as few key strokes as possible.  

  • Use of Barcodes - Utilize barcodes on shipping and return labels, these can be scanned and pull up the appropriate customer order even if the customer fails to insert the packing and return slip.  This minimizes time spent in processing returns.
  • Return Notifications - Using integrated reverse logistic services will allow you to be notified of inbound returns. coming back from customers.  This can be done within many systems via returns merchandise authorization (RMA) or through third party solutions that offer return ship labels. These solutions help to plan labor on the dock and in returns processing.

6. Consider Reverse Logistics Services

Third-party logistics (3PL) and specialized Reverse Logistics services can provide software and automated tracking that goes well beyond what is typically developed by IT departments internally.

An assessment and cost study is needed to identify current costs and problems. Using these services, how will costs change? What are the other financial impacts in terms of customer future purchases, retention and lifetime value?

Depending on the provider, services may include:

  • Customer self-serve portals
  • Automated exchange of products
  • Rule based workflows
  • Data collection and analysis
  • Inbound communication of returns to better plan receiving, returns and refurb labor
  • Quick review/approval of returns and exchanges
  • Integrations to WMS, customer service and accounting systems

7. Factor Expected Returns Into Purchases

Returns can lead to overstocks. Purchasing and inventory control should buy net sales not gross demand unless a product is going to be continued in the assortment. In practice, are you calculating expected returns into the purchasing? This will not apply to products with low return rate but it sure does for higher return categories like apparel and footwear.

8. Can You "Save the Sale"

Before you get the return back, can you “save the sale”?  Our favorite positive example is Crutchfield Corporation. Bill Crutchfield, president and founder of Crutchfield, Inc., the car audio and home theater retailer, learned early on in starting his business about customer returns. He almost quit the business because returns were so high. Read our article and see how Crutchfield saved his entire business assessing and changing his approach to returns.

Read: Handling Returns With Care


Returns are expensive, and you will never be able to eliminate them altogether - instead focus on how to minimize returns.  Determine how you can significantly reduce their impact on customer’s buying, your customer service practices, and ultimately your profitability.

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