Why is understanding your return rate important?
Returns rate is a retail metric that refers to the frequency that customers return orders. It’s important for e-commerce businesses to know as it impacts revenue, profit and is an indicator of customer satisfaction.
What is returns rate?
The rate at which products are returned is a metric all e-commerce business should be monitoring. By understanding how to calculate returns rate, a business can take appropriate steps to managing returns to an acceptable level.
Returns rate can be based on either the number of orders or the monetary value of orders. This could result in different return rates but for some businesses the number of orders may not be readily available. If you don’t have order numbers available, it’s something to consider addressing as metrics, such as unit economics, at an order level are very valuable to be aware of.
Why is returns rate so important?
Returns rate is important as it can tell you a lot from a simple calculation. You can make strategic decisions from understanding your returns rate. A high returns rate may also attach a logistics cost impact returns are free i.e. higher returns rate, higher returns logistics costs. A low returns rate can indicate customer satisfaction with your products.
It’s also important to be sure you’re correctly matching returns to the right orders – you’ll need to consider the timing as well. For example, if you have a 30 day return window, something sold on 20th of the month may not be returned until the following month, possibly after you’ve already closed your month and reported your metrics and performance for that month. In this case you would be showing a sale in the first month and a return in the following month – over inflating performance in that first month. This is why it’s important to consider a returns provision. Your e-commerce or stock management system may also help you track this.
What is a good returns rate?
Achieving a 0% returns rate isn’t realistic, so it’s important to understand what ‘good’ looks like.
Ultimately, returns rate varies across sectors and will be impacted whether you sell solely online or have a physical store too. Various surveys show that around 30% of all online orders are returned, as opposed to brick-and-mortar stores which is around 9%. Consumer behaviours also vary by product type. While some products are uniform and easier to judge than others, clothing is particularly susceptible to higher returns based on multiple attributes such as size, colour and fit. Women’s clothing returns track far higher than men’s.
How do you improve returns rate?
Making returns easy for customers could be seen in two ways:
- it will increase the number of returns you receive, or
- you remove the barriers to a customer buying (reducing your checkout abandonment rate).
So, while improving your returns rate is important, you need to be sure this is not at the sacrifice of sales.
Focus on customer support by resolving issues or questions customers might have promptly post-purchase would improve the returns rate. Additionally, try pushing that star product which customers just love and tend not to return. Above all, it’s about product transparency. High-quality images, clear descriptions, timely customer service and a strong supply chain to deliver as expected.
Once you understand your returns rate, you may wish to explore top reasons for returns – receiving the wrong item, ordering multiple sizes or colours, quality or not as expected from description. One interesting point to note, is that the majority of customers check the returns page/policy before making a purchase – if the user experience is poor and the returns policy is hard to find, you’re likely losing out on the customer altogether. This should be considered in your website conversion rate as you have already driven the customer to your website.
What does returns rate look like?
How do you calculate returns rate?
The formula to calculate returns rate is:
Returns rate = Returned orders in period / Total orders in period x 100%
Returns rate worked example
If a company has the following, it’s returns rate can be calculated like this:
- Sales in period: £240,000 with a total 1,920 orders.
- Returns in period: £53,000 with a total 480 orders.
Returns rate (financial) = £53,000 / £240,000 x 100% = 22%
Returns rate (order basis) = 480 / 1,920 x 100% = 25%
The reason for the difference between the returns rate calculated financially and on an order basis is that some of the returned orders could be worth more, or less, the average price. Returns rate is needed from a financial perspective to understand profitability but the order basis is equally valuable as there could be additional underlying reasons that need to be understood.
It’s also highly valuable to segment returns rate, whether by geography, product lines, store or online to give greater clarity on the reasons for returns to mitigate.
Conclusion
Returns rate is a fundamental metric that all e-commerce businesses should track and understand. As well as accurate financial information, real customer insight can be gathered through segmenting and digging into the reasons.
If you’re not tracking returns rate, you need to be. As with most metrics, you’ll likely need to consider other metrics linked to returns rate.
