The Cost of E-Commerce Returns and Why You Should Care

I surf e-commerce sites daily both professionally and as a consumer. While the overall user experience has improved greatly over the years, I'm shocked at what I find (or don’t find) in this day and age, specifically as it relates to product returns. Why does this matter? Because returns are killing margins for most e-tailers!

Thirty percent. That’s the average percentage of orders that get returned to e-tailers annually. There are a number of reasons for this:

• shoppers deliberately ordering more than one product (e.g., multiple sizes of a garment);
• flexible return policies;
• the product is no longer needed;
• product didn't match its description;
• incorrect gift purchase;
• merchant sent the wrong item;
• product was damaged; and/or
• the order never got delivered = poor address quality.

Regardless of the reason, returns are super costly to an operation, especially given the average margin for e-commerce sales. CNBC reports that the average return represents 30 percent of the purchase price. The average margin for an online order is 10 percent, and the average cost of one return is $15.00. Now I’ve heard that five out of four people are poor at math (including me), so I will try to break this down for you:

Let’s take a $50 order that is returned:

• $50 pair of shoes
• 10 percent margin = $5
• Return costs = $15
• Net loss = $10.

That means that the retailer would need to sell at least three units of the same product just to recover the cost of one return! Sheesh.

Now that our minds are blown, what if you could reduce returns by 5 percent? That’s actually the number of orders that have incorrect address information right at the point of entry. In other words, consumers are entering the address wrong or incompletely. This creates chargebacks and all the associated costs of a typical return that eat up that already slim margin. So what to do?

Point of Entry Address Correction and Validation

I’m not talking that Google thing that remembers your address. This is an API that connects with actual USPS data to correct and validate address information (including apartment number and business vs. residential address) in sub-second time. For a fraction of a penny per transaction, you can decrease returns by a minimum of 5 percent.  One e-tailer I worked with saved $110,000 in the first six months alone deploying this simple technology.

So now what?

The first step is to identify if you have address correction and validation in place. In my experience, only about one in 10 e-commerce sites have something decent in place. The ones that do seem to only notify the consumer to check their address vs. actually correcting it. If they forget an apartment number or miss a digit on the Zip Code, for example, you might get a return. If you use a USPS-certified vendor that connects directly with the USPS in real time, you avoid this scenario. It will also be a hard sell by your shipper to convince you (and charge you) that the address is wrong.

The second step is to audit your returns. I do this regularly and it’s a simple way to identify immediate return on investment. Just send your returns file to a vendor and ask them to provide a report of what they could have corrected. I did this for one e-tailer and we found that 36 percent of its returns had bad addresses.

The last step is to implement a solution. In some cases, this can be done in as little as four hours depending on your team's experience working with APIs.

Ensuring accurate address quality will reduce product returns, save you money, and improve customer satisfaction and the overall customer experience. Good selling!

Rolf Gehrung is a director of AccuZIP INC, a provider of data quality software.