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The Real Impact of Returns VS Replacements

Threecolts
Geri Mileva
Published
August 8, 2023
Modified
May 7, 2024
The real impact of returns vs replacements

It’s inevitable that at some point, customers won’t be happy with something. If what they receive is substantially different from what they expect, or if they believe it to be faulty in some way, they’re not just going to keep it - they’ll likely send it back or ask for a new one. 

Last year, returns are estimated to have cost retailers around $816 billion, and in the US alone, estimates suggest that e-commerce will eventually make up a third of total retail returns, despite representing only 15% of total sales across the nation. 

Part of the reason is that online sales tend to lean towards easily returnable goods such as clothes or accessories, but any item can be returned under certain conditions.

So what are the impacts of each?

Returns

It’s not just as simple as giving the customer their money back and closing the issue. The logistics behind the returns also cost money. Each sale made through FBA channels also carries a fee paid by the seller, which they will not get back if something is returned. Even more costly, almost HALF of returns to Amazon FBA are deemed unsellable and are disposed (disposal order with fees) or returned to seller (removal order with fees)

On top of the purely financial consequences, returns also throw a wrench into future sales growth. Too many returns will trigger a warning badge on your listing warning potential buyers to be careful before purchasing your item. The bad reviews usually associated with returns also discourage shoppers leading to lower search ranking and fewer sales.

Processing and accountability

One of the first things that happen when an item gets back to the Amazon warehouse is an evaluation of its condition. If it’s in good shape, it goes back into your inventory for another order, but almost HALF of returns to Amazon FBA are deemed unsellable and are disposed of (disposal order with fees) or returned to the seller (removal order with fees). Even if it’s not damaged beyond use, if they are in less-than-pristine shape they can no longer be sold as brand new and deemed unsellable. This means in many cases you lose the revenue, incurred sale and return expenses AND lose the product.

Don’t run afoul of policy

If your system of returns falls short of Amazon’s return policies,  then you may be subject to disciplinary action from Amazon, which ranges from withholding funds to permanent suspension from the marketplace. You don’t even have to be out of compliance for Amazon to penalize your returns record.

The extent to which your returns result in customer dissatisfaction will be reflected in your return dissatisfaction rate (RDR), which is calculated using the percentage of valid return requests that resulted in negative feedback from customers, the lateness of responses (if requests go unanswered for 48 hours, it’s considered late, and the percentage of return requests that are wrongly rejected). 

If the RDR is Poor (as opposed to Good or Fair), you can end up out of eligibility for Prime sales, which can be incredibly detrimental to your revenue, as it would not only reduce visibility but make customer more likely to choose alternatives that ship faster for free.     

Similarly, your order defect rate (ODR) monitors the proportion of defective products sold to customers within a certain time period. If this gets too high, Amazon drops all subtleties and displays a banner on the product page to warn customers about potentially buying from you. 

Replacements

The biggest difference in the financial impact of returns vs replacements is that if you’re sending a replacement, you still get the revenue from the sale. 

Sometimes, a customer may find that getting a replacement may not necessarily fix the issue they had with the first item - perhaps the fundamental issue they had wasn’t necessarily with that particular item, but with the wider design of the product.

These costs are further complicated if what you’re replacing is part of a bundle, some other kind of bulk replacement, or even wholesale orders.

Breakdown of Return Fees – Amazon

Figure 1 shows a simple example sale for an item retailing at $29.99. You’ll notice most of the costs of the initial sale are virtually identical - things like storage costs, FBA fees, advertising, shipping to Amazon and cost of goods are the same across the board. If something is returned you will, however, be able to get most of the Amazon referral fee back, other than 20% that Amazon keeps as a processing fee.

Where they differ is in the additional costs. A return here carries an additional cost of $2.00 for the removal order, while the replacement has a much larger $9.00 for the cost of goods of the replacement item, as well as another $9.65 for the multi-channel fulfillment order cost. 

While the replacement has far higher costs, it results in a far lower overall cost - $12.56 compared to the $22.31 lost in a simple return - because with a return you don’t get the $29.99 in revenue from the sale. 

It’s not just the tangible costs that matter here. Taken together, returns and replacements represent an opportunity cost for the business, both in terms of time and money, that could be used elsewhere for growth rather than damage control. 

How can I reduce returns and replacements? 

Accurate product descriptions
The space between how the product is presented in the description and how it is in real life is fertile ground for returns. If a customer buys something, they expect it to match what it says in the description.

Packaging
Don’t underestimate the role that packaging plays here, it can help (or hurt) you in multiple ways. Functionally, if your packaging is too flimsy and not robust enough, it increases the risk of the item being damaged enroute to the customer. Aesthetically, it can also be a marker of the quality of the product, especially in premium categories, so don’t ignore it.

Effective use of images and videos
Having high-quality product photos that are an accurate representation of the product, and how it is used, will reduce the chance of the buyer getting blindsided and wanting to send it back. Making good use of video to give detailed demonstrations of how the product works, what it looks like, and how it can fit into your life, will also go a long way. 

Improve the returns handling system and customer service
A returned item doesn’t have to mean a lost customer. If you can demonstrate that your customer service is exemplary, even if the product itself didn’t meet the buyer’s needs, you can win them over for repeat business. Never underestimate the impact of effective customer service. Sending something back will often be one of the first touchpoints customers will have with your customer service function. The return is bad enough, but if the process of returning something is overly burdensome or unsatisfactory, a frustrated customer could be pushed to leave a negative review or rating, harming your brand image and causing all kinds of new headaches you’d be better off avoiding.

Returns and replacements are both par for the course in any e-commerce business, so they should be expected, but never forget to keep track of why things are being sent back. Not only will it help you fix the issue, but if there’s a recurring problem that’s resulting in replacements or returns, you may end up finding yourself under an avalanche of negative feedback. Focusing on reducing negative feedback comes at the opportunity cost of trying to increase positive feedback. 

One of the most effective things a brand can do to nip a potential return in the bud is to have effective and proactive customer support. That’s where Onsite can help. A support platform like the one Onsite provides can go a long way towards helping you give your customers the resources to sort out any issues long before they would need to return something. Giving them the means by which to figure out their problem and get what they need out of the product will prevent many items from being returned.

Browse through and read our other blog posts that are data-driven insights with our very own proprietary data and learn more on Mother's Day trends and best practices, Easter sales, price elasticity of demand, Amazon FBA fee changes, Amazon product title optimization, winter seasonal products, Amazon end of year sales, Valentine’s Day trends and best Amazon fulfillment centers by location and throughput.

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